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FEDERAL TRADE COMMISSION
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SECTION 2 HEARINGS
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UNDERSTANDING SINGLE-FIRM BEHAVIOR:
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REMEDIES
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MARCH 28, 2007
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P R O C E E D I N G S
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- - - - -
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MS. KURSH: Good morning, everyone. Thank you
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for joining us.
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I'm Gail Kursh. I'm with the Legal Policy
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Section of the Antitrust Division, and I would like to
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welcome everyone this morning to the first of three
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panels on remedies in Section 2 cases.
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These panels are part of an ongoing series of
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public hearings on single-firm conduct.
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My co-moderator today is Dan Ducore, the
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assistant director of the Compliance Division in the
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FTC's Bureau of Competition.
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The Department of Justice and the Federal Trade
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Commission are jointly sponsoring these hearings to help
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advance development of the law concerning Section 2 of
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the Sherman Act.
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We began these hearings last June and have
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covered a wide range of single-firm conduct that may
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raise antitrust issues, including predatory pricing and
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predatory bidding, tying, refusals to deal, exclusive
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dealing, bundled rebates and misleading and deceptive
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practices, among other topics.
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It seems fitting to us as we get toward the end
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of these hearings that we now address remedies. |
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However, it would have been just as fitting for
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us to have addressed remedies at the very outset of
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these hearings.
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While I expect our panelists today may disagree
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on the effectiveness of past Section 2 remedies and
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perhaps even have differing views on the appropriate
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goals of Section 2 remedies, I hope that we can all
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agree today that crafting appropriate remedies in
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Section 2 cases is critically important and that
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consideration of remedies should begin very early in an
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investigation or litigation.
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So on behalf of the division, I want to thank
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our panelists for participating today and agreeing to
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share their insights with us.
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I will introduce each panelist in more detail
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before he speaks. But in brief, our speakers in order
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are Dave Heiner, vice president and deputy general
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counsel for Microsoft; Robert Crandall, a senior fellow
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at the Brookings Institute; Per Hellstrom, chief of Unit
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C-3 of the Directorate General for Competition, the
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European Commission; and Tad Lipsky, a partner at Latham
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& Watkins and former Deputy Assistant Attorney General
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for the Antitrust Division.
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I also want to thank my colleagues at the FTC
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and at the division for organizing these hearings. And |
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our panel this morning will go as follows. We will ask
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each of the four panelists to speak for approximately 15
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minutes. We will then take a short break.
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The panelists will each be given a couple
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minutes to respond to each other and then we will have a
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moderated discussion that Dan and I will lead.
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We will not be taking any questions from the
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floor, and we intend to end today at 12 noon, take a
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lunch break and begin the afternoon session at around
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1:30.
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Before introducing our first speaker, I will
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turn things over to Dan and let him make an
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introduction.
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MR. DUCORE: Thanks, Gail. On behalf of the
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Federal Trade Commission, I also want to thank our
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panelists for agreeing to share their time and
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especially their views with us this morning.
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Briefly, the remedies issue is obviously from
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the agency's point of view about more than simply money
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damages. That is somebody else's issue.
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But certainly more so than in an area like
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merger enforcement, Sherman 2 cases present much more of
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a one of a kind kind of concern when you are trying to
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develop the remedy in the sense that you have to be very
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careful that the particular remedy matches the |
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particular facts and the particular theory of harm in
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your case.
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I expect today we will hear a lot about the
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critical thinking that must go into fashioning effective
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remedies for particular problems. And Gail is certainly
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correct -- and I have seen this in my own experience --
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that you have to be thinking about remedies at the
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earliest stages of your case and, for an enforcement
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agency, at the earliest stages of your investigation.
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As someone who thinks about remedies pretty much
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full-time, I'm going to be particularly interested in
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hearing about both the broad approaches but also about
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some of the smaller issues, including things such as
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let's say administrability and the pitfalls and dangers
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that can face an agency as it maybe starts to go off the
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cliff and become an industry regulator.
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With those introductions, let me get started,
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with the exception I have to make a couple of logistical
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announcements.
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First, if there is an alarm, please go down the
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stairway and get out of the building and follow the
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instructions of people. You will be actually going
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across the street. Second, the closest restrooms, men's
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out the door and to the left, women out the door and
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past the elevators to the left. |
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And finally, especially for the panelists,
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please turn off cell phones, electronic devices,
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especially things like Blackberries. They can create
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static on the microphones.
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With that more mundane information, let me turn
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it back to Gail to introduce the first speaker.
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MS. KURSH: Thanks, Dan. David Heiner is vice
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president and deputy general counsel at Microsoft
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Corporation, where he heads up the legal department's
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antitrust group.
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Since joining Microsoft in 1994, Dave has played
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a leading role in Microsoft's response to government
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antitrust proceedings in the United States, Europe and
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Asia.
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He is the author of "Assessing Tying Claims in
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the Context of Software Integration: A Suggested
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Framework for Applying the Rule of Reason Analysis."
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Dave.
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MR. HEINER: Thank you, Gail and Dan, for the
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invitation to speak here today, which I very much
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appreciate.
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This is a subject upon which I think it is fair
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to say Microsoft has quite a bit of experience, working
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largely with many people I see in the room.
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At the outset, I thought it might be useful to |
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briefly recap the remedies to which Microsoft has been
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subject over the past decade or so.
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In 1994, a consent decree was put in place and a
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nearly identical European Union undertaking were put in
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place. These were mostly contractual in nature.
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In 2002, a consent decree and associated
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litigated final judgment were entered in the Section 2
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case against Microsoft.
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The Section 2 case was followed by a number of
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competitor lawsuits. Hundreds of consumer class actions
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were filed. Nearly all of these private cases have been
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settled with payments and some conduct relief as well.
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In March 2004, the European Commission issued
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its decision against Microsoft. The Commission took a
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different approach to the issues than did the U.S.
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court.
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In February 2006, the Korean Fair Trade
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Commission issued its decision against Microsoft. The
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KFTC took yet a third approach. The EC and KFTC
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decisions are on appeal now.
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As you might imagine, all of this generates
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quite a bit of work within Microsoft and its law
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department.
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When I joined the company in 1994, I was the
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first antitrust lawyer at the company. Today I lead a |
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group of about 30 professionals dedicated full-time to
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antitrust counseling and compliance.
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This group includes software developers and
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business personnel as well as lawyers and paralegals.
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All told, a few hundred people at Microsoft are
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engaged in compliance work over the past few years.
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I would like to begin with a suggestion on the
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overall approach to fashioning relief.
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I would suggest that it's probably better to
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focus on creating or preserving opportunities for
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competitors rather than limiting the defendant's ability
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to deliver consumer value. This is the approach very
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much taken by the U.S. consent decree.
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The Court of Appeals had reversed and remanded
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the Section 1 tying claim against Microsoft but affirmed
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Section 2 liability relating to the manner in which
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Internet Explorer had been integrated into Windows 98.
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The decree that resulted did not require that
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any functionality be removed from Windows. Rather,
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every provision of the decree is directed at creating or
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preserving opportunities for competitors, both as a
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matter of product design and contractually.
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The focus is upon ensuring that distribution
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channels remain open. This is an approach that was
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strongly approved by the Court of Appeals in 2004. |
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Today, new Windows PCs come loaded up with
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software from Microsoft's competitors, such as Google,
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Yahoo, AOL, Semantec, McAfee and many others.
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Under this approach, consumers benefit from the
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ability to choose either integrated solutions or
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separate stand-alone software or, as is so often the
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case, to use both.
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The European Commission has taken a different
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approach. The Commission ordered Microsoft to create
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new versions of Windows from which media playback
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functionality had been removed. These are called
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Windows XPN and Windows Vista N.
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They were built following extensive compliance
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discussions with the European Commission staff. They
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are available in every European language.
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However, not a single PC manufacturer has chosen
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to license these operating systems. These operating
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systems sit on the shelf. Costs have been imposed, but
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there is little apparent benefit for anyone.
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I will return to another aspect of this in a
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moment. For now, I would note only that the U.S.
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approach seems far more effective at advancing antitrust
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values.
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This focus on creating opportunity tells us
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something about the proper objectives of antitrust |
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remedies.
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I would suggest that remedies should be put in
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place in order to safeguard competitive opportunities
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but not necessarily to engineer any particular market
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outcome, such as a reduction in market share. This is
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for the market to determine once any competitive
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restraints have been removed.
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Indeed, even if engineering market outcomes were
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thought to be desirable theory, it is hard to see how
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this could be accomplished in practice in most cases.
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By its nature, a remedy will only govern the
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conduct of the defendant, not other market participants.
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Everyone else, competitors, developers of
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complementary products and, most notably, consumers will
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act according to their self interest.
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This is particularly noteworthy in high-tech
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industries where products often interconnect with each
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other in different ways.
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For example, both the U.S. and EU remedies
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require Microsoft to make available certain technology
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called communication protocols to its competitors for
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use in their products.
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About 30 firms have taken licenses to this
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technology under the U.S. program and one firm to date
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under the similar European program. |
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But whether firms choose to take a license and
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what kinds of products they build with those licenses
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is, of course, entirely up to them and outside the
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control of either Microsoft or any antitrust agency.
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This general point is relevant outside the
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context of access remedies as well.
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Internet Explorer continues to have very high
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share, although declining. Should this be seen as a
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shortcoming of the U.S. consent decree?
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Well, the open source Firefox Web browser now
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has about 14 percent share, up from zero just a few
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years ago.
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Given the safeguards set up by the consent
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decree which apply on a worldwide basis, there is no
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reason why Firefox couldn't have a much higher share if
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that reflected consumer preferences.
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In fact, Firefox's share is about 33 percent in
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some major European countries, up from 20 percent just a
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year ago.
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This focus on competitive opportunity rather
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than outcome of market shares is especially important, I
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think, in government actions.
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As the Court of Appeals explained in the
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Microsoft case, liability can be established with little
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or no proof of actual market impact from the conduct at |
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issue.
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This is what the court termed in the Microsoft
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case a rather endogenous test for causation.
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In fact, the District Court found that there was
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no proof that the success of Internet Explorer had been
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due to unlawful conduct.
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Where there is no proof of market impact in the
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first place, it would seem especially inappropriate to
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expect a remedy to bring about a particular market
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outcome.
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This brings me to my third observation.
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Whatever the proper role of antitrust remedies may be in
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the abstract, I think, as Gail and Dan said at the
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outset, it is really quite important that they be fully
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thought through before liability proceedings are
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commenced.
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This is true for at least two reasons.
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First and most importantly, if it is hard to
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devise an appropriate remedy, that may suggest that
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there is no liability in the first place. At the very
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least, it may suggest that the liability rules were not
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sufficiently clear to provide any real guidance or
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notice to the defendant of what would be termed unlawful
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later.
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Second, absent a clear view on the question of |
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remedy, it may be difficult or impossible to obtain
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rapid relief through settlement.
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These points are well illustrated I think by
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Microsoft's experience in dealing with the Windows tying
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issues through the years.
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The addition of new functionality to Windows can
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present competitive challenges for firms that wish to
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offer comparable functionality separately.
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Antitrust agencies around the world have focused
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on that over the past 10 years.
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At the same time and as the Court of Appeals
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noted in the Microsoft case, such integration can lead
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to important benefits for software developers, PC
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manufacturers, in fact, to the entire PC ecosystem.
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That's why functionality has been integrated
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into new operating system products steadily over the
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past 20 years or so and why in fact we see integration
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of functions as quite a common function across many
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product categories.
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So one has the question how should these
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competing considerations be addressed in a remedy?
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In the U.S., the consent decree approach I
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outlined earlier is now in place. But there were quite
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a few bumps along the road to getting there, including
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three rounds of failed settlement talks, one before |
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Judge Posner in Chicago.
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I think it is fair to say at least part of the
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reason why those settlement talks failed is that there
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was disagreement among the DOJ and the various states as
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to what would be a suitable form of relief.
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Absent a clear view on this, no agreement could
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be reached, and the eventual remedy was delayed.
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The history in Brussels is instructive as well.
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In early 2004, Microsoft proposed a variety of remedies
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to address the Commission's concerns regarding the
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inclusion of media functionality in Windows.
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The Commission case team devoted a great deal of
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effort to defining and exploring those proposals, and
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Microsoft is grateful for that.
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Ultimately, however, the Commission determined
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that a general remedy should be devised that would
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address all future tying cases.
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Given the range of possible fact patterns and
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the benefits of integration, however, neither the
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Commission nor Microsoft was able to articulate any such
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rule that would govern future product design decisions
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despite prodigious efforts by both sides.
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As a result, settlement talks failed. The
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Commission proceeded to impose the logical remedy for a
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tying case, which was an order to untie. As a result, |
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PC manufacturers and consumers can now choose to get
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Windows without media functionality.
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As I have said, they have chosen the
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full-feature version of Windows, as one might expect.
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So the question becomes should it be unlawful
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for a firm to fail to create a product for which there
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is no appreciable consumer demand? Here consideration
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of remedy may suggest that there was no unlawful tie in
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the first place.
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The same might be said about the package
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discounting that was at issue in Lepages or the
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selective discounting and output increases that were at
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issue in the American Airlines case.
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I would like to conclude with two final
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observations of a practical nature.
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First, in Microsoft's experience, it would seem
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that the legal process is generally best suited to
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contractual remedies.
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Particular cases may call for other forms of
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relief. But we should recognize that these come with
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significant challenges for all concerned.
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Contracts are good because they are within the
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purview of lawyers. We understand contracts. We know
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how to read them.
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They are relatively easy to monitor, both for |
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the defendant and for the enforcement agency, and I
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would note that essentially no issue of significance has
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arisen through the years in Microsoft's compliance with
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the contractual provisions of the U.S. consent decree.
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Product design remedies are more difficult.
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Here considerable technical expertise may be required in
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order to devise and monitor a remedy.
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Ultimately lawyers will remain responsible for
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making compliance judgments regarding highly technical
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matters, and this may be hard, even with expert
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technical help.
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In addition, agency lawyers will inevitably find
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themselves drawn into the details of product design and
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even the details of making engineering trade-offs which
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are essential to the product design process.
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To deal with these kinds of complexities, the
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technical committee set up under the U.S. consent decree
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now has more than 40 full-time employees.
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Remedies that require sharing of complex
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technical information are also quite challenging.
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Technological complexity can quickly lead, I think it is
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safe to say, to enforcement complexity.
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Protocol licensing, for example, is just one of
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eight major provisions of the U.S. consent decree, but
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it takes up the lion's share of the compliance work, |
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both for Microsoft and for the agencies.
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The EU protocol remedy introduces still greater
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complexity. That is because it seeks to enable
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fundamentally different computer operating systems with
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different computer architectures to work together as if
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they were one.
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This is a computer science project, and even the
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Commission itself has recently said that making this
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work would require a massive development effort by third
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parties, and that hasn't happened yet.
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The result has been considerable frustration for
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the Commission and for Microsoft.
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This past summer, the Commission imposed fines
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upon Microsoft of 280 million Euro for failing to
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complete this project to the satisfaction of the
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technical advisors set up under that decision.
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Pricing is another challenge and likely will be
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for any access case that involves information goods,
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such as software.
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The protocol technology that Microsoft has
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developed was developed over the course of about 10
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years. It is covered by 35 patents, and many more are
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pending. It is covered by copyright and trade secret
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law.
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How is this to be valued? The answer is not |
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entirely obvious given the many ways that software is
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monetized today and the varying business models that
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people have.
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Microsoft has suggested pricing that is
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comparable to that which is in place under the U.S.
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program where many firms have taken licenses. That
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pricing is backed up by more than a thousand pages of
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analysis and justification that the Commission
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requested.
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The Commission has taken issue with this
|
11 |
pricing, however, and is threatening to impose new fines
|
12 |
that could run to additional hundreds of millions of
|
13 |
Euros.
|
14 |
My final observation relates to globalization.
|
15 |
From Microsoft's perspective and I think it is
|
16 |
fair to say from that of other high-tech companies, it
|
17 |
is increasingly important that antitrust agencies
|
18 |
cooperate closely on remedies and show due respect for
|
19 |
principles of international comity.
|
20 |
For sound economic reasons, the Windows
|
21 |
operating system is essentially identical all over the
|
22 |
world. That uniformity is critical to the role that
|
23 |
Windows provides in enabling compatibility between
|
24 |
literally thousands of complementary software products
|
25 |
and hardware products. |
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And that is threatened today by the varying
|
2 |
approaches taken to the Windows tying issues in the
|
3 |
United States, in Europe and Korea, which I haven't had
|
4 |
time to go through this morning.
|
5 |
In the compulsory licensing area, I think it is
|
6 |
safe to say that the U.S. and foreign countries are
|
7 |
taking a different approach to compulsory licensing.
|
8 |
In the age of the Internet, once trade secrets
|
9 |
are revealed, they can never be recovered. Absent
|
10 |
greater deference to comity principles, we may well find
|
11 |
that the legal regime that imposes the most onerous
|
12 |
legal requirements de facto prevails on a worldwide
|
13 |
basis.
|
14 |
Again, thanks very much, Gail and Dan. I
|
15 |
appreciate the opportunity to speak here today.
|
16 |
(Applause.)
|
17 |
MS. KURSH: Thanks, Dave. Robert Crandall will
|
18 |
be next.
|
19 |
Robert is a senior fellow in economic studies at
|
20 |
the Brookings Institution. He has previously served as
|
21 |
acting deputy and assistant director at the Council on
|
22 |
Wage and Price Stability.
|
23 |
He has written extensively on antitrust policy,
|
24 |
with a particular emphasis on the telecommunications
|
25 |
sector and emerging issues in wireless and broadband |
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competition.
|
2 |
Among the antitrust topics on which he has
|
3 |
written is the effectiveness or lack thereof, I guess,
|
4 |
of relief in government Section 2 cases.
|
5 |
Bob.
|
6 |
MR. CRANDALL: Thank you, Gail. It is a
|
7 |
pleasure to be here.
|
8 |
I haven't written that extensively in antitrust.
|
9 |
In fact, I spent most of my career looking at regulatory
|
10 |
activities that range as far as environmental policy and
|
11 |
fuel economy standards and more recently
|
12 |
telecommunications regulation, which, of course, is
|
13 |
related to competition policy.
|
14 |
I have not spent as much time as my colleagues
|
15 |
on this panel have, I'm sure, on the details of
|
16 |
antitrust, nor the details of Section 2 remedies.
|
17 |
My purpose today is to provoke, frankly, and for
|
18 |
that reason I'm somewhat disappointed we will not have
|
19 |
questions in the audience, though I'm not sure how many
|
20 |
economists are in the audience anyway.
|
21 |
You see the title of my presentation. I will
|
22 |
focus on the AT&T divestiture, not simply because that's
|
23 |
the one I know a little bit about, but because some work
|
24 |
which I have done and which Clifford Winston and I have
|
25 |
done and Ken Elzinga and I have done on Section 2 relief |
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using a case-by-case approach to this, which I think is
|
2 |
the only way to go about it.
|
3 |
Each one of these cases is sui generis. It is
|
4 |
hard to do a more general study. It suggests very
|
5 |
little effect it creates on the market, on competition
|
6 |
in the market, on output, on prices.
|
7 |
In fact, not because of shameless
|
8 |
self-promotion, but because I would like to provoke
|
9 |
people to read the articles and maybe prove me wrong, I
|
10 |
have listed the articles in this first slide.
|
11 |
But the one case that everybody comes to as the
|
12 |
example of success in Section 2 structural relief cases
|
13 |
particularly is the AT&T divestiture, which, of course,
|
14 |
was negotiated someplace on a ski slope in Utah in 1982
|
15 |
and was executed effective January 1, 1984 after about
|
16 |
10 years of litigation.
|
17 |
Indeed, at first I would have been a supporter
|
18 |
of that and perhaps anyone that was wishing to get into
|
19 |
a debate with me on this would find things I have said
|
20 |
in the past, 20 years ago, that I might have approved.
|
21 |
Maybe I was overly seduced by Bill Baxter, who was a
|
22 |
very persuasive guy and a very good fellow to boot.
|
23 |
But over time I have come to question whether in
|
24 |
fact even the AT&T case can be considered a success in
|
25 |
terms of relief from a Section 2 prosecution. |
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Now, most people in the room would know about
|
2 |
this case. We don't have to spend much time on it.
|
3 |
The principal outcome was a divestiture of the
|
4 |
Bell operating companies from the rest of AT&T, AT&T
|
5 |
keeping the manufacturing and long distance arms and a
|
6 |
large share of the research operations.
|
7 |
The near-term result -- and I will show in a
|
8 |
second -- is long distance service increased. Long
|
9 |
distance service output increased and U.S. long distance
|
10 |
rates fell.
|
11 |
I do these slides myself. That's why they look
|
12 |
so bad.
|
13 |
But was the increased long distance competition
|
14 |
due to vertical divestiture? This is a very different
|
15 |
world in 1982.
|
16 |
AT&T accounted for 80, 85 percent of the access
|
17 |
lines and almost the same percentage of total telephone
|
18 |
subscribers, including wireless.
|
19 |
AT&T's wireless service was not launched until
|
20 |
1983 in Chicago, its cellular service. They had a more
|
21 |
mundane wireless service prior to that.
|
22 |
This is the period in which I think it was
|
23 |
McKinsey was predicting there would be a demand for no
|
24 |
more than one million cell phones in the United States.
|
25 |
At this time, though, we had so-called universal |
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service pricing, which is really inverse Ramsey pricing,
|
2 |
for you economists in the room. I suppose antitrust
|
3 |
lawyers may understand the jargon.
|
4 |
This, in fact, invited entry into long distance
|
5 |
service. It invited the likes of Bill McGowan of
|
6 |
Microwave Communications Incorporated -- he said he
|
7 |
changed the name to MCI because he didn't want people to
|
8 |
think he was going to fry them -- to enter the long
|
9 |
distance service to figure a way to get access to AT&T's
|
10 |
service, particularly with very low prices.
|
11 |
Indeed, they battled that out for many years,
|
12 |
culminating in a private antitrust action and convincing
|
13 |
the Justice Department in '74 to file the Section 2
|
14 |
case.
|
15 |
Once again, the question was was the vertical
|
16 |
divestiture which resulted in this case necessary to
|
17 |
promote long distance competition? What are the
|
18 |
numbers?
|
19 |
Here are the numbers on real interstate long
|
20 |
distance rates and AT&T's average share of revenues
|
21 |
using the same access on the left-hand side.
|
22 |
And you see that starting in 1984, after the
|
23 |
divestiture, AT&T steadily lost market share and long
|
24 |
distance rates came down steadily.
|
25 |
This is taken to reflect success of the decree. |
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Of course, we don't know what the but for would look
|
2 |
like. And it may well be that without some action that
|
3 |
we wouldn't have had this result.
|
4 |
In fact, most other countries had to take action
|
5 |
themselves, and they took action only along one
|
6 |
dimension of the decree. No other country that I'm
|
7 |
aware of has actually required a divestiture of their
|
8 |
operating companies from manufacturing or long distance
|
9 |
service companies in their country.
|
10 |
Virtually all of them, however, at some time
|
11 |
after 1984, as late as 1998 in the EU, required access,
|
12 |
equal access to the incumbent local exchange company
|
13 |
switches for terminating or originating calls.
|
14 |
This obviously is regulated access, and in any
|
15 |
regulated access there is going to be an argument about
|
16 |
the price. But nobody engaged in vertical divestiture.
|
17 |
One could argue that what Offcom is doing in the
|
18 |
U.K. today is a very mild version of structural
|
19 |
separation with British Telecom. We will see how that
|
20 |
works out.
|
21 |
But no other country actually engaged in
|
22 |
vertical divestiture.
|
23 |
Now, if you look at what happened to the price
|
24 |
of long distance services, comparing the U.S. interstate
|
25 |
rate -- the intrastate rates didn't go down as fast |
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because the states controlled and used their regulatory
|
2 |
controls to keep those prices relatively high, the
|
3 |
inverse Ramsey pricing continues to stay low.
|
4 |
If you look at the U.S. interstate prices
|
5 |
against the average for Canada and wouldn't make much
|
6 |
difference which one you use for the EU. I use the
|
7 |
three-minute price here, and I think they also publish
|
8 |
10-minute prices in the annual monitoring reports that
|
9 |
the EU does on monitoring effects of their regulatory
|
10 |
program.
|
11 |
What you see here is prices came down even more
|
12 |
rapidly in Canada and the EU, much more quickly
|
13 |
subsequent to their liberalization than it did in the
|
14 |
United States subsequent to ours.
|
15 |
In fact, equal access to the switches was all
|
16 |
that was required. And the FCC in the United States had
|
17 |
not done this of its own volition prior to the bringing
|
18 |
of the AT&T case in 1974 or prior to the negotiation of
|
19 |
the consent decree, the divestiture with the equal
|
20 |
access provisions in it in 1982.
|
21 |
Now, in no small part long distance rates in the
|
22 |
United States fell because of declining access charges.
|
23 |
One of the things -- and you could take this as
|
24 |
a measure of the success of the decree. One of the
|
25 |
things that the decree did was to expose exactly how |
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much if you want to call it broadly subsidy was going on
|
2 |
between long distance service and other service, local
|
3 |
access to the telephone network in the regulatory
|
4 |
process at the Federal Communications Commission.
|
5 |
With very high access charges now having to be
|
6 |
levied to keep the rates at about the same level, the
|
7 |
FCC started the process of rebalancing rates, lowering
|
8 |
access charges and putting all those complicated charges
|
9 |
that you and I don't understand on the back of our
|
10 |
telephone bills, which are in fact designed to try to
|
11 |
shield from the public information about what's really
|
12 |
going on here.
|
13 |
But it made good policy sense to put these
|
14 |
nontraffic-sensitive charges as a fixed charge on your
|
15 |
telephone bill and to lower the traffic-sensitive
|
16 |
charges of long distance by doing so.
|
17 |
In fact, a great deal, as you can see, of the
|
18 |
decline in long distance rates occurred because of the
|
19 |
decline in access charges.
|
20 |
My friends who worked on the AT&T case at DOJ
|
21 |
and others who have been involved in this process over
|
22 |
the years who don't like my presentation will argue with
|
23 |
me that this could not have happened but for the case.
|
24 |
In fact, that is one of the benefits of the
|
25 |
case, I suppose. We could not have persuaded the FCC to |
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undertake both equal access and to rebalance rates but
|
2 |
for the divestiture.
|
3 |
I suppose that is a benefit. But again, the
|
4 |
problem here was not AT&T's monopolization activities,
|
5 |
unless you consider their lobbying activities of the FCC
|
6 |
as part of it, but, rather, the FCC's seeming
|
7 |
incompetence or reluctance to do the right thing to
|
8 |
maximize economic welfare for people using the telephone
|
9 |
network.
|
10 |
As a mea culpa, I was actually at the FCC
|
11 |
advising part-time one of the commissioners, Glen
|
12 |
Robinson, who is now professor of administrative law at
|
13 |
University of Virginia. So I guess I'm tied up in the
|
14 |
complicity in all that.
|
15 |
This is simply saying much the same thing, that
|
16 |
in fact what happened was as a result of the
|
17 |
divestiture, there was an exposure of the folly of the
|
18 |
universal service pricing policy, something which the
|
19 |
FCC addressed with great opposition from so-called
|
20 |
consumer groups, who claimed that millions of low-income
|
21 |
people would fall off the telephone network.
|
22 |
Of course, we know better than that because we
|
23 |
know the price elasticity in the demand for access to
|
24 |
telephone service is very, very low.
|
25 |
What about the costs of the decree? My own |
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estimation -- and I haven't seen anyone else attempt to
|
2 |
address this -- was that we lost about $5 billion of
|
3 |
output just in the transition from the old AT&T to the
|
4 |
new AT&T over 1984-85, in that period.
|
5 |
There are some estimates -- now, these were
|
6 |
funded by the Bell companies as attempting to get out of
|
7 |
the decree. There is an estimate by Paul Ruben, a
|
8 |
colleague at Emory, that the process of administering
|
9 |
the line of business restrictions in the decree totaled
|
10 |
about $1.4 billion over time.
|
11 |
Though what happened -- and this goes to Dave's
|
12 |
presentation on trying to provide technological
|
13 |
prescriptions and deal with changes in technology in an
|
14 |
antitrust decree. What happened was that the market
|
15 |
changed rather dramatically.
|
16 |
Something called the Internet came up and the
|
17 |
separation of interstate from local and intrastate
|
18 |
services in the decree became extremely problematic.
|
19 |
Not only that, but the information restriction which
|
20 |
eventually was abolished by the Court of Appeals also
|
21 |
was a problem at a time when obviously information and
|
22 |
transmission switching of signals were melding together.
|
23 |
Now, here is one of the more interesting -- I
|
24 |
mentioned earlier that the estimates, at least one
|
25 |
commercial estimate of what cellular technology was |
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going to do back in the 1980s was seriously wrong.
|
2 |
At the very time that the AT&T case was brought,
|
3 |
the FCC was deciding what to do about the so-called
|
4 |
cellular spectrum.
|
5 |
It took about another nine years for them
|
6 |
finally to have one of these licenses begin to --
|
7 |
through one of these licenses for service to become
|
8 |
available. There was a lengthy hassle over how not only
|
9 |
to allocate the spectrum but how to assign it and divvy
|
10 |
it up among players.
|
11 |
We know what they did. They decided to have
|
12 |
only two licenses -- why is not at all clear -- and to
|
13 |
give one of them to the incumbent wireline carrier on
|
14 |
the grounds that I suppose that wireless was
|
15 |
complementary and not likely to be competitive with
|
16 |
wireline service.
|
17 |
Obviously one's perspective on that would change
|
18 |
over time.
|
19 |
So it wasn't until 1983 that wireless service
|
20 |
began. This is the time when the consent decree was
|
21 |
just going into effect, after it had been negotiated.
|
22 |
And in the negotiation of the consent decree, the Bell
|
23 |
companies were allowed to keep one of the wireless
|
24 |
licenses.
|
25 |
In retrospect, wireless became the most serious |
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competitor for a long period of time. Cable and VOiP
|
2 |
may now take its place in the future.
|
3 |
And it was certainly a mistake to do that. But
|
4 |
the bigger mistake was only to assign two bands to
|
5 |
cellular service.
|
6 |
It wasn't until we ran a huge federal budget
|
7 |
deficit and the Congress decided we needed to raise
|
8 |
money through spectrum auctions that we began to get
|
9 |
more spectrum allocated to, more and more licenses
|
10 |
awarded for cellular service.
|
11 |
And, of course, starting about 1995, 1996, the
|
12 |
new PCS cellular licenses were bid on and began to
|
13 |
operate, and we went from two carriers to six national
|
14 |
carriers over a period of time through a contorted
|
15 |
process I won't bore you with right now, because the
|
16 |
stuff was licensed on a local market by local market
|
17 |
basis rather than national basis.
|
18 |
But the important message here is what drove
|
19 |
competition starting in the late '90s was wireless, and
|
20 |
particularly long distance competition in the '90s, and
|
21 |
now I would even argue competition for the local access.
|
22 |
What I show you here is a chart in which the top
|
23 |
red line shows what we would have expected interstate
|
24 |
terminating switched access minutes to look like given
|
25 |
what was happening to prices and GDP, and the dotted |
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line below, what actually happened to wireline
|
2 |
terminating and interstate access.
|
3 |
The gap that opens up there is primarily due to
|
4 |
wireless. That is, wireless began to take a very, very
|
5 |
large share.
|
6 |
Interestingly enough, this whole thing developed
|
7 |
because of the development of these national plans which
|
8 |
most of us have called from anywhere to anywhere. They
|
9 |
were introduced first by AT&T, still the largest long
|
10 |
distance player.
|
11 |
They cannibalized their own business with this,
|
12 |
because then ever other cellular company had to follow
|
13 |
in the next year. And today, of course, we have not
|
14 |
only a proliferation of these plans, but the plans also
|
15 |
allow zero per minute calling in nighttime and on
|
16 |
weekends.
|
17 |
This number, which goes through 2004, is
|
18 |
woefully out of date. I haven't tried to update it.
|
19 |
I would think that a very, very large share,
|
20 |
overwhelming majority of all interstate long distance
|
21 |
minutes now go over wireless. As I said, this may
|
22 |
change with VOiP.
|
23 |
The price of the decree -- and this is one of
|
24 |
the problems of any of these decrees -- is it is
|
25 |
difficult to get rid of it. |
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The price for getting rid of it after 10 or 12
|
2 |
years was the 1996 Telecommunications Act which -- and I
|
3 |
won't go into in great detail; we don't have time -- is
|
4 |
subject to its own folly and led to enormous battles
|
5 |
between entrants and particularly MCI and AT&T and the
|
6 |
regional Bell companies, led to an unbundling regime
|
7 |
which got more and more liberal as more and more of the
|
8 |
new entrants failed and ended up with a thing called a
|
9 |
uni-platform which means the entrant could use all of
|
10 |
the facilities of the Bell companies at discounted
|
11 |
rates, 50 to 60 percent off retail, through the
|
12 |
so-called unbundling process, a provision which was
|
13 |
eventually overturned by the Court of Appeals which said
|
14 |
it went too far.
|
15 |
Also, there was a line-sharing provision which
|
16 |
is still in existence throughout Europe and most other
|
17 |
countries of the world, Japan, Australia, but which also
|
18 |
was ruled as an unjustified extension of the unbundling
|
19 |
regime by the D.C. Circuit.
|
20 |
In fact, the great savior of folly in U.S.
|
21 |
telecommunications was Steven Williams of the U.S. Court
|
22 |
of Appeals, now retired or senior status.
|
23 |
What happened in the '96 act, we wasted at least
|
24 |
$50 billion of investment. Where the stuff went nobody
|
25 |
knows. I can't find it on eBay today. |
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MCI and AT&T were forced to enter the arms of
|
2 |
Verizon and SBC respectively, not because of the ending,
|
3 |
the D.C. Circuit opinions. They would have been forced
|
4 |
into it anyway because wireless was eating their lunch
|
5 |
so rapidly that their revenues were declining by 10 to
|
6 |
15 percent per year.
|
7 |
So, after 12 years of the AT&T decree and nine
|
8 |
years after the 1996 act, we reverted back to a
|
9 |
vertically integrated telecom sector.
|
10 |
It was not antitrust, although you could argue
|
11 |
that antitrust, certainly the equal access provision did
|
12 |
generate the nascent competition early on in long
|
13 |
distance services.
|
14 |
But we could have gotten there without antitrust
|
15 |
had the FCC been on the job or had they realized the
|
16 |
benefits of doing this. We led the way with the AT&T
|
17 |
decree, and then the rest of the world could follow with
|
18 |
their equal access provisions.
|
19 |
Today, the local bottleneck is largely
|
20 |
irrelevant. And, in fact, despite the rhetoric
|
21 |
surrounding it, the local telephone companies are in
|
22 |
deep trouble because they do not have a network which is
|
23 |
easily capable of delivering high-speed video on demand
|
24 |
and are, therefore, having to spend enormous amounts of
|
25 |
money to upgrade their networks to catch the cable |
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companies who very easily can offer voice
|
2 |
telecommunications services.
|
3 |
As a result, what has happened is with the
|
4 |
change in the regulatory regime, the incumbent local
|
5 |
carriers are now investing enormous sums in their
|
6 |
networks, far more, by the way, than the more regulated
|
7 |
EU carriers are investing in Europe or, for that matter,
|
8 |
more regulated carriers in Australia. Japan still is
|
9 |
investing a lot despite a heavily regulated system.
|
10 |
I don't know that I can give you general lessons
|
11 |
from all this. I think this is sui generis.
|
12 |
The AT&T decree may have worked in a narrow
|
13 |
sense in that it did introduce equal access into long
|
14 |
distance.
|
15 |
The cost of the vertical divestiture was
|
16 |
extremely high. Was it necessary? I think in
|
17 |
retrospect I can say probably not.
|
18 |
But I didn't have the foresight at the time to
|
19 |
say that. And it is easy enough to go back and be a
|
20 |
Monday morning quarterback.
|
21 |
But I think it is at least too facile to say
|
22 |
this is a decree that clearly was a success and one
|
23 |
which we ought to follow in other cases, although one
|
24 |
wonders what other industry would offer the same
|
25 |
opportunities for this type of vertical divestiture and |
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access.
|
2 |
But perhaps Dave has some ideas on that.
|
3 |
With that, let me just stop and say one of the
|
4 |
things that Cliff Winston and I really wanted to provoke
|
5 |
is economists looking at the impacts of antitrust
|
6 |
decrees, antitrust policy in general, more empirical
|
7 |
work.
|
8 |
Our conclusion in our paper wasn't that
|
9 |
antitrust is a failure. It was that we have no
|
10 |
empirical evidence that it is a success. And that is a
|
11 |
serious problem for a policy that's only been in place
|
12 |
for 117 years.
|
13 |
So we hope to provoke people into doing research
|
14 |
and either proving what we have done so far right or
|
15 |
wrong, as the case may be.
|
16 |
I thank you for your attention.
|
17 |
(Applause.)
|
18 |
MS. KURSH: Thank you, Bob.
|
19 |
I would like to now ask Per Hellstrom to come
|
20 |
up. Per is chief of the Unit C-3 at the Directorate
|
21 |
General for Competition, European Commission.
|
22 |
He is actively involved in the European
|
23 |
Commission's case against Microsoft, and we are very
|
24 |
grateful to him for traveling across the Atlantic to
|
25 |
share his perspectives based on his experiences with |
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Article 82.
|
2 |
MR. HELLSTROM: I would like to provide a
|
3 |
European perspective to this issue of remedies.
|
4 |
I don't really intend to go into detail in any
|
5 |
particular case. I certainly don't want this to turn
|
6 |
into another hearing on the Microsoft case.
|
7 |
I already defended that case once before the
|
8 |
court, and we are still awaiting the judgment in that
|
9 |
case.
|
10 |
But I could mention that as some of you may be
|
11 |
aware, the Commission is currently undertaking a review
|
12 |
of its policy under Article 82, which is our provision
|
13 |
for single-firm behavior.
|
14 |
And in addition to that, we are also reviewing
|
15 |
our policy as regards remedies, both under Article 81,
|
16 |
cartels, et cetera, and Article 82. And we are
|
17 |
preparing some internal guidance in this regard.
|
18 |
Just a brief overview of the legal framework in
|
19 |
Europe, which may be different than the U.S. framework.
|
20 |
We have Article 82 of the treaty, which states
|
21 |
that abuse of a dominant position shall be prohibited.
|
22 |
Now, this provision has direct effect and it can
|
23 |
be relied upon by private parties before national
|
24 |
courts, and it is the implementing regulation,
|
25 |
Regulation 1/2003, which provides the enforcement powers |
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to the European Commission to enforce Article 82 and
|
2 |
impose remedies.
|
3 |
Remedies are not mentioned in Article 82 itself.
|
4 |
In addition to that, we have the case law of the
|
5 |
Community Courts which, of course, has dealt with the
|
6 |
issue of remedies in some cases, and there is certain
|
7 |
decisional practice of the European Commission, the
|
8 |
Microsoft decision being one of those.
|
9 |
I believe, therefore, that one must separate the
|
10 |
issues of the finding of an abuse and the imposition of
|
11 |
a remedy, at least in our legal system.
|
12 |
Having said that, from the point of view of an
|
13 |
enforcement authority, I do share the view that it is
|
14 |
important to think about remedies early on in an
|
15 |
investigation.
|
16 |
But for the purposes of the discussion on
|
17 |
remedies, I think also we must assume that we have
|
18 |
already a valid finding of an abuse, for example, a
|
19 |
refusal to deal, tying, excessive pricing. And certain
|
20 |
aspects that could in theory be relevant for the
|
21 |
imposition of a remedy, such as the specific character
|
22 |
of the market, efficiencies, incentives to innovate,
|
23 |
et cetera, may in fact already have been taken into
|
24 |
account in the finding of the abuse.
|
25 |
Now, regulation 1/2003, that is the implementing |
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regulation that gives powers to the Commission.
|
2 |
The context with regard to remedies are Article
|
3 |
7, which gives the power for us to take prohibition
|
4 |
decisions and impose mandatory remedies; Article 9,
|
5 |
which provides for commitment decisions. That is
|
6 |
voluntary remedies where it is up to the parties to
|
7 |
propose adequate remedies. There is no finding of an
|
8 |
abuse.
|
9 |
And these decisions are only possible where the
|
10 |
Commission does not intend to impose a fine.
|
11 |
And then there is also provision for interim
|
12 |
measures in cases of urgency in Article 8.
|
13 |
I will focus today only on the first one,
|
14 |
Article 7, prohibition decisions, whereby the Commission
|
15 |
is entitled, where it finds an infringement of either
|
16 |
Article 81 or 82, to require the undertaking concerned
|
17 |
to bring such an infringement to end. For this purpose,
|
18 |
it may impose on them any behavioral or structural
|
19 |
remedies which are proportionate to the infringement
|
20 |
committed and necessary to bring the infringement
|
21 |
effectively to an end.
|
22 |
Structural remedies can only be imposed either
|
23 |
where there is no equally effective behavioral remedy or
|
24 |
where any equally effective behavioral remedy would be
|
25 |
more burdensome for the undertaking concerned than the |
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structural remedy.
|
2 |
In other words, two types of remedies are
|
3 |
possible, behavioral, structural.
|
4 |
As the wording indicates, the principles of
|
5 |
necessity and proportionality applies. And the aim, as
|
6 |
stated, is to bring the infringement effectively to an
|
7 |
end.
|
8 |
In other words, the Commission has the power to
|
9 |
require a company to restore the market conditions
|
10 |
absent the infringement and to impose remedies that are
|
11 |
necessary to that effect.
|
12 |
But, of course, details of any such measures can
|
13 |
only be decided on a case-by-case basis.
|
14 |
In addition to this, Recital 12 of the
|
15 |
regulation provides that with regard to structural
|
16 |
remedies, "changes in the structure of an undertaking as
|
17 |
it existed before the infringement was committed would
|
18 |
only be proportionate where there is a substantial risk
|
19 |
of a lasting or repeated infringement that derives from
|
20 |
the very structure of the undertaking."
|
21 |
Now, if we look at how this framework is applied
|
22 |
in practice, I believe that the standard scenario is to
|
23 |
have a cease and desist order plus fines.
|
24 |
In our terminology, fines are not really
|
25 |
remedies, but cease and desist orders are. |
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And by cease and desist orders, I mean an order
|
2 |
for the company to bring the abusive behavior to an end
|
3 |
and refrain from repeating such act and conduct as well
|
4 |
as any act or conduct having the same or equivalent
|
5 |
object or effect.
|
6 |
This is usually the standard phrase in an
|
7 |
Article 82 decision.
|
8 |
But a remedy, as we speak about it here today,
|
9 |
is an elaboration, then, sometimes an expansion of a
|
10 |
cease and desist order, either prescribing a certain
|
11 |
action or prohibiting a certain action, leaving the firm
|
12 |
discretion on what precisely to implement.
|
13 |
Now, how to design a remedy. In theory,
|
14 |
remedies or commitments should be effective,
|
15 |
proportionate/necessary, clear and precise, cost
|
16 |
efficient, transparent and consistent.
|
17 |
Of course, in practice, this is quite a
|
18 |
challenge.
|
19 |
And as mentioned, evidently there is an inherent
|
20 |
link between the nature of the infringement and the
|
21 |
remedies available to the Commission, and any assessment
|
22 |
of the effectiveness and necessity of the remedy must be
|
23 |
based on the facts and circumstances of each individual
|
24 |
case.
|
25 |
But here are some possible criterias, a |
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nonexhaustive list on how to assess the effectiveness of
|
2 |
a remedy, questions such as does the remedy lower
|
3 |
barriers to entry, is it likely to increase consumer
|
4 |
welfare, can it be practically implemented, monitored
|
5 |
and enforced and how quickly can the remedy restore
|
6 |
competition.
|
7 |
One question that has been raised is whether one
|
8 |
could foresee a two-step approach with regard to
|
9 |
remedies. That is, if the initial remedies imposed are
|
10 |
ineffective for one reason or another, could stricter
|
11 |
remedies be imposed.
|
12 |
Here there may be a difference in our respective
|
13 |
legal frameworks. In Europe, in order for us to impose
|
14 |
a new remedy if the initial remedy does not work, we
|
15 |
would have to respect the procedural rights of the
|
16 |
parties, and we would normally have to issue a so-called
|
17 |
statement of objections outlining the reasons why a new
|
18 |
remedy is required. And that, of course, is a procedure
|
19 |
that we know takes time.
|
20 |
Of course, this is true for the initial remedy.
|
21 |
We must provide sufficient notice in a statement of
|
22 |
objection of the remedies foreseen. It would be
|
23 |
possible to have some options, some alternatives and
|
24 |
allow the company concerned to comment on these.
|
25 |
With regard to behavioral remedies, a possible |
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definition of behavioral remedy, "a behavioral remedy is
|
2 |
a measure that obliges the concerned undertaking to act
|
3 |
in a certain way or to omit certain anticompetitive
|
4 |
conduct."
|
5 |
Compliance with behavioral remedies usually has
|
6 |
to be monitored and enforced. One can classify these
|
7 |
types of remedies according to the type of infringement,
|
8 |
antiforeclosure remedies, anticollusion remedies or
|
9 |
antiexploitation remedies.
|
10 |
I will not go into further detail on these now.
|
11 |
Common to most behavioral remedies is that they
|
12 |
do not change the incentive of the firms to engage in
|
13 |
anticompetitive behavior. As a consequence, compliance
|
14 |
has to be monitored to avoid circumvention.
|
15 |
Monitoring raises various questions as to who
|
16 |
should monitor and how. Should it be the European
|
17 |
Commission, some sector-specific regulator, competitors,
|
18 |
customers, trustees, national courts, or could one
|
19 |
resort to some arbitration mechanism, and how should all
|
20 |
this be organized.
|
21 |
I believe as regards monitoring, the U.S. is
|
22 |
probably more advanced in this regard than we are in
|
23 |
Europe. And we are currently looking into ways to
|
24 |
improve our effectiveness in this regard.
|
25 |
A structural remedy is a measure that |
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effectively changes the structure of the market by a
|
2 |
transfer of property rights regarding tangible or
|
3 |
intangible assets, including the transfer of an entire
|
4 |
business unit that does not lead to any ongoing
|
5 |
relationships between the former and future owner.
|
6 |
After its completion, "a structural remedy
|
7 |
should not require any further monitoring."
|
8 |
So structural remedies would normally involve
|
9 |
the transfer of property rights, some form of
|
10 |
divestiture. There should not be any ongoing links.
|
11 |
There should be a one-off measure, a clean
|
12 |
break, and this remedy should remove incentives and/or
|
13 |
the means of a firm to infringe competition law.
|
14 |
It may be necessary to have some sort of
|
15 |
behavioral flanking measures. Monitoring and
|
16 |
enforcement should only be necessary until divestiture
|
17 |
is completed.
|
18 |
That would be an advantage compared to
|
19 |
behavioral remedies. However, structural remedies have
|
20 |
rarely been used in Europe under Article 82.
|
21 |
However, for the future, the Commission would
|
22 |
not hesitate to impose structural remedies when
|
23 |
necessary and appropriate. In fact, we could even be
|
24 |
obliged to do so, although, of course, again it would
|
25 |
depend on the circumstances of each case. |
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I would just like to conclude with a quote from
|
2 |
Mr. Charles A. James, the former Assistant Attorney
|
3 |
General at DOJ.
|
4 |
He has stated in an article that "an antitrust
|
5 |
remedy must stop the offending conduct, prevent its
|
6 |
recurrence and restore competition. Preventing
|
7 |
recurrence must involve proactive steps to address
|
8 |
conduct of similar nature. Restoration requires
|
9 |
prospective relief to create lost competition and may
|
10 |
involve actions to disadvantage the antitrust offender
|
11 |
and/or favor its rivals."
|
12 |
I believe the Commission would fully subscribe
|
13 |
to this statement, although I should add that the
|
14 |
Assistant Attorney General also emphasized that the
|
15 |
relief, however, must have its foundation in the
|
16 |
offending conduct.
|
17 |
So in the end, it all comes back to the inherent
|
18 |
link between the remedy and the infringement identified.
|
19 |
Thank you for your attention.
|
20 |
(Applause.)
|
21 |
MS. KURSH: Thank you, Per.
|
22 |
Tad Lipsky is a partner at Latham & Watkins and
|
23 |
a former Deputy Assistant Attorney General at the
|
24 |
Antitrust Division.
|
25 |
While at the division, he organized and |
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supervised preparation of the merger guidelines and the
|
2 |
Antitrust Division's view of the United States versus
|
3 |
IBM, among many important antitrust cases.
|
4 |
His career has spanned virtually every facet of
|
5 |
antitrust law, and he has served in both public and
|
6 |
private practice, both here and abroad.
|
7 |
Welcome, Tad.
|
8 |
MR. LIPSKY: Thanks, Gail and Dan. Your careers
|
9 |
have spanned almost every aspect of antitrust law too.
|
10 |
I must say you have the organization of these
|
11 |
hearings down to an art and science.
|
12 |
It is really a great pleasure to be able to
|
13 |
focus just on the substance and you are taking care of
|
14 |
all the rest.
|
15 |
So congratulations. This has been a fascinating
|
16 |
set of presentations this morning, and, indeed, the
|
17 |
whole record of the hearings has been very interesting.
|
18 |
I enjoyed it very much. I am sure it will end
|
19 |
up being a very signal contribution to a lot of
|
20 |
subjects.
|
21 |
The remedies in some respects is really the
|
22 |
whole debate.
|
23 |
Ultimately every antitrust case comes down to
|
24 |
what is the problem and what do you want to do about it.
|
25 |
If you don't have the answer to the remedy, you really |
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aren't out of the starting gate.
|
2 |
It is interesting when Bill Baxter came to
|
3 |
Washington, he had a specific plan for some things he
|
4 |
wanted to address. Actually, the AT&T case was not high
|
5 |
on his list.
|
6 |
His list was to begin an amicus program to
|
7 |
articulate to the courts in antitrust cases some
|
8 |
economic errors and omissions that he thought were
|
9 |
endemic in the precedent.
|
10 |
It is interesting we are seeing sort of the
|
11 |
final element of that play out just this week with the
|
12 |
Legion case.
|
13 |
Just about every landmark of judicial ignorance
|
14 |
that Bill had identified has now fallen, when you look
|
15 |
at the Monsanto and Associated General Contractors and
|
16 |
NCAA versus Board of Regents and Copperweld.
|
17 |
This is really getting down to the last part of
|
18 |
that program.
|
19 |
And then he wanted to rewrite what were then the
|
20 |
effective merger guidelines, the 1968 sort of Warren
|
21 |
court, Lyndon B. Johnson version of merger guidelines.
|
22 |
Finally, the third element on his list was what
|
23 |
he had seen -- he wanted to do something about judgments
|
24 |
and decrees and the way relief was handled in the
|
25 |
division, and that meant not only cleaning out a lot of |
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old decrees but, believe it or not, when Baxter came to
|
2 |
town in 1981, it was not yet the consistent practice,
|
3 |
although it was beginning to be more consistent to have
|
4 |
sunset provisions in judgment decrees and in consent
|
5 |
decrees entered by the Antitrust Division.
|
6 |
I think both at the Commission and the division
|
7 |
that is now pretty much uniformly the practice.
|
8 |
He abolished the judgment enforcement section
|
9 |
because he thought it was very pernicious to have a
|
10 |
separate judgment enforcement section which discouraged
|
11 |
connecting the theory of remedy to the theory of relief
|
12 |
sought in a case.
|
13 |
Bill had many memorable phrases, but his way of
|
14 |
summing up this problem was to say of the division
|
15 |
litigators, he said "Everybody likes to catch them, but
|
16 |
nobody wants to clean them," by which he meant if you
|
17 |
weren't willing to clean the fish, then you probably
|
18 |
shouldn't be fishing to catch it either.
|
19 |
My presentation is really in two parts. One is
|
20 |
talking about essential facilities and mandatory access,
|
21 |
because that is such a hot part of the remedies debate
|
22 |
in the context certainly of Section 2 cases,
|
23 |
monopolization cases.
|
24 |
But it is really the way of illustrating what I
|
25 |
think is a fundamental point that is sometimes lost in |
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48
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debating the specifics of particular cases and I think
|
2 |
needs to be emphasized.
|
3 |
Perhaps not a Baxterian phrase, but my phrase to
|
4 |
capture the issue is no sense pretending.
|
5 |
If your image of the way an industry should work
|
6 |
in a modern capitalist competitive economy is that there
|
7 |
should be a number of competitors vying for advantage to
|
8 |
supply products and services that meet demand, there are
|
9 |
some industries where you are not going to have
|
10 |
multiple -- by virtue of the cost structure or some
|
11 |
other almost element of the technology or the market,
|
12 |
you are not going to have multiple competitors.
|
13 |
This is where the essential facility doctrine
|
14 |
really starts, from an implicit recognition that if you
|
15 |
have something that meets the essential facility
|
16 |
definition and it also is something that other
|
17 |
competitors cannot practically duplicate -- is I think
|
18 |
the phrase from the seminar cases -- what you have is a
|
19 |
classic declining cost industry where you simply are not
|
20 |
going to be able to structure it and expect optimal
|
21 |
results on a competitive basis.
|
22 |
You will have to consider the viability of
|
23 |
regulatory alternatives, price limits in the framework
|
24 |
of utility regulation or some other kind of public
|
25 |
intervention, and that puts you kind of in the space |
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where you have essentially got a fundamental departure I
|
2 |
think from the antitrust vision of the way an industry
|
3 |
is supposed to operate and you need to consider whether
|
4 |
you can even attack the problem with an antitrust-like
|
5 |
remedy, be it vertical divestiture or whatever, or
|
6 |
whether you need a regulatory scheme.
|
7 |
And it also means that the costs and benefits of
|
8 |
these ways of addressing this problem need to be
|
9 |
confronted in an intellectually honest way and that you
|
10 |
might conclude that the best thing to do is to do
|
11 |
nothing because there are some problems whose remedies
|
12 |
are more costly than just suffering the problem.
|
13 |
I also wanted to point out, as long as we are on
|
14 |
the subject, there is a flaw in the essential facilities
|
15 |
doctrine, and that is that there is an element that says
|
16 |
you are not required to provide access if you don't have
|
17 |
room in your facility to provide the access.
|
18 |
That is just inconsistent with the fundamental
|
19 |
premise of an essential facility. If you are a
|
20 |
monopolist, you obviously have the incentive to
|
21 |
undersize and not build enough capacity.
|
22 |
So the fact you are actually operating at
|
23 |
capacity and don't have room to fit in access by anybody
|
24 |
else may actually be a signal that you are engaged in
|
25 |
exploiting your monopoly position. |
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So it shouldn't be a reason -- you can say the
|
2 |
essential facilities doctrine is silly because all it
|
3 |
does is identify circumstances where you have to replace
|
4 |
antitrust with regulation.
|
5 |
But at least if that's your theory, you don't
|
6 |
want to say that you are going to ignore the problem if
|
7 |
it turns out that the monopolist is in fact a monopolist
|
8 |
and doing what he is not supposed to do.
|
9 |
Finally, a point that has been touched on
|
10 |
before, the idea of intellectual property and mandatory
|
11 |
licensing of intellectual property as a remedy.
|
12 |
If your inability to duplicate is because of a
|
13 |
law that says that nobody else has the legal right to
|
14 |
make, use or sell some product or do something else,
|
15 |
then you have an inherent tension between the reward
|
16 |
structure set up by the intellectual property law and
|
17 |
the idea of antitrust intervention.
|
18 |
That is another real complicated problem. So if
|
19 |
you want to try and access remedy, here are some of the
|
20 |
costs and complications.
|
21 |
First of all, we already heard how complicated
|
22 |
it is to engage in access pricing. These are all the
|
23 |
familiar problems of traditional public utility-style
|
24 |
regulation, local distribution monopolies, gas,
|
25 |
electricity, what have you. |
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Another issue that I think tends to be ignored
|
2 |
is evasion possibilities. It is very easy to discuss
|
3 |
monopoly pricing in your premise for intervention and to
|
4 |
slip into an assumption that if you can do something
|
5 |
about monopoly pricing, that will enhance the
|
6 |
performance of the essential facility that you have.
|
7 |
But, in fact, anybody who has dealt with an
|
8 |
insurance company or bought a car or actually bought
|
9 |
anything more complicated than a toothpick realizes that
|
10 |
there are zillions of dimensions to any commercial
|
11 |
transaction. There is credit terms, there is delivery,
|
12 |
there is service, repair, do you get a case with that
|
13 |
instrument.
|
14 |
If you have monopoly problem, you have to have
|
15 |
some way of forcing, compelling the monopolist to go out
|
16 |
beyond the area of profit maximization in every
|
17 |
dimension, not just price and output but quality and
|
18 |
service and innovation and all that other stuff.
|
19 |
So these regulatory problems tend to be severely
|
20 |
underestimated.
|
21 |
I have listed some other disadvantages here of
|
22 |
access remedies. You sacrifice economies of
|
23 |
integration, as is made obvious by some of our decrees
|
24 |
over the years, the Paramount decree separating
|
25 |
exhibition from production of motion pictures. |
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You had it in the AT&T case. It comes up from
|
2 |
time to time. The institutional problems of enforcement
|
3 |
through the consent decree process I think are fairly
|
4 |
well recognized.
|
5 |
The Paramount decree, as a matter of fact, being
|
6 |
perhaps a good example, because after a course of
|
7 |
enforcement over many years, you had a situation where
|
8 |
ultimately the Assistant Attorney General had to walk
|
9 |
away from a remedy that had been adopted by the decree
|
10 |
enforcement staff, which looked to the new folks like
|
11 |
authorizing the so-called splits, the exhibition side,
|
12 |
buyers cartel.
|
13 |
So arguably you had a decree enforcement staff
|
14 |
being co-opted by the industry that they were regulating
|
15 |
and coming up with a solution that was seriously
|
16 |
anticompetitive.
|
17 |
Finally, here is a huge problem that is very
|
18 |
difficult to get a grip on but nevertheless we are
|
19 |
confident that it exists, that if you encourage
|
20 |
disadvantaged firms, usually a disadvantaged competitor,
|
21 |
to believe there is an antitrust remedy in an essential
|
22 |
facility-type context, you are encouraging them to come
|
23 |
to the agency, to invest their resources in legal
|
24 |
maneuvering rather than investing those resources in
|
25 |
innovation that would destroy the monopoly. And that's |
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a bad thing.
|
2 |
Nevertheless, as this slide is headed, once you
|
3 |
are in this space where you can't assume that there is a
|
4 |
competitive structure that will automatically achieve
|
5 |
optimal performance, you have to assess the possibility
|
6 |
that some kind of intervention and some kind of access
|
7 |
remedy, despite all the costs and burdens that I just
|
8 |
enumerated, might actually be better than doing nothing
|
9 |
or might be better than applying some other regulatory
|
10 |
remedy.
|
11 |
And some of the items that are sometimes
|
12 |
relevant to deciding whether you want to dive off that
|
13 |
cliff or not, if you are going to establish conditions,
|
14 |
prices and conditions of access, is there a regulatory
|
15 |
mechanism that is already extant that could take care of
|
16 |
that issue.
|
17 |
What most people regard as the seminal essential
|
18 |
facilities case -- it is arguable, but let's accept that
|
19 |
for right now -- U.S. versus Terminal Railroad, that's
|
20 |
where the J. Gould Railroads owned all the bridges and
|
21 |
terminals in St. Louis, and they wouldn't let the
|
22 |
western railroads use those facilities on equivalent
|
23 |
terms.
|
24 |
When the Supreme Court basically found liability
|
25 |
or instructed the lower court to find liability for the |
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Gould coalition's behavior, they sent the matter back to
|
2 |
the District Court and said fashion a decree that lets
|
3 |
the western railroads use these facilities more or less
|
4 |
on the same terms and conditions as the railroads that
|
5 |
are part of the Gould group, "but, by the way, don't
|
6 |
mess around with the ICC's ratemaking authority, you
|
7 |
can't make rates."
|
8 |
So they had the ICC there they thought they
|
9 |
could rely on to solve any specific ratemaking issues.
|
10 |
We have already heard reference to the FCC's
|
11 |
ability to adjust the access charges and in effect work
|
12 |
in cooperation with the federal District Court in the
|
13 |
Bell system decree.
|
14 |
Then you have this fascinating case of Otter
|
15 |
Tail Power, where the Supreme Court in a 4-3 decision,
|
16 |
where the dissent was actually right, but nevertheless,
|
17 |
it was a 4-3 decision where the Supreme Court
|
18 |
essentially said that on remand, the parties would have
|
19 |
to work out an access arrangement.
|
20 |
And in this particular instance, the Federal
|
21 |
Power Commission would have been the logical regulator.
|
22 |
But at that time it did not have the power to regulate
|
23 |
the access terms and conditions that the Supreme Court
|
24 |
was looking to have enforced.
|
25 |
I don't know where that left people practically. |
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I doubt that that decree did much good. But in any
|
2 |
event, since we have gone from the Federal Power
|
3 |
Commission to the Federal Energy Regulatory Commission,
|
4 |
they do now have the power to order and regulate access.
|
5 |
But, of course, things have been scrambled in
|
6 |
that industry by some fairly aggressive deregulation.
|
7 |
There are some cases which are decided more on
|
8 |
Section 1 grounds, Gamco and the Associated Press case.
|
9 |
I will not spend any time on them. Basically,
|
10 |
it is an organization where they are granting access to
|
11 |
a bunch of different competitors.
|
12 |
So if one of them is wrongfully excluded, you
|
13 |
can just order access on the same terms and conditions
|
14 |
that are available to everybody else. That makes your
|
15 |
information and regulation costs a lot lower.
|
16 |
And, finally, the question of dynamic
|
17 |
efficiencies, I think that Bob has really touched on
|
18 |
this very profound question about whether the AT&T
|
19 |
decree really has anything to do with the fact that long
|
20 |
distance rates have come down and now we have all of
|
21 |
these different forms of communication.
|
22 |
I think it is arguable -- I don't have the time
|
23 |
or energy to argue it right now. But I think it is
|
24 |
arguable that a lot of these innovations might not ever
|
25 |
have occurred without the divestiture decree. |
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AT&T had essentially invented mobile telephony
|
2 |
or at least developed it to the point where the FCC was
|
3 |
beginning to grant licenses.
|
4 |
A tremendous fraction of the immense
|
5 |
communications and data processing research in the
|
6 |
United States took place in an AT&T subsidiary known as
|
7 |
Bell Labs.
|
8 |
That was brought to an end by the decree.
|
9 |
Really I think it may turn out that the strongest case
|
10 |
for connecting the AT&T decree to the subsequent
|
11 |
explosion in competition in the communication sector is
|
12 |
more an institutional question of unbinding parts of the
|
13 |
system that were capable of innovating, although I'm not
|
14 |
sure even Bill Baxter would have identified that as a
|
15 |
specific objective of his.
|
16 |
It is difficult to draw general conclusions from
|
17 |
this history of Section 2 remedies, but let me try a
|
18 |
few.
|
19 |
The need for speed. It is often remarked how
|
20 |
long structural cases take and how the industry and the
|
21 |
technology tend to change in a manner that by the time
|
22 |
you are done, everything you thought when you started
|
23 |
the case is irrelevant.
|
24 |
Well, Exhibit A in that would be United States
|
25 |
versus IBM, where it started as a relatively restricted |
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predatory pricing case, actually, but it soon expanded.
|
2 |
It absorbed all these issues about foreign peripherals
|
3 |
being attached to the IBM system.
|
4 |
The theory shifted. And, of course, if you look
|
5 |
at the specific procedural approach that was taken in
|
6 |
the Federal District Court up in New York, where the
|
7 |
case was pending, sort of put like an eight- to 10-year
|
8 |
bump in the schedule for the trial, more or less
|
9 |
guaranteed disaster.
|
10 |
If you want to have some fun, go back and look
|
11 |
at the original 1969 IBM complaint. It sounds so
|
12 |
antique.
|
13 |
In an effort to make IBM sound like this
|
14 |
thundering, huge, unstoppable behemoth, it says its
|
15 |
revenues for general purpose computer systems went from
|
16 |
600 million to $3 billion, as if that was something that
|
17 |
would scare us. But nowadays, $3 billion would probably
|
18 |
not be a 1 percent market share in that particular
|
19 |
industry.
|
20 |
U.S. v. Microsoft, I am the mid-Atlantic
|
21 |
distributor of Ann Bingaman's success sheet. I really
|
22 |
love what she did in the processor license case.
|
23 |
She took it -- I think from the day that the
|
24 |
division actually opened the investigation to the day
|
25 |
that decree was entered was just about exactly one year. |
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If you can pick a targeted practice and remedy
|
2 |
it on that time schedule, it almost doesn't matter
|
3 |
whether it was good or bad, because you look at it on a
|
4 |
time schedule where things haven't changed that much and
|
5 |
you can actually make a judgment about what you are
|
6 |
doing, whether you are doing something that is helpful
|
7 |
or the opposite.
|
8 |
If it had taken 13 years, it would have been
|
9 |
ridiculous. But this is an approach that provided a lot
|
10 |
of flexibility and tended to minimize error costs.
|
11 |
The broader phase of Microsoft that we have
|
12 |
heard spoken about mostly this morning it seems to me
|
13 |
extended over a much longer time period.
|
14 |
There are a lot of shifts in remedies. You had
|
15 |
a change in administration, where certainly the emphasis
|
16 |
shifted, and that sort of fits back into the old IBM
|
17 |
pattern that you can't -- I believe I heard it said at
|
18 |
one point that we were going to go into the liability
|
19 |
determination and that phase of Microsoft without any
|
20 |
clear idea of what the remedy was going to be.
|
21 |
Of course, there were some fairly notorious
|
22 |
developments on that subject, both in the District Court
|
23 |
and in the Court of Appeals, the bit about, well, we won
|
24 |
World War II, so we get to determine how the Japanese
|
25 |
have to behave. |
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And then U.S. versus Western Electric, which was
|
2 |
sort of the middle and the end phase of the AT&T
|
3 |
litigation. Back in the 1910s, it was thought that AT&T
|
4 |
had a monopoly of long distance which it was using to
|
5 |
snuff out competition of local telecommunications.
|
6 |
In the 1950s incarnation of U.S. versus Western
|
7 |
Electric, the theory was that AT&T had a monopoly of
|
8 |
telecommunications equipment that was being used to
|
9 |
monopolize long lines and local.
|
10 |
And then finally in the 1974, the final phase of
|
11 |
the case, the theory was that it was the local
|
12 |
monopolies that were used to monopolize the other part.
|
13 |
So this is a little bit gratuitous. It is
|
14 |
perfectly possible that over that horrendous stretch of
|
15 |
time, all three theories might have been true when they
|
16 |
were asserted. Yet, I think it is only in the final
|
17 |
phase that you have a good match between the theory of
|
18 |
liability and the remedy that was proposed.
|
19 |
I think that's what made -- to the extent it
|
20 |
worked, I think that's what made the U.S. versus AT&T
|
21 |
decree work.
|
22 |
Institutional suitability of different elements
|
23 |
of our society, of our political and legal system to
|
24 |
manage relief in these large cases, we all know that the
|
25 |
legislature can only intervene selectively and to set |
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broad principles.
|
2 |
It is very difficult when you do that to try to
|
3 |
achieve any kind of economic policy coherence. It only
|
4 |
happens rarely, for example, in the Airline Deregulation
|
5 |
Act, when essentially Congress said forget economic
|
6 |
regulation, we are going back to antitrust.
|
7 |
We have sort of the opposite in communications
|
8 |
regulation, all kinds of interventions for all kinds of
|
9 |
conflicting and indistinct policy purposes.
|
10 |
Administrative regulation itself tends to
|
11 |
reflect that policy and coherence that often
|
12 |
characterize legislation.
|
13 |
The executive is a little bit more coherent. At
|
14 |
least you have the President theoretically in charge of
|
15 |
what the Assistant Attorney General does, and the
|
16 |
Assistant Attorney General at least in theory is in
|
17 |
charge of what the trial staff does.
|
18 |
It tends to be better directed and more
|
19 |
coherent, but it is not immune from distractions and
|
20 |
from other agendas, as I think is perhaps illustrated by
|
21 |
some of the side-winding that has occurred in almost
|
22 |
every major Section 2 structural case since World War
|
23 |
II.
|
24 |
Finally, the judicial role. Of course, the
|
25 |
Federal District Court is very much in command of what |
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happens in its own courtroom.
|
2 |
Griffin Bell loves to tell the story he was
|
3 |
appointed directly to the Fifth Circuit Court of
|
4 |
Appeals, and at his investiture the chief judge said
|
5 |
"well, Griffin, you made a hell of a mistake, you know
|
6 |
up on this court you have to get at least one other guy
|
7 |
to agree with you before you can do anything, but in
|
8 |
Federal District Court, you are pretty much in command
|
9 |
of the courtroom."
|
10 |
I think Judge Green's phase of United States
|
11 |
versus AT&T illustrates certainly the best of what can
|
12 |
happen when he gets ahold of a good structural Section 2
|
13 |
case, and maybe in the later phases he might also have
|
14 |
illustrated perhaps not the worst of what can happen but
|
15 |
some of the disadvantages, that even judges are not
|
16 |
immune from the kind of bunker mentality that sets in
|
17 |
after you have witnessed these two litigants going back
|
18 |
and forth and perhaps have some views of your own, based
|
19 |
on the evidence, of course, but nevertheless we do have
|
20 |
examples.
|
21 |
Judge Wiezanski in United Shoe Machinery
|
22 |
Corporation or -- I have forgot the name of the judge in
|
23 |
the Paramount decree, and there is also some evidence of
|
24 |
that from the New Jersey court, where the same judge had
|
25 |
responsibility for administering United States versus |
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Western Electric for '56 to '82 -- anyway, 26 years.
|
2 |
You can do the subtraction.
|
3 |
In conclusion, if I had to derive a number of
|
4 |
crisp, identifiable principles from our hundred-plus
|
5 |
years of experience in these kinds of cases, to have a
|
6 |
good one, you have to have a legally sound theory for
|
7 |
attacking a monopoly and you have to have a good
|
8 |
economic analysis that convinces you that the legal
|
9 |
theory deserves to be applied.
|
10 |
And for our purposes here today, most
|
11 |
importantly, you have to be able to identify an
|
12 |
effective remedy that can actually be carried out
|
13 |
without imposing so many costs on various parts of the
|
14 |
system that it is not worth the trip.
|
15 |
And if you wanted to identify a good candidate
|
16 |
for a structural case, I think given all of these
|
17 |
difficulties, you need, number one -- this is something
|
18 |
that is only useful for important problems.
|
19 |
The administrative costs and complexities, the
|
20 |
type of focus, long-term focus on these kinds of issues
|
21 |
that is necessary to bring them to successful conclusion
|
22 |
means that you don't mess around with lemon carts even
|
23 |
if they are monopolies.
|
24 |
You are looking for very long-term performance
|
25 |
issues and very big and important industries. |
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Finally, to return to the point I was trying to
|
2 |
make with the initial presentation about access remedies
|
3 |
and essential facilities, you have to be intellectually
|
4 |
honest about what you are balancing.
|
5 |
You can try some limited remedies. You can look
|
6 |
at the possibility of access remedies and more
|
7 |
regulatory approaches, either under the rubric of an
|
8 |
antitrust case or perhaps you ought to be lobbying a
|
9 |
federal agency or a state agency, for that matter, to
|
10 |
impose the regulatory alternative, and you also need to
|
11 |
ask yourself the question whether given the costs and
|
12 |
benefits of all the alternatives, maybe the best thing
|
13 |
to do is nothing.
|
14 |
So thank you.
|
15 |
(Applause.)
|
16 |
MS. KURSH: We will take a 10-minute break and
|
17 |
then start off with the questions. Thank you.
|
18 |
(Recess.)
|
19 |
MS. KURSH: Back on the record. Thank you
|
20 |
everyone.
|
21 |
The way we are going to proceed for the
|
22 |
remainder of our time this morning is I will ask each of
|
23 |
our panelists in order, starting with Dave, to take just
|
24 |
a few minutes to respond to anything they heard from
|
25 |
anyone else. |
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For example, Dave, if you want to respond to Per
|
2 |
or anyone else on the panel, you should feel free.
|
3 |
And then we will proceed with our moderated
|
4 |
question session.
|
5 |
The way we have done this in the past, for those
|
6 |
of you who haven't been here before, is the agency will
|
7 |
be putting up on the slide some propositions. These are
|
8 |
not necessarily propositions that the agencies are
|
9 |
endorsing, but they are just a way for us to begin the
|
10 |
questioning as sort of a springboard for the discussion.
|
11 |
So, Dave, why don't we start with you.
|
12 |
MR. HEINER: I hate to disappoint, Gail. But I
|
13 |
don't think I have any comments to add to what the
|
14 |
others said.
|
15 |
MS. KURSH: All right, fine. Then we will -- go
|
16 |
ahead, Bob.
|
17 |
MR. CRANDALL: I'm more loquacious than Dave.
|
18 |
A couple things. First, we mentioned this in a
|
19 |
conference call. Tad raises the essential facilities
|
20 |
doctrine.
|
21 |
The problem with the essential facilities is
|
22 |
someone has to set the price. I can't imagine in the
|
23 |
modern world anything, other than maybe water utilities
|
24 |
or gas utilities, in which it would be a very easy task
|
25 |
to set the prices efficiently for access to a network |
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industry.
|
2 |
The difficulty in figuring out costs, whether
|
3 |
they are forward looking or backward looking costs, of
|
4 |
dealing with the problem of the real options for not
|
5 |
investing when technology is changing, the stranded cost
|
6 |
problem, essentially, are just enormous, not to mention
|
7 |
the fact that once you begin to have a regulated
|
8 |
approach to essential facilities, you then create
|
9 |
enormous tensions in modernizing those essential
|
10 |
facilities.
|
11 |
Once you have a set of clients using the network
|
12 |
of the local telephone companies in the United States or
|
13 |
in Europe, then any attempt by the telephone company to
|
14 |
change its network technology is going to be opposed by
|
15 |
some of those people who are using the current
|
16 |
technology.
|
17 |
So you create enormous disincentives, both from
|
18 |
the pricing and because of the argument over technology
|
19 |
for deploying new technologies.
|
20 |
So it strikes me that there is a very strong
|
21 |
presumption against the essential facilities doctrine in
|
22 |
technologically progressive industries.
|
23 |
Finally, Tad mentions the fact that there was
|
24 |
probably some benefit to breaking up AT&T because they
|
25 |
tended to control the technologies through Bell Labs and |
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everything.
|
2 |
There is something to that. Interestingly
|
3 |
enough, a lot of the students of telecom think one of
|
4 |
the great tragedies of breaking up AT&T was the
|
5 |
destroying of Bell Laboratories.
|
6 |
But at the bottom, this was a regulatory
|
7 |
problem. Had the FCC not engaged in activities to
|
8 |
foreclose entry, through the licensing spectrum or
|
9 |
through its long distance policy, remember the FCC
|
10 |
actually fought in court to try to prevent MCI from
|
11 |
offering switched long distance service.
|
12 |
The only reason they allowed MCI and the others
|
13 |
and in the so-called special access carriers was to get
|
14 |
information on what the costs are from another source so
|
15 |
they could regulate AT&T a little more efficiently.
|
16 |
So the problem at the bottom was the fact of a
|
17 |
regulatory regime which was interested in the long run
|
18 |
perpetuation of itself. That's a problem which also
|
19 |
could exist as we heard in terms of continuing to
|
20 |
supervise decrees and why sunset is a good item on
|
21 |
decrees.
|
22 |
MS. KURSH: Thank you.
|
23 |
Per.
|
24 |
MR. HELLSTROM: Perhaps a brief comment to
|
25 |
something that Dave said. |
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He said that the aim for competition authority
|
2 |
should be to create competitive opportunities rather
|
3 |
than engineer a particular market outcome.
|
4 |
I just would like to say that I think we fully
|
5 |
support that. I think the European Commission does not
|
6 |
aim to engineer market outcomes. But, of course, we may
|
7 |
disagree on what it actually means to have real
|
8 |
competitive opportunities, and there may be some
|
9 |
divergence.
|
10 |
MS. KURSH: Actually, if I could follow-up on
|
11 |
that a little bit.
|
12 |
Dave, one of the questions I had for you on that
|
13 |
point that you made, would you say that's also true in a
|
14 |
case where the theory of liability was based on the
|
15 |
monopoly resulting from the exclusionary conduct?
|
16 |
MR. HEINER: Well, I think I was mainly focused
|
17 |
on the experience Microsoft has had to date, which was a
|
18 |
case where there was not an acquisition of monopoly
|
19 |
cases.
|
20 |
Is that what your question is going to?
|
21 |
MS. KURSH: Yes.
|
22 |
MR. HEINER: My comment was focused on the
|
23 |
monopoly maintenance situation. In that case, it seems
|
24 |
appropriate to try to create opportunities but not
|
25 |
necessarily go so far as to try to have a particular |
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market outcome in terms of share.
|
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MS. KURSH: Thank you.
|
3 |
Tad?
|
4 |
MR. LIPSKY: Just maybe to respond briefly to
|
5 |
Bob's remark.
|
6 |
There is no question that the occasions for
|
7 |
invocation of the essential facility doctrine are
|
8 |
becoming more rare because of a lot of industries like
|
9 |
electric power.
|
10 |
As I suggested, the public policy focus has been
|
11 |
more on maximizing the areas of the industry that can be
|
12 |
deregulated or where market-based solutions can be
|
13 |
implemented.
|
14 |
So we no longer have a regulated utility kind of
|
15 |
as our mental model for the way that that industry
|
16 |
works. But it shouldn't be excluded that there are
|
17 |
areas that would be candidates for the application of
|
18 |
that doctrine.
|
19 |
Again, I don't argue with the fact that the
|
20 |
costs and complexities of administering an access
|
21 |
pricing program can be just enormous. That could be a
|
22 |
very good reason for just saying "tough, here is an
|
23 |
essential facility."
|
24 |
And if Congress isn't willing to adopt a
|
25 |
tailored regulatory regime to address it, probably we |
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are going to do more harm than good by attacking it with
|
2 |
antitrust remedies.
|
3 |
I think you will actually find at least more
|
4 |
than a hint of that style of reasoning in this new line
|
5 |
I guess what I would call soft immunity cases in which I
|
6 |
would put both Town of Concord versus Boston Edison and
|
7 |
also arguably the Trinko case, where you have an
|
8 |
antitrust remedy that is sought to be overlaid on a
|
9 |
regulatory background and where the court says the
|
10 |
standard for immunity for federal antitrust is a very
|
11 |
high one.
|
12 |
It is the plain repugnancy standard, which was a
|
13 |
term first used in Terminal Railroad, that we are not
|
14 |
going to rule, we are going to reject the argument for
|
15 |
immunity, but nevertheless, we refuse to recognize the
|
16 |
validity of the claim.
|
17 |
That's why I call it kind of soft immunity. It
|
18 |
is a legal ruling that the claim will not go forward.
|
19 |
But it is not under the traditional rubric of either
|
20 |
express or implied immunity from antitrust prosecution.
|
21 |
MS. KURSH: Thanks.
|
22 |
Tad, let me follow up a little bit on that. You
|
23 |
had said -- and I think that's what you were addressing
|
24 |
right now -- that there may be times when the best thing
|
25 |
is to do nothing. |
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Can you set out what are the guideposts for
|
2 |
those situations? What are you looking for? When do
|
3 |
you make that determination that the best thing is to do
|
4 |
nothing?
|
5 |
MR. LIPSKY: It is very hard to define in the
|
6 |
abstract other than to say you have to look at all the
|
7 |
costs and benefits in the particular industry.
|
8 |
It is not something that lends itself really to
|
9 |
an ideological type of approach.
|
10 |
For example, there was a phase of the AT&T case
|
11 |
when, and this was the rationale that the entry of the
|
12 |
decree was based on and much of the dialogue or debate
|
13 |
in the early implementation of the decree, including
|
14 |
decisions made on applications for waiver of the line of
|
15 |
business restrictions and so forth.
|
16 |
You used to constantly hear the phrase that the
|
17 |
RBOCs had the incentive and ability to fill in the
|
18 |
blank, but basically to goldplate, to enter at less than
|
19 |
remunerative prices, to do all kinds of things to
|
20 |
exclude competitors and so on and so forth and,
|
21 |
therefore, these incentives and the ability to restrict
|
22 |
competition in the market they proposed to enter either
|
23 |
that they be kept out or that it be conditioned.
|
24 |
I think that argument is logically sound. But
|
25 |
if all you can say for the arguments is that it is |
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logically sound, it seems to me you have only taken like
|
2 |
the first step, because you had to worry about things
|
3 |
like if we exclude the RBOCs, what is going to happen to
|
4 |
innovation, what is going to happen to competition in
|
5 |
this line of business, who is going to administer the
|
6 |
restriction, who is going to decide whether a Humvee is
|
7 |
a car if they are applying to enter the car market and
|
8 |
they produce a Humvee.
|
9 |
All those hideous administrative chores are
|
10 |
costly. They encourage strategic behavior. They have
|
11 |
all the costs and also some of the benefits that I have
|
12 |
identified.
|
13 |
It is really the weighing of the costs and
|
14 |
benefits which is the critical step. It is not simply
|
15 |
having a logical argument as to why a remedy of a
|
16 |
certain type ought to address a certain type of
|
17 |
anticompetitive behavior. It is very extremely fact
|
18 |
specific.
|
19 |
MS. KURSH: With that, let's start with our
|
20 |
first proposition, slide number 2. I will read it for
|
21 |
the record.
|
22 |
"Relief should 'terminate the illegal monopoly,
|
23 |
deny to the defendant the fruits of its statutory
|
24 |
violation, and ensure that there remain no practices
|
25 |
likely to result in monopolization in the future.'" |
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It is a quote from United Shoe Machinery.
|
2 |
First, I will start with the basic question whether
|
3 |
everyone on the panel agrees that these are appropriate
|
4 |
remedial goals in a Section 2 case.
|
5 |
MR. HEINER: I will comment briefly.
|
6 |
We had occasion to look at this in connection
|
7 |
with the Section 2 case against Microsoft, where this
|
8 |
particular quote which was brought out.
|
9 |
Our understanding of its meaning was that the
|
10 |
"terminate the illegal monopoly" part of that would
|
11 |
apply in a monopoly acquisition case as opposed to a
|
12 |
monopoly maintenance case.
|
13 |
Understood that way, it seems to make sense.
|
14 |
The next clause, "deny to the defendant the
|
15 |
fruits of its statutory violation," I think one has to
|
16 |
then look at the causation issue, what were the fruits
|
17 |
of the violation.
|
18 |
And if as I was saying during my 15 minutes, if
|
19 |
the causation is relatively weak, there may be lesser
|
20 |
occasion to try to effect change.
|
21 |
And the last clause seems to be relatively
|
22 |
noncontroversial, I would think.
|
23 |
MS. KURSH: Does anyone have a different view or
|
24 |
is there a general agreement?
|
25 |
MR. CRANDALL: I think it is incredibly |
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optimistic that the last clause could be achieved by any
|
2 |
decree, particularly given the difficulty of even
|
3 |
understanding what caused the monopoly to start with.
|
4 |
But in high-tech industries, given the rapid
|
5 |
rate of change, imagine I guess -- we haven't raised --
|
6 |
have you raised MediaPlayer yet?
|
7 |
MR. HEINER: I briefly referenced it.
|
8 |
MR. CRANDALL: The idea that somehow breaking
|
9 |
off MediaPlayer -- that's right, you talked about
|
10 |
selling the one without Realplayer.
|
11 |
The idea that that somehow was necessary to
|
12 |
prevent Steve Jobs from getting into the business of
|
13 |
distributing music seems rather naive now in retrospect.
|
14 |
I think things change so rapidly you can't
|
15 |
possibly satisfy that last clause in a lot of industry.
|
16 |
MS. KURSH: But is it an appropriate goal to be
|
17 |
reaching for that?
|
18 |
MR. CRANDALL: To dream the impossible dream? I
|
19 |
suppose.
|
20 |
MS. KURSH: I will take that.
|
21 |
MR. HEINER: Let me offer two qualifications.
|
22 |
The word "ensure" is obviously a very strong word.
|
23 |
Whether you could really ensure anything in this area is
|
24 |
kind of a question mark, I think.
|
25 |
And as I read the quote -- and it may or may not |
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be what the court had intended -- but I would read it as
|
2 |
ensure that there remain no practices likely to result
|
3 |
in unlawful monopolization.
|
4 |
There may be natural economic forces and there
|
5 |
may be someone built a better mousetrap leading to a
|
6 |
very high market share. That is something I think we
|
7 |
don't try to remedy through antitrust.
|
8 |
MS. KURSH: If you were to tweak the quote
|
9 |
somewhat, in a monopoly maintenance case would you agree
|
10 |
that determining the unlawful exclusionary conduct would
|
11 |
also be an appropriate goal?
|
12 |
MR. HEINER: I would think so.
|
13 |
MS. KURSH: Let me throw out some other
|
14 |
possibilities as goals and see what people think about
|
15 |
them.
|
16 |
Do we get agreement that punishment is not an
|
17 |
appropriate equitable goal for the enforcement agencies
|
18 |
in the United States anyway?
|
19 |
MR. HEINER: You will get agreement from Me.
|
20 |
MR. CRANDALL: You mean in a civil sense or a
|
21 |
criminal sense?
|
22 |
MS. KURSH: Either one.
|
23 |
MR. CRANDALL: To the extent you invoke as one
|
24 |
of the goals of deterrence, I suppose you can justify
|
25 |
doing that. |
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I can't imagine you could do it for Section 2.
|
2 |
That is one of the arguments for criminal penalties or
|
3 |
treble damages in section 1. Of course, we have no
|
4 |
studies that show whether it works, it deters collusion
|
5 |
or not.
|
6 |
MS. KURSH: Let me follow up on that for a
|
7 |
moment.
|
8 |
You used the word deterrents. Do you think it
|
9 |
is an appropriate goal of a Section 2 remedy to try to
|
10 |
deter others from engaging in Section 2 violations?
|
11 |
MR. CRANDALL: Once again, I think it is
|
12 |
impossible to imagine that it would work. I can't
|
13 |
imagine that somebody engaged in some new industry where
|
14 |
he gains 80, 90 percent market share is going to be
|
15 |
deterred unless there are criminal penalties associated
|
16 |
or very large financial penalties associated with a
|
17 |
certain market share, which I would hope would never
|
18 |
take place.
|
19 |
I can't imagine this is sufficiently certain
|
20 |
that it could work as a deterrent in a Section 2 case.
|
21 |
MS. KURSH: Tad, do you have any views on
|
22 |
whether punishment or deterrence of others are
|
23 |
appropriate goals?
|
24 |
MR. LIPSKY: I don't think punishment is
|
25 |
something that comes in to most questions of |
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monopolizing conduct.
|
2 |
You can imagine episodes that might occur within
|
3 |
the context of a Section 2 litigation where other
|
4 |
statutes are brought to bear that do properly have
|
5 |
punishment and deterrence elements, thinking of things
|
6 |
like destruction of evidence or intimidation of
|
7 |
witnesses or crimes collateral to any judicial
|
8 |
proceeding or government prosecution.
|
9 |
But I think there was a case called Empire Gas
|
10 |
which was brought as a criminal Section 2 case where it
|
11 |
was probably the only Section 2 claim that also included
|
12 |
a federal firearms count.
|
13 |
I wish I could remember the specific
|
14 |
circumstances. Probably somebody riding around the
|
15 |
Midwest countryside using a 30 ought 6 to shoot at his
|
16 |
competitors' propane tanks or something.
|
17 |
AUDIENCE MEMBER: Dynamite.
|
18 |
MR. LIPSKY: Dynamite, thank you. It is so
|
19 |
helpful to have Greg here in the audience. He really
|
20 |
knows his firearms.
|
21 |
MS. KURSH: I think I heard at least two
|
22 |
panelists, maybe more, maybe Dave and Per mention about
|
23 |
helping disadvantaged rivals.
|
24 |
What are the views of the panelists on whether
|
25 |
that is an appropriate Section 2 remedy, remedial goal? |
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MR. HELLSTROM: I think I may have mentioned in
|
2 |
that I quoted something stated by Mr. Charles A. James.
|
3 |
MS. KURSH: What is your view on it, Per? Do
|
4 |
you think that in the EU helping disadvantaged rivals is
|
5 |
an appropriate goal in a Section 2 case -- not Section
|
6 |
2.
|
7 |
MR. HELLSTROM: I think if you have a
|
8 |
foreclosure abuse that forecloses competition, and that
|
9 |
is presumably also some competitors, indeed, a remedy
|
10 |
would probably favor some of the rivals in that it would
|
11 |
allow if they had been unlawfully foreclosed, allow them
|
12 |
to enter or stay in the market, yes. That would be
|
13 |
favorable to them.
|
14 |
MR. CRANDALL: To the economist, it sounds a
|
15 |
little bit like the infant industries argument. And
|
16 |
politically it strikes me as a bad general idea because
|
17 |
it risks creating a set of clients from whom you can't
|
18 |
disengage because they require the favorable environment
|
19 |
in order to survive.
|
20 |
MS. KURSH: Dave, do you see a distinction
|
21 |
between opening up the opportunities for rivals and
|
22 |
helping disadvantaged rivals?
|
23 |
MR. HEINER: The phrase "helping disadvantaged
|
24 |
rivals" could be subject to a range of interpretations,
|
25 |
I suppose. |
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If it means creating opportunities, I think
|
2 |
that's exactly what we need to do.
|
3 |
One could imagine a fuller interpretation of
|
4 |
that phrase that could mean take the assets of the
|
5 |
defendant and transfer them to the disadvantaged rival.
|
6 |
That would seem to go too far.
|
7 |
I think that phrase which Mr. James used
|
8 |
possibly could be subject to being misread.
|
9 |
MS. KURSH: And, Per, if I could ask you to just
|
10 |
comment. Do you see the remedial goals different under
|
11 |
European law than in the United States in this area?
|
12 |
MR. HELLSTROM: I'm not too familiar with
|
13 |
remedial goals in the United States. It is hard for me
|
14 |
to comment.
|
15 |
MS. KURSH: Do you see them as different than
|
16 |
the ones in this proposition?
|
17 |
MR. HELLSTROM: Clearly, I would agree with Dave
|
18 |
that it is not really the purpose to terminate the
|
19 |
illegal monopoly insofar as our Article 82 relates to
|
20 |
abusive behaviors.
|
21 |
It is more about terminating the abusive
|
22 |
behavior and not the dominant position as such.
|
23 |
So I would agree with that statement.
|
24 |
MS. KURSH: If we can go to slide number 3 for a
|
25 |
moment. |
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I will read this quickly. I think someone
|
2 |
already commented on it.
|
3 |
"The fruits of a violation must be identified
|
4 |
before they may be denied."
|
5 |
Of course, that is from Microsoft.
|
6 |
In essence, that's saying that one -- we talked
|
7 |
about earlier one goal is to deny the fruits of a
|
8 |
violation to the defendant.
|
9 |
How do you determine what the fruits of a
|
10 |
violation are? Does anyone have some thoughts on how
|
11 |
you should go about making that determination?
|
12 |
MR. HEINER: That is something that is supposed
|
13 |
to come out during liability phase, I would think.
|
14 |
The next sentence from this decision goes on to
|
15 |
say what the fruits were in the Microsoft case. And
|
16 |
what they said was that Microsoft had inhibited nascent
|
17 |
competitive threats.
|
18 |
So the logical remedy the court explained was to
|
19 |
remove those inhibitions on a going forward basis, and
|
20 |
that's what was done in the consent decree.
|
21 |
MS. KURSH: Tad or Bob, do either one of you
|
22 |
have some thoughts about general principles that should
|
23 |
be applied when deciding what fruits flow from a
|
24 |
particular violation or is it just a very fact-specific
|
25 |
determination? |
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MR. CRANDALL: I don't like the term "fruits."
|
2 |
It strikes me that this suggests that the real issue
|
3 |
here is the monopoly profits of the defendant.
|
4 |
I can imagine a situation in which Microsoft had
|
5 |
reaped even greater returns from its operating system
|
6 |
position, monopoly, and being a perfectly discriminating
|
7 |
monopolist, which an economist might say there is no
|
8 |
grounds for intervention here because the output is at
|
9 |
an optimal level.
|
10 |
This is a battle that has gone on for years. It
|
11 |
is not so much that the greedy monopolist earned
|
12 |
monopoly profits but rather that profits and outputs are
|
13 |
distorted.
|
14 |
I would prefer it to say the effects of a
|
15 |
violation must be identified, the effects on prices and
|
16 |
output, rather than fruits.
|
17 |
MS. KURSH: Tad?
|
18 |
MR. LIPSKY: We have this system in the United
|
19 |
States where you have the government which never seeks
|
20 |
damages or relief that will redown to the government's
|
21 |
benefit as a purchaser.
|
22 |
So they don't care about fruits in general,
|
23 |
except in the most kind of Elysian and abstract sense
|
24 |
that any remedial system like antitrust is supposed to
|
25 |
work, you did something wrong, you have to pay back. |
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Then, of course, we have the fantastic system
|
2 |
with these wonderful talk about fruits, subsidies to
|
3 |
private action. You have mandatory treble damages and
|
4 |
payment of attorney fees and notice pleading and
|
5 |
discovery and joint and several liability.
|
6 |
It just goes on and on and on so that you have
|
7 |
this entire population which stretches 12 stories high
|
8 |
from here all the way up to Connecticut Avenue of people
|
9 |
working to either get or defend people from having to
|
10 |
pay these spectacular sums which are surely in excess of
|
11 |
anything that could reasonably be described as fruits of
|
12 |
the violation.
|
13 |
It is almost like the system is designed so that
|
14 |
we will never seek an intelligent answer to that
|
15 |
question.
|
16 |
It does have a meaning in the sense that it was
|
17 |
referred to in the first part of the previous quote,
|
18 |
which is if you have a case where you think the monopoly
|
19 |
is attributable to a certain type of behavior, then you
|
20 |
have a real problem. Then you have to decide whether to
|
21 |
actually have a structural remedy where you break
|
22 |
something up.
|
23 |
Beyond that meaning of fruits, I think we have a
|
24 |
problem implementing that in our system.
|
25 |
MS. KURSH: All right. Can we turn to slide 5. |
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Jumping ahead a little bit to keep things
|
2 |
moving. We have talked about this a little. Let's get
|
3 |
into it in more detail.
|
4 |
A famous quote from Trinko, "No court should
|
5 |
impose a duty to deal that it cannot explain or
|
6 |
adequately and reasonably supervise. The problem should
|
7 |
be deemed irremediable by antitrust law when compulsory
|
8 |
access requires the court to assume the day-to-day
|
9 |
controls characteristic of a regulatory agency."
|
10 |
We have had some discussion about this already,
|
11 |
but I think it is worth a little more.
|
12 |
In Trinko, the Court specifically was addressing
|
13 |
refusals to deal.
|
14 |
Tad, I would start with you. What if any
|
15 |
refusals to deal do you believe are irremediable?
|
16 |
MR. LIPSKY: Well, I don't think any refusal to
|
17 |
deal is irremediable.
|
18 |
The question is whether it is irremediable at a
|
19 |
tolerable cost. I think that's what I was trying to
|
20 |
suggest.
|
21 |
If Judge Green had not had the FCC to fall back
|
22 |
on for the implementation of the access charge element
|
23 |
of the MFJ remedy, I think he might well have concluded
|
24 |
that it was an impossible task, that as meritorious as
|
25 |
the division's case was, it was simply not an acceptable |
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judicial function for him to be involved in.
|
2 |
I wonder if he could have just said in the
|
3 |
Tunney Act proceeding this is a violation of Article 3,
|
4 |
courts don't do this.
|
5 |
It is almost what is suggested in this quotation
|
6 |
from Trinko, and I suppose that in the right case, he
|
7 |
probably would have been upheld in that.
|
8 |
MS. KURSH: Are there other types of cases,
|
9 |
let's say predatory pricing or other types of refusal to
|
10 |
deal cases where you think the cost of a remedy are
|
11 |
going to be so high or so difficult to effectively
|
12 |
monitor and enforce that the agency should not be
|
13 |
bringing the cases?
|
14 |
Anyone want to comment on that?
|
15 |
MR. CRANDALL: The Robinson-Patman Act. Any
|
16 |
reduction in price is unlawful.
|
17 |
MS. KURSH: Do you think that even if the cost
|
18 |
of a conduct decree is very high that there is value in
|
19 |
bringing the case with a simple "sin no more" kind of
|
20 |
judgment, the violation is enjoined?
|
21 |
MR. LIPSKY: If there ever is a good predatory
|
22 |
pricing case brought, I think that would be a good
|
23 |
example.
|
24 |
The IBM case started that way. It started
|
25 |
essentially as a predatory pricing case involving a |
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Model 90 and very advanced for them, very advanced
|
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computers that control data -- they were beating IBM to
|
3 |
the prestige customers like the MIT Labs and Lawrence
|
4 |
Berkeley and so forth.
|
5 |
So there was a valid predatory pricing claim
|
6 |
that could have been discussed back in 1969.
|
7 |
Unfortunately, things worked out so that that
|
8 |
aspect of the case was obscure.
|
9 |
But there would be an occasion to say all right,
|
10 |
let's have a big fine, let's have a big kind of remedial
|
11 |
punishment for engaging in blatant predatory pricing
|
12 |
behavior.
|
13 |
MS. KURSH: But for -- I'm sorry. Let me just
|
14 |
follow up on that.
|
15 |
In a government case, what do you see as the
|
16 |
appropriate relief in a predatory pricing case that you
|
17 |
believe should be brought?
|
18 |
MR. LIPSKY: I think arguably you could just
|
19 |
have some kind of fine or penalty. I'm not suggesting
|
20 |
that the remedy in a predatory pricing case would be
|
21 |
price regulation.
|
22 |
I think especially in a market like that, which
|
23 |
was extraordinarily dynamic and remains dynamic, I
|
24 |
wouldn't attempt to impose any kind of forward-looking
|
25 |
remedy. |
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MS. KURSH: Dave?
|
2 |
MR. HEINER: I would just say generally I think
|
3 |
that a sin no more remedy, once the sin is identified,
|
4 |
will likely be more efficacious and easier to administer
|
5 |
than remedies in the form of thou shall do something.
|
6 |
Whenever you have a defendant creating something
|
7 |
new or doing something they haven't done before, I think
|
8 |
we are getting into more challenging areas and certainly
|
9 |
have seen that in various Microsoft remedies, I think.
|
10 |
MS. KURSH: If oversight, control, regulation is
|
11 |
unworkable or extremely costly, should that be a basis
|
12 |
for a structural remedy? Anyone? Any takers?
|
13 |
MR. CRANDALL: Not necessarily. It may well be
|
14 |
that -- as an economist, when I talk about cost, I'm
|
15 |
talking about the effect on output, not just the
|
16 |
administrative cost of carrying out the decree.
|
17 |
It may well be that the structural remedy
|
18 |
creates more economic cost than doing nothing.
|
19 |
So ruling out a behavioral decree and then
|
20 |
looking at a structural decree is okay, but that doesn't
|
21 |
mean to say necessarily you go with a structural decree.
|
22 |
MR. HEINER: It may well be also, I think, as I
|
23 |
was suggesting earlier, if it is so costly to administer
|
24 |
an access remedy, that may reflect in part the fact that
|
25 |
perhaps the underlying objective is too ambitious or |
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there shouldn't really be liability in the first place.
|
2 |
MS. KURSH: I wanted to follow-up. Do people
|
3 |
agree with that, if there does not seem to be an
|
4 |
appropriate effective remedy, that suggests that maybe
|
5 |
there was not underlying liability to begin with?
|
6 |
Per, do you have a view on that?
|
7 |
MR. HELLSTROM: I have my doubts on that
|
8 |
approach. I think that puts the cart before the horse
|
9 |
in a sense.
|
10 |
I think one should carefully analyze the
|
11 |
behavior and try to establish whether there is an abuse.
|
12 |
As we said, there are various alternative
|
13 |
remedies. A simple cease and desist order could be an
|
14 |
appropriate remedy, together with a fine.
|
15 |
So I'm not sure if indeed there are such
|
16 |
situations.
|
17 |
MR. LIPSKY: I hesitate to make any absolute
|
18 |
statement about that. The theory is the theory and the
|
19 |
remedy is the remedy. You can imagine good theories and
|
20 |
bad remedies and vice versa.
|
21 |
MR. HEINER: My statement was not absolute
|
22 |
either. It was a maybe kind of statement.
|
23 |
Just to elaborate on it a little, the central
|
24 |
antitrust issue involving Microsoft over the past 10
|
25 |
years or so has been this question of building features |
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into Windows and this second question involving
|
2 |
interoperability that has become quite prominent
|
3 |
recently.
|
4 |
I have really been struck by this tying issue,
|
5 |
as we have gone around the world literally talking to
|
6 |
enforcement agencies about it, that the agencies may
|
7 |
have a clear view on liability, but we don't seem to get
|
8 |
to a remedy that will be deemed satisfactory.
|
9 |
Again, this is why we really couldn't settle the
|
10 |
European Union case. The Commission had taken the view,
|
11 |
not unreasonably, that a settlement really ought to
|
12 |
address the issue on a going-forward basis for years to
|
13 |
come. It should not just address MediaPlayer
|
14 |
functionality.
|
15 |
So Commissioner Monti was looking for something
|
16 |
that we could really generalize. And, frankly, there
|
17 |
was nothing we could come up with.
|
18 |
It seems to me that the reason for that was that
|
19 |
anything you would propose, the remedy was worse than
|
20 |
the perceived harm. You would lose the benefits of
|
21 |
integration over time.
|
22 |
It is those benefits that also lead us back to
|
23 |
thinking, gee, should there be liability in the first
|
24 |
place.
|
25 |
And then we have the remedy which didn't come |
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out of the settlement but was imposed and further drives
|
2 |
on the point that there shouldn't be any liability. We
|
3 |
will hear from the European court on that and see how it
|
4 |
comes out.
|
5 |
MS. KURSH: Do any of the panelists have a view
|
6 |
on what is appropriate equitable relief in a product
|
7 |
design case?
|
8 |
Are there limitations? Is there a template that
|
9 |
we should be following? No? Okay.
|
10 |
MR. CRANDALL: I don't know how you can
|
11 |
generalize that.
|
12 |
MR. DUCORE: I would like to follow up a little
|
13 |
on this point about irremediability, if there is such a
|
14 |
word.
|
15 |
And maybe I will be provocative here. Maybe I
|
16 |
should give the disclaimer that I should have given
|
17 |
before, that whatever I say are my own views and not the
|
18 |
views of the Commission or commissioner.
|
19 |
But from the perspective of an enforcement
|
20 |
agency, does anybody on the panel think, especially in
|
21 |
the context of the U.S. system, where you can have
|
22 |
follow-on private litigation -- that's all about money
|
23 |
generally.
|
24 |
Is there a value in an agency, enforcement
|
25 |
agency taking on perhaps a difficult, complex situation |
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and establishing the point that what took place was a
|
2 |
Sherman 2 violation or a Section 5 violation and even if
|
3 |
it is not able to fashion a specific, effective going
|
4 |
forward conduct remedy, set the stage for the victims of
|
5 |
that conduct then coming forward with follow-on
|
6 |
litigation to get the damages that, after all, the
|
7 |
agency generally doesn't seek on its own?
|
8 |
MR. CRANDALL: I will offer a view on that.
|
9 |
I don't see the antitrust laws as being designed
|
10 |
to redistribute income.
|
11 |
The way you put it, you avoided one large class
|
12 |
of people, namely, the trial attorneys who are going to
|
13 |
benefit from that.
|
14 |
I don't see that there is an overwhelming social
|
15 |
benefit from doing that, and there have to be better
|
16 |
ways to redistribute income than doing it that way.
|
17 |
MR. LIPSKY: Given all of the incentives for
|
18 |
private litigation that exist under the U.S. system, I
|
19 |
would say that what you are proposing is kind of
|
20 |
dangerous, because it used to be that you have a
|
21 |
criminal case and there would or wouldn't be a trial and
|
22 |
there would be a plea, and sort of word would get out,
|
23 |
and at some point the private litigation, the class
|
24 |
actions would follow.
|
25 |
Nowadays, all you need is a press release saying |
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that some agency somewhere in the world is investigating
|
2 |
some industry, and, kaboom, you have an MDL, even where
|
3 |
the press release says it is the European Commission
|
4 |
investigating, not even the United States that is
|
5 |
investigating.
|
6 |
Given this -- it just happens -- there used to
|
7 |
be just the criminal cases and then it went to all the
|
8 |
horizontal cases. Now it is even vertical cases, like
|
9 |
Dentsply.
|
10 |
You immediately get follow-on class actions the
|
11 |
minute something comes to light. The same with U.S.
|
12 |
Tobacco.
|
13 |
The whole litigation bar is sitting out there
|
14 |
like the Strategic Air Command on hairtrigger alert.
|
15 |
I think the necessity for the agencies to go
|
16 |
forward and establish liability, as you have described,
|
17 |
I think that's in many ways a dangerous approach.
|
18 |
Now, it is another thing to say should the
|
19 |
agencies be articulating and focusing on competition
|
20 |
problems. Absolutely. Usually, at least for the major
|
21 |
Section 2 cases, all of these cases arise in kind of a
|
22 |
broader policy context.
|
23 |
The AT&T case are years of debate about what to
|
24 |
do about this or that part of telecom, and there is a
|
25 |
White House Office of Telecommunications policy that was |
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involved and the FCC was involved.
|
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And the Division and the Commission should be
|
3 |
vigorously involved in those kinds of debates. And they
|
4 |
have investigative tools that are appropriate for
|
5 |
situations like that.
|
6 |
But on the narrow proposition if there is no
|
7 |
hope of an efficacious remedy should the agencies
|
8 |
nevertheless go forward and prosecute just to get the
|
9 |
determination on the record that this was bad, somehow
|
10 |
that rubs me very much the wrong way.
|
11 |
MR. DUCORE: What about to establish the points
|
12 |
of that so it might be easier to challenge the next
|
13 |
conduct that's similar earlier in the process, maybe at
|
14 |
a point where you could more easily follow up on an
|
15 |
efficacious remedy?
|
16 |
MR. CRANDALL: If? I don't understand.
|
17 |
MR. DUCORE: In other words, take on a hard
|
18 |
case, hoping to be able to design a good remedy but not
|
19 |
steering away from the case I will say simply because
|
20 |
you are not sure you can develop the remedy but
|
21 |
nevertheless if you establish liability, then setting
|
22 |
the stage so that if the next industry comes along and
|
23 |
does the same thing, you are better positioned perhaps
|
24 |
to challenge it more quickly and stop it before it
|
25 |
reaches a point where it is irremediable. |
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MR. LIPSKY: I guess you could defend the United
|
2 |
States versus Robert Crandall on that case. But it is
|
3 |
not the same Bob Crandall. It is the former chairman of
|
4 |
American Airlines.
|
5 |
I think it is a good point in the context of
|
6 |
legal theory. U.S. versus Crandall is sort of the
|
7 |
perfect illustration of something that was conduct that
|
8 |
was debatably within the attempt defense. I think it
|
9 |
was brought as a civil case primarily for that reason.
|
10 |
It did have the result that the agency wanted,
|
11 |
which was to establish that this kind of inchoate offer
|
12 |
to collude would work as an attempt case where the
|
13 |
parties could collectively exercise monopoly power.
|
14 |
Of course, inchoate collusion, invitations to
|
15 |
collude has since become kind of an active prong of
|
16 |
antitrust under other statutes as well. I think it
|
17 |
served the intended purpose.
|
18 |
I think well-advised business people are told
|
19 |
that inchoate forms of collusion, offers to collude,
|
20 |
even though they may not meet the standards of Section 1
|
21 |
of the Sherman Act, are nevertheless very bad ideas.
|
22 |
In the Section 2 area, in the monopolization
|
23 |
conduct area, though, I wonder if there isn't enough
|
24 |
difference industry to industry and form of conduct to
|
25 |
form of conduct. |
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It might be a relatively rare case where you
|
2 |
actually want to accomplish or where there is any
|
3 |
objective in trying to accomplish the plausibility.
|
4 |
Offering natural gas and gas water heaters as a
|
5 |
bundle might be more or less desirable in ways that
|
6 |
offering a computer operating system and a
|
7 |
Windows-compatible Internet browser are not. It could
|
8 |
go either way.
|
9 |
So I think you query what you really accomplish
|
10 |
in trying to establish a standard, given that a lot of
|
11 |
these cases occur in very dynamic industries.
|
12 |
MS. KURSH: Tad, on a somewhat different point,
|
13 |
I have a question for you.
|
14 |
In Aspen Skiing, the District Court had ordered
|
15 |
the parties to offer jointly a four-area coupon book, as
|
16 |
you might recall, similar to the one that Ski Co was
|
17 |
offering at another resort.
|
18 |
Do you have any view on whether this aspect of
|
19 |
the remedy in Aspen Skiing helped or hurt consumers and
|
20 |
when if ever forceing the only two competitors in a
|
21 |
market to collaborate is good for consumer welfare?
|
22 |
MR. LIPSKY: Well, Aspen is a funny little case,
|
23 |
because the market power issue was stipulated the wrong
|
24 |
way.
|
25 |
But if you can force yourself to imagine that |
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the four ski slopes in Aspen, Colorado had a monopoly
|
2 |
anything, maybe you can picture a world in which all the
|
3 |
ski slopes in North America are owned by two companies,
|
4 |
and one owns 75 percent of them and the other owns 25
|
5 |
percent of them. So in the average ski resort, you
|
6 |
would have a situation like Aspen.
|
7 |
You could respectively argue that this is more
|
8 |
like the U.S. versus Associated Press or Gamco Warehouse
|
9 |
kind of situation.
|
10 |
Here is an efficient arrangement. The terms and
|
11 |
conditions have been set historically by the parties for
|
12 |
ordinary profit-maximizing reasons. And you could order
|
13 |
them to collaborate if you thought that the conduct
|
14 |
was -- that the larger competitor's conduct in cutting
|
15 |
off cooperation with the smaller competitor was an
|
16 |
attempt to maintain this monopoly.
|
17 |
There is a leak in that theory, though, and that
|
18 |
is in order to get its refusal to cooperate with I
|
19 |
forget which ski company was the evil monopolist and
|
20 |
which one was the gallant David challenging Goliath.
|
21 |
But the problem was the David ski company said
|
22 |
we will give you a voucher, we will give our customers a
|
23 |
voucher redeemable at the local bank in cash.
|
24 |
It was actually more remunerative for the
|
25 |
monopolist to accept that voucher than to allow people |
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to use their credit cards, because they didn't even have
|
2 |
to pay the merchant fee, the clearance fee associated
|
3 |
with use of the credit card.
|
4 |
To me, as I say, if you can force yourself to
|
5 |
believe that it was a monopoly case, I think the whole
|
6 |
case could have been solved simply by enjoining that
|
7 |
act, that the defendant should have been required when a
|
8 |
customer of the other ski company came up and said
|
9 |
"here, I will give you this cash, this face value cash
|
10 |
cost-free voucher for your tickets," the defendant could
|
11 |
have been required to accept that and that would have
|
12 |
solved the whole problem.
|
13 |
Now, I think maybe the issue you were trying to
|
14 |
get at is the one lurking below the surface of
|
15 |
cooperation between competitors.
|
16 |
Of course, that is a huge problem and it is
|
17 |
alluded to in Trinko, of course. But Aspen Skiing
|
18 |
actually is a little bit different because of the
|
19 |
externality, the joint product of allowing customers to
|
20 |
use all the competitors.
|
21 |
That is actually a product that had independent
|
22 |
utility to customers in Aspen Skiing, which would not be
|
23 |
true.
|
24 |
You wouldn't buy a form of long distance service
|
25 |
just because it allowed you to make a call on MCI and on |
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AT&T. That would make no sense.
|
2 |
It is in the AT&T-type situation, where there is
|
3 |
no utility in the use of multiple competitors, that you
|
4 |
have the much greater danger and no apparent benefit of
|
5 |
the forced collaboration.
|
6 |
MS. KURSH: In a refusal to deal with a rival
|
7 |
situation, how does the court, the agency establish the
|
8 |
terms in which the rivals have to deal?
|
9 |
MR. LIPSKY: That's, of course, what most of my
|
10 |
remarks were devoted to, what a terrible dilemma that
|
11 |
is.
|
12 |
The presence of a regulatory agency helps, query
|
13 |
whether a court can ever do it absent the Associated
|
14 |
Press/Gamco Warehouse kind of situation.
|
15 |
MR. CRANDALL: I would demur on that.
|
16 |
My discussion of this with the regulatory agency
|
17 |
in many cases can't come close to getting it right. The
|
18 |
fact they have more resources to throw at it doesn't
|
19 |
suggest they will get the prices right.
|
20 |
It may be something for courts to avoid. It
|
21 |
doesn't suggest a regulatory solution necessarily.
|
22 |
MR. LIPSKY: Bob, do you allow the intellectual
|
23 |
possibility that there could be a case where as
|
24 |
imperfect as the regulatory solution might be, with all
|
25 |
the costs and benefits considered, it might be better to |
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regulate rather than if your alternative is to do
|
2 |
nothing?
|
3 |
MR. CRANDALL: I suggest something like water
|
4 |
distribution or gas distribution, something where the
|
5 |
technology is extremely simple and not changing very
|
6 |
much. That's a possibility.
|
7 |
Once you get beyond that, I think it is
|
8 |
problematic.
|
9 |
MS. KURSH: Thank you very much.
|
10 |
Dan, do you have something?
|
11 |
MR. DUCORE: One question to try to wrap that
|
12 |
up.
|
13 |
The FTC and DOJ have slightly different
|
14 |
functions. We are not always in front of a judge.
|
15 |
I guess the question for a panel is whether they
|
16 |
see a value in whether you call it an investigation or
|
17 |
administrative litigation that leads to some report that
|
18 |
identifies the issue and sort of tees it up that a
|
19 |
court-type remedy doesn't seem workable here, Congress
|
20 |
should step in and deal with it in some way?
|
21 |
MR. CRANDALL: You are suggesting just an
|
22 |
investigation, an inquiry, but not necessarily
|
23 |
litigation?
|
24 |
MR. DUCORE: If the concern is that we are not
|
25 |
equipped to write a decree or order, that it goes |
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forward and specifically modulates conduct and there
|
2 |
isn't an existing regulatory agency that we think would
|
3 |
be well equipped but at least flag it for consideration.
|
4 |
MR. CRANDALL: I think it is perfectly
|
5 |
appropriate for the FTC or the DOJ to be doing analyses
|
6 |
of these things.
|
7 |
The question is do they bring cases. Earlier
|
8 |
you were suggesting you might bring a case even though
|
9 |
you don't have an appropriate remedy and it's just a
|
10 |
learning experience so that you are better prepared next
|
11 |
time.
|
12 |
I think Dave might be concerned that you spent
|
13 |
10 years on Microsoft trying to learn how to do it
|
14 |
better the next time.
|
15 |
MR. DUCORE: What I was getting at is if all you
|
16 |
can get -- my earlier point I don't think I made it as
|
17 |
clear.
|
18 |
If you could only have what is called a
|
19 |
sin-no-more remedy, you did this, this was unlawful,
|
20 |
don't do that again, that obviously may set up private
|
21 |
actions, but it also sets the precedent so we have told
|
22 |
you not to do this again, if the next guy comes along
|
23 |
and maybe he is doing it, maybe we could get a judge to
|
24 |
tell him stop earlier in the process.
|
25 |
It is not that you couldn't have a remedy. It |
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is that the remedy would simply be you shouldn't do that
|
2 |
anymore.
|
3 |
MS. KURSH: All right. On that note, I would
|
4 |
ask everyone to join me in thanking our panelists for
|
5 |
their insight.
|
6 |
We will see everyone this afternoon at 1:30. We
|
7 |
pick up on remedies and some other interesting topics to
|
8 |
get into.
|
9 |
Thank you. 12:00 p.m.
|
10 |
(Whereupon, at 12:00 p.m., the hearing was
|
11 |
recessed, to be reconvened at 1:30 p.m. this same day.)
|
12 |
|
13 |
|
14 |
|
15 |
|
16 |
|
17 |
|
18 |
|
19 |
|
20 |
|
21 |
|
22 |
|
23 |
|
24 |
|
25 |
|
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AFTERNOON SESSION (1:30 p.m.)
|
2 |
MR. ELIASBERG: Welcome to the second remedies
|
3 |
panel, part of the ongoing series of hearings on
|
4 |
single-firm conduct.
|
5 |
I'm Ed Eliasberg. I'm a lawyer with the legal
|
6 |
policy section of the Antitrust Division. My
|
7 |
co-moderator today is Dan Ducore, the assistant director
|
8 |
of the compliance division in the FTC's Bureau of
|
9 |
Competition.
|
10 |
The Department of Justice and Antitrust Division
|
11 |
and Federal Trade Commission are jointly sponsoring
|
12 |
these hearings to help advance the development of the
|
13 |
law concerning Section 2 of the Sherman Act.
|
14 |
Transcripts and other materials from the prior
|
15 |
sessions are available on the DOJ and FTC Websites.
|
16 |
These are the next to last set of hearings. We
|
17 |
will be holding a wrap-up in the coming months and ask
|
18 |
that you check the Division's and FTC Website pages for
|
19 |
more information about it.
|
20 |
Today's session concerns remedies in actions
|
21 |
brought under Section 2.
|
22 |
Accepted wisdom seems to be that effectively
|
23 |
remedying violations of Section 2 can be a challenge.
|
24 |
Our panelists may have differing views on how well
|
25 |
remedies in past Section 2 matters have furthered the |
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purposes of the antitrust laws.
|
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The discussion session in this panel will have
|
3 |
particular emphasis on structural and conduct remedies
|
4 |
in Section 2 matters.
|
5 |
Also on our panel is a representative from the
|
6 |
European Commission to share his perspectives based on
|
7 |
emerging remedies under European law.
|
8 |
On behalf of the Division, I thank our panelists
|
9 |
for participating today and sharing their views with us.
|
10 |
I will introduce each in more detail before he
|
11 |
speaks. But in brief, our speakers in the amended order
|
12 |
of appearance are the following.
|
13 |
Andy Joskow is a senior vice president and
|
14 |
director of NERA Economic Consulting.
|
15 |
Dietrich Kleemann is head of the task force on
|
16 |
ex post assessment of merger decisions, Directorate
|
17 |
General for Competition, European Commission.
|
18 |
We are scheduled to have also Franklin Fisher,
|
19 |
who is the Jane Berkowitz Carlton and Dennis William
|
20 |
Carlton professor of microeconomics at the Massachusetts
|
21 |
Institute of Technology, and hopefully he will be able
|
22 |
to join us in a few minutes.
|
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Then John Thorne, who is senior vice president
|
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and deputy general counsel at Verizon Communications.
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And Richard Epstein, the James Parker Hall |
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distinguished service professor of law at the University
|
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of Chicago Law School.
|
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Thanks to my colleagues at the FTC and the
|
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division for organizing this hearing.
|
5 |
The organization of the panel is as follows. We
|
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will have three panelists speak for approximately 15
|
7 |
minutes each. Then we will take a short break. The
|
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final two panelists will speak.
|
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Each panelist will have a couple minutes to
|
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respond to the other presentations, and then there will
|
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be a moderated discussion led by Dan and me.
|
12 |
In that time period also, David Heiner, who was
|
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on the panel this morning who is, I believe, deputy
|
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general counsel of Microsoft, has graciously agreed to
|
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join us and maybe will also be participating, if he
|
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likes, in the moderated discussion.
|
17 |
We will not be taking any questions from the
|
18 |
floor, and we plan to end at 4:30.
|
19 |
Before introducing our first speaker, I would
|
20 |
like to turn things over to my co-moderator, Dan Ducore.
|
21 |
MR. DUCORE: On behalf of the Federal Trade
|
22 |
Commission, I want to thank our panelists for graciously
|
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volunteering their time and their views today to help
|
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assess remedies for single-firm antitrust violation
|
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cases. I was going to say Sherman 2, but we do it under |
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Section 5 of the FTC Act.
|
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As I think it became pretty clear in this
|
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morning's session, I will say Sherman 2 violations are
|
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sometimes hardest to make out.
|
5 |
I think it is probably equally true that once
|
6 |
you have made them out, figuring out the best way to
|
7 |
remedy those problems is at least equally hard.
|
8 |
And unlike some other areas in merger
|
9 |
enforcement and certainly horizontal agreements
|
10 |
enforcement, Sherman 2 single-firm conduct violations
|
11 |
are of necessity, particularly fact intensive when it
|
12 |
comes to designing remedies, both in terms of what the
|
13 |
theory of the harm is and how the industry operates.
|
14 |
As someone whose office has to deal with
|
15 |
remedies for all kinds of antitrust cases every day, I'm
|
16 |
going to be particularly interested in hearing about
|
17 |
broad approaches as well as some of the more detailed
|
18 |
issues having to do with administrability and, as part
|
19 |
of that, what do you do if it is not clear that a
|
20 |
remedy, a workable remedy doesn't do more harm than
|
21 |
good.
|
22 |
We talked a little bit about that this morning.
|
23 |
This afternoon we are going to focus a little more on
|
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the difference between the conduct remedy approach and
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the structural approach. |
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So with that, we are about to start, except I
|
2 |
have to make a couple of logistical announcements.
|
3 |
One is in case of an emergency and if an alarm
|
4 |
goes off, walk, do not run, to the exit and do not take
|
5 |
the elevator but take the stairs down stairs and walk
|
6 |
across the street, and there will be obviously people
|
7 |
directing you to where to go. I suspect that won't be
|
8 |
an event this afternoon.
|
9 |
Also, the restrooms, if anybody in the audience
|
10 |
needs them, are out the hall to the left, the men's room
|
11 |
to the immediate left, the women's room past the
|
12 |
elevators to the left.
|
13 |
Finally, please turn off all electronic devices,
|
14 |
especially cell phones, Blackberries and other hand-held
|
15 |
devices which in particular can create static if they
|
16 |
are operating near the microphones.
|
17 |
So without any further ado, and I don't know if
|
18 |
you are going to restructure the order again.
|
19 |
MR. ELIASBERG: We have the good fortune that
|
20 |
Dr. Franklin Fisher has been able to join us now.
|
21 |
Welcome, Frank.
|
22 |
Frank, I will sort of leave it to you. If you
|
23 |
need a moment to catch your breath, we can have Andy go
|
24 |
first.
|
25 |
DR. FISHER: I can go first. |
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MR. ELIASBERG: I appreciate you going back to
|
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the bullpen, Andy.
|
3 |
DR. FISHER: Of course, you understand that I am
|
4 |
tempted to talk about the effects of deregulation on the
|
5 |
behavior of airlines. Perhaps not.
|
6 |
MR. ELIASBERG: Franklin Fisher is the Jane
|
7 |
Berkowitz Carlton and Dennis William Carlton professor
|
8 |
of microeconomics at the Massachusetts Institute of
|
9 |
Technology, Emeritus, where he has taught for 44 years.
|
10 |
He has served as director of CRA International
|
11 |
since 1967 and is a director of the National Bureau of
|
12 |
Economic Research.
|
13 |
His book, "Industrial Organization, Economics
|
14 |
and the Law," is widely read by lawyers and economists
|
15 |
alike.
|
16 |
Frank, let me assure you we are delighted to
|
17 |
have you here today.
|
18 |
DR. FISHER: Thank you. I am delighted to be
|
19 |
here, although somewhat more stressed than I thought I
|
20 |
was going to be.
|
21 |
All right. Well, the question of how to design
|
22 |
remedies in Section 2 cases isn't easy.
|
23 |
Unlike prospective mergers which can be blocked
|
24 |
or price fixing cases or collusion cases where actions
|
25 |
can be enjoined, single-firm monopoly cases even when |
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won tend to founder on remedy issues.
|
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Structural relief can be and often is seen as
|
3 |
too drastic, and injunctive relief can simply turn into
|
4 |
an effort to prohibit actions already in the past and
|
5 |
already obsolete or can require continuing and perhaps
|
6 |
continual judicial supervision.
|
7 |
Too often in the past antitrust authorities have
|
8 |
failed adequately to consider the problem of remedies.
|
9 |
And I'm delighted to see an actual hearing is taking
|
10 |
place on this subject.
|
11 |
With those encouraging remarks, I have two parts
|
12 |
to this talk.
|
13 |
I want first to discuss what I think the
|
14 |
desirable objectives are that a Section 2 remedy or
|
15 |
maybe any remedy should be, and then I want to exemplify
|
16 |
some of this by talking about the Microsoft case and
|
17 |
suggested remedies in it.
|
18 |
I was the principal economic witness for the
|
19 |
Division in that case. And I'm going to talk about
|
20 |
these two things.
|
21 |
Here are the five things that I think one ought
|
22 |
to try to achieve, and it will turn out that some of
|
23 |
them are impossible to achieve and you can't achieve
|
24 |
some of them without making some of the others
|
25 |
difficult. |
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And while I don't think it is a whole mess, I do
|
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think it is a very complicated issue.
|
3 |
The first one is one ought to want to restore
|
4 |
competition. That ought to be a primary objective. One
|
5 |
ought to want to undo the anticompetitive effects of the
|
6 |
violation.
|
7 |
That may not be possible. Indeed, it may not be
|
8 |
clear what would have happened in the absence of the
|
9 |
violation. That's particularly true in innovative
|
10 |
industries.
|
11 |
Second, the punishment as it were ought to fit
|
12 |
the crime. I realize these are civil cases, but you
|
13 |
know what I mean. One wants to fit the remedy to the
|
14 |
violation.
|
15 |
It is natural to require that the remedy be
|
16 |
reasonably consonant with the liability findings. In
|
17 |
particular, it is natural to require that the remedy be
|
18 |
such that had it been in place at the time, the
|
19 |
violations would not have occurred.
|
20 |
But while that requirement is as the law is
|
21 |
developed as I understand it, that requirement may
|
22 |
satisfy the standard for consent decree hearings under
|
23 |
the Tunney Act, it is not guaranteed to satisfy the
|
24 |
important objective of restoring competition.
|
25 |
I will exemplify that when we talk about the |
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Microsoft case.
|
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A broader remedy that prohibits violations, not
|
3 |
merely those found liable but similar to those to be
|
4 |
liable, may still not work.
|
5 |
This is likely to happen if the defendant used
|
6 |
the anticompetitive actions to ward off a threat to its
|
7 |
monopoly power at a crucial moment, with similar threats
|
8 |
unlikely to arise again or perhaps ever.
|
9 |
Next one would like to disgorge monopoly
|
10 |
profits. The violator shouldn't be permitted to profit
|
11 |
from the violation. Otherwise, there won't be any
|
12 |
disincentives for it or others to repeat such
|
13 |
violations.
|
14 |
But, of course, fines are unusual in Section 2
|
15 |
cases. On the other hand, fines may not be necessary.
|
16 |
The treble damage provision of the Clayton Act
|
17 |
certainly encourages private suits, and the loss of such
|
18 |
a suit can result in considerably more than the
|
19 |
disgorgement of monopoly profits.
|
20 |
I really don't like that answer. I can't tell
|
21 |
from your faces whether you like it or not, but I don't.
|
22 |
Treble damages also encourage -- here, by the
|
23 |
way -- I don't know if you have been given my text. If
|
24 |
you have, in the text there is a really Freudian error.
|
25 |
The text I recently discovered says "treble damages also |
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encourage reasonably basic private suits" --the word
|
2 |
"basic" should be "baseless" -- "sometimes suits that
|
3 |
follow a federal investigation, even though that
|
4 |
investigation doesn't result in an actual case and
|
5 |
finding of liability."
|
6 |
Particularly in large class action suits, this
|
7 |
results in a kind of legalized privacy, with the mere
|
8 |
certification of a class enough to produce settlement by
|
9 |
defendants greatly at risk.
|
10 |
That's mainly a problem I think for Section 1
|
11 |
cases. But the whole issue of treble damages is too
|
12 |
complex to simply assume that they should continue and
|
13 |
will result efficiently in the disgorgement of monopoly
|
14 |
profits.
|
15 |
One possible answer would be to require the
|
16 |
defendants to compensate those that were injured (back
|
17 |
to the federal case) as well as paying something above
|
18 |
that, since otherwise they or others may be tempted to
|
19 |
take advantage of these situations, and in return the
|
20 |
compensated victims should give up their rights to sue
|
21 |
for treble damages.
|
22 |
D, I'm quite fond of this one, but it is
|
23 |
difficult. Make the remedy self-enforcing. If
|
24 |
possible, one wants the remedy to serve for itself.
|
25 |
You want a situation to be created in which |
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market forces prevent the recurrence of the same or
|
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similar violations, as opposed to injunctive relief.
|
3 |
That kind of remedy ideally doesn't require
|
4 |
continued and long judicial supervision and continued
|
5 |
wrangling and litigation that can go with that.
|
6 |
Ordinarily, of course, this is going to require
|
7 |
some sort of structural remedy. That isn't easy to do.
|
8 |
In the first place, courts are traditionally
|
9 |
reluctant to grant structural relief, which usually
|
10 |
means divestment or breakup. In the second place,
|
11 |
crafting one is not easy and may sometimes be
|
12 |
impossible.
|
13 |
Too often in the past the antitrust
|
14 |
authorities -- let me say for the moment I will talk
|
15 |
about something in the quite distant past. You don't
|
16 |
have to worry, guys. You weren't around. I was.
|
17 |
The antitrust authority has simply assumed that
|
18 |
a somewhat arbitrary divestment is what is called for.
|
19 |
That may have gone hand in hand with the naive belief
|
20 |
that monopoly power equals large market share, so that
|
21 |
simply breaking up the defendant would be sufficient
|
22 |
without the relationship of the breakup to the
|
23 |
violation.
|
24 |
That was certainly true of the great fiasco of
|
25 |
the IBM case. I, by the way, was the principal witness |
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for IBM in the IBM case.
|
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The government's remedy proposal never reached
|
3 |
the court but was discussed at deposition by an
|
4 |
economist whom I will courteously not name.
|
5 |
He proposed breaking up IBM into four successor
|
6 |
companies, each of which would have one and only one
|
7 |
tape plant or disk plant. No consideration was given to
|
8 |
whether computer companies with only one such plant were
|
9 |
likely to be viable.
|
10 |
The focus was exclusively on reducing IBM's
|
11 |
supposedly very large market share, which was measured
|
12 |
by the government in truly peculiar ways, having nothing
|
13 |
to do with market power.
|
14 |
Structural remedies need to be better thought
|
15 |
through than that.
|
16 |
I'm sorry. I can't stop myself from telling the
|
17 |
following story:
|
18 |
That witness never testified at trial. It came
|
19 |
out at his deposition.
|
20 |
And there was a truly peculiar set of things in
|
21 |
the deposition, which began with the witness being
|
22 |
instructed not to answer the questions of how many
|
23 |
successor companies he proposed to have. And the
|
24 |
grounds for that -- first, I quote the lawyer in
|
25 |
question -- "I won't tell you." |
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Upon being told that that was not cognizable
|
2 |
under the Federal Rules, he offered to tell if the room
|
3 |
would be cleared of people not connected with the case.
|
4 |
IBM's lawyer said "I don't see anybody in the
|
5 |
room not connected with the case." And the lawyer for
|
6 |
the Justice Department observed that my son and the son
|
7 |
of the late John McGowan, who both of us were working on
|
8 |
the case, were present he said "the boys."
|
9 |
So they sent the boys out of the room. And now
|
10 |
the lawyer was willing to give the grounds.
|
11 |
He said "I'm not going to let him tell because
|
12 |
it might upset the stock market."
|
13 |
Well, there was some discussion as to whether
|
14 |
that came under the Federal Rules, and decided to let
|
15 |
the answer go on, provided the room was still further
|
16 |
cleared of everybody not totally essential.
|
17 |
Nicholas Katzenbach, then general counsel for
|
18 |
IBM, asked if it was okay if he stayed. The lawyer said
|
19 |
yes, but I couldn't.
|
20 |
I said I was going to go out and join my
|
21 |
12-year-old son, who was no doubt calling his broker at
|
22 |
that very moment.
|
23 |
The witness then testified about the tape plants
|
24 |
and the disk plants. But the number was sealed and
|
25 |
referred to as X in the transcript. |
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The motion to unseal, like many things in the
|
2 |
IBM case, remained undecided. That was in 1974. The
|
3 |
case ended in 1982 with that motion still undecided by
|
4 |
Judge Edelstein.
|
5 |
That number was four to anybody with any sense
|
6 |
who can count the number of tape plants and disk plants
|
7 |
that IBM had, and it was also four to anybody who was
|
8 |
with that same witness at a cocktail party a couple
|
9 |
weeks later and heard him say it was four.
|
10 |
Believe me, the IBM case was full of things like
|
11 |
this, some much worse.
|
12 |
Anyway, I could not talk about remedies without
|
13 |
getting to that. It lives with me still.
|
14 |
The last thing is I think, as I already said,
|
15 |
one ought to try to avoid remedies that require
|
16 |
prolonged and complicated judicial oversight.
|
17 |
That's likely to be true of complicated
|
18 |
injunctive relief, and it is particularly burdensome if
|
19 |
the injunction is to hold for long periods of time in a
|
20 |
changing industry.
|
21 |
Now I want to talk about Microsoft.
|
22 |
One of the things about Microsoft is almost none
|
23 |
of the remedies proposed were without flaws, maybe none
|
24 |
of them without.
|
25 |
I have to talk first a little bit about the |
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underlying economics and what is called the
|
2 |
"applications barrier to entry", and then I have to talk
|
3 |
about the violation.
|
4 |
This won't take very long, and then the conduct
|
5 |
remedies all the problems and the structural problems,
|
6 |
ultimately some problems.
|
7 |
Here is the story on the underlying economics.
|
8 |
How long have I got? I will speak slower.
|
9 |
First place, this is the way things stood in the
|
10 |
business in the late 1990s and to some extent still
|
11 |
stand, I think.
|
12 |
Applications written for one operating system
|
13 |
generally don't run on others. It is expensive to port
|
14 |
them. You have to start all over to port them to
|
15 |
another operating system.
|
16 |
Secondly, software application writing has large
|
17 |
economies of scale. The costs are all up front, big
|
18 |
costs. They are the costs of writing the program,
|
19 |
debugging the program, writing the manuals that go with
|
20 |
it. Putting out extra copies of the program costs
|
21 |
essentially zero.
|
22 |
As a result, application writers prefer to write
|
23 |
for operating systems which have many users so they can
|
24 |
spread the fixed costs over a large number of customers.
|
25 |
On the other hand, not surprisingly, computer |
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users prefer operating systems that have a large number
|
2 |
of applications.
|
3 |
As a result, an operating system that becomes
|
4 |
relatively popular for whatever reason attracts more
|
5 |
applications. These attract additional users, which in
|
6 |
turn attract even more -- well, this is badly written.
|
7 |
It should say which in turn attract even more
|
8 |
applications, which in turn attract even more users and
|
9 |
so on.
|
10 |
Eventually that operating system attains
|
11 |
monopoly power as other operating systems find it
|
12 |
difficult or expensive to attract application writers.
|
13 |
This is the so-called applications barrier to entry.
|
14 |
Microsoft was the beneficiary of this, starting
|
15 |
at least with Windows 95 and continuing onward. And if
|
16 |
Microsoft had simply been content with this relatively
|
17 |
natural phenomenon, there would not have been an
|
18 |
antitrust case and there certainly wouldn't have been a
|
19 |
successful antitrust case.
|
20 |
But Microsoft was not content with this. It
|
21 |
sought to destroy or contain two innovations, Netscape's
|
22 |
browser and Sun Microsystem's Java, that threatened to
|
23 |
weaken or remove the applications barrier to entry.
|
24 |
I'm not going to discuss exactly how those would
|
25 |
have worked, but I will -- that's relatively available |
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elsewhere.
|
2 |
There is -- I can't resist it -- government
|
3 |
Exhibit 39. By the way, you mustn't think that I retain
|
4 |
in my memory after whatever it is, eight years, what is
|
5 |
in every single exhibit in the case. This happens to be
|
6 |
my favorite.
|
7 |
Government Exhibit 39 is an e-mail that says you
|
8 |
should care about the browser even more than does Bill
|
9 |
Gates, because if we lose the browser, we lose basically
|
10 |
everything, and goes on about the operating systems will
|
11 |
turn into a commodity and so on.
|
12 |
Microsoft basically was found to have violated
|
13 |
the antitrust laws by its actions in those two
|
14 |
dimensions.
|
15 |
This was a great victory for the government.
|
16 |
But the events leading to the remedy, in my opinion,
|
17 |
eventually turned that victory into another fiasco.
|
18 |
What remedies were suggested and what were the
|
19 |
problems with them? Well, with perhaps one exception
|
20 |
which wasn't exactly considered seriously by the
|
21 |
government, I believe, every suggested remedy had
|
22 |
important defects in terms of the objectives that I
|
23 |
listed above.
|
24 |
I begin with the conduct remedies.
|
25 |
There is the one in the ultimate settlement. |
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This is a remedy -- basically it is a conduct remedy
|
2 |
that matched the violation. It did that and might deter
|
3 |
similar conduct.
|
4 |
It didn't restore competition, and it may have
|
5 |
left Microsoft secure in having destroyed two really
|
6 |
important threats.
|
7 |
Well, there is an issue here. That would
|
8 |
satisfy and did satisfy Tunney Act proceeding. But this
|
9 |
wasn't an ordinary a Tunney Act proceeding.
|
10 |
This wasn't a proceeding before liability. This
|
11 |
was a proceeding after liability had been decided,
|
12 |
appealed, affirmed, certiorari had been denied, and the
|
13 |
case came back again with a remand on remedy.
|
14 |
By the way, I didn't have much to do with the
|
15 |
remedies which is why I'm criticizing them. I was
|
16 |
retained briefly by the Antitrust Division after the
|
17 |
remand on remedy, but there was no serious work involved
|
18 |
in that.
|
19 |
The remedy that eventually emerged might have
|
20 |
been appropriate for a pretrial consent decree, but it
|
21 |
wasn't appropriate after liability was finally decided.
|
22 |
It gave up the fruits of victory.
|
23 |
It is entirely possible -- one doesn't know --
|
24 |
that if you think about it, Microsoft may have succeeded
|
25 |
in destroying the threats to the applications barrier to |
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entry at the golden moment in which they were there.
|
2 |
And trying to put the toothpaste back in the tube
|
3 |
afterwards doesn't work.
|
4 |
Another remedy that was a conduct remedy
|
5 |
suggested was allowing other operating systems to use
|
6 |
the application programming interface of Windows; that
|
7 |
is, give the other makers of other operating systems
|
8 |
enough information so that programs written for Windows
|
9 |
would run on their operating system. They could design
|
10 |
their operating systems that way.
|
11 |
Well, that would certainly have been effective
|
12 |
if it had succeeded. It would, however, have
|
13 |
required -- it might have gone too far, in fact.
|
14 |
It would have required prolonged and complicated
|
15 |
judicial oversight. Anybody who has ever been involved
|
16 |
in writing a complicated software program -- and believe
|
17 |
me, I know at the moment from bitter experience and the
|
18 |
programs I'm involved with are nothing like as
|
19 |
complicated as operating systems -- knows that even with
|
20 |
the best will in the world, if you try to make the
|
21 |
program available to other programmers or teach them how
|
22 |
to do things with it, it is very hard.
|
23 |
And there wouldn't have been the best will in
|
24 |
the world, and there would have been for a very long
|
25 |
time continued wrangling over whose fault it was that |
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this wasn't succeeding. And that would have required
|
2 |
continued judicial oversight.
|
3 |
Now I come to structural remedies. The first is
|
4 |
the one one might most naturally think of. It was
|
5 |
called the Baby Bills for reasons that should be
|
6 |
apparent.
|
7 |
It was one in which there would have been three
|
8 |
successor companies made out of Microsoft. Each one of
|
9 |
them would have had the right to Windows.
|
10 |
There were a number of objections to this, some
|
11 |
of them valid, some of them not quite so impressive.
|
12 |
The first one was; Would successor companies
|
13 |
have kept their versions of Windows compatible with the
|
14 |
installed base of programs? There was a lot of talk
|
15 |
about that.
|
16 |
I think the answer was of course they would,
|
17 |
because they would have had a big incentive to attract
|
18 |
the people with the installed base of program.
|
19 |
The second one sounds funny but isn't, the
|
20 |
question of who would get Bill Gates, who may not have
|
21 |
been an asset in the trial, believe me, but he was
|
22 |
certainly an asset to the company and would still be.
|
23 |
And you can't divide him up, so to speak.
|
24 |
The one that wasn't typically mentioned but I
|
25 |
think ought to be bothersome is the following. |
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Eventually the phenomenon that I talked about in
|
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the underlying economics would take over again, and one
|
3 |
or the other of these companies would get ahead, the
|
4 |
snowball effect would take over, the application remedy
|
5 |
would occur and the thing would be restored.
|
6 |
Of course, each of these companies would be
|
7 |
owned by the original Microsoft shareholders, so that in
|
8 |
some sense anyway the monopoly profits it would have
|
9 |
earned later would accrue back to the owners of the
|
10 |
violator.
|
11 |
The remedy proposed by the Antitrust Division
|
12 |
was to break up Microsoft into two successor companies,
|
13 |
one with the operating systems and the other with the
|
14 |
applications, particularly Microsoft Office, in the
|
15 |
belief or the hope that the applications company would
|
16 |
have a big incentive to encourage competition and
|
17 |
operating systems.
|
18 |
Maybe that would have worked. It is somewhat
|
19 |
roundabout, and it is not obvious that if it worked, it
|
20 |
would have been self-enforcing.
|
21 |
Not obvious that it would have worked, and I
|
22 |
don't find it particularly attractive. It never got, so
|
23 |
to speak, much past the starting block.
|
24 |
The remedy that I think is attractive, although
|
25 |
also has problems, is the one proposed by Herbert |
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Hovenkamp, but so far as I know, not apparently
|
2 |
seriously discussed in the higher reaches of the Justice
|
3 |
Department.
|
4 |
This was the following. Pick a number, N. You
|
5 |
have to study what the number N should be. Then require
|
6 |
Microsoft to auction off N licenses to Windows together
|
7 |
with the requisite know-how. Do nothing further.
|
8 |
This is simple. And it improves competition.
|
9 |
No breakup is required. If the ultimate monopoly gains
|
10 |
do not necessarily occur, the ultimate gains don't
|
11 |
necessarily principally accrue to the original Microsoft
|
12 |
shareholders, which is attractive, as opposed to the
|
13 |
Baby Bill remedy.
|
14 |
This seems to me to be a model of remedy design,
|
15 |
despite its possible flaws. And I wish it had been more
|
16 |
seriously discussed.
|
17 |
But Microsoft, like other cases, is a case in
|
18 |
which it was not obvious that there is any really,
|
19 |
really good remedy.
|
20 |
I happen to hate the one that eventually arose
|
21 |
in the settlement, but other people made that.
|
22 |
Thank you.
|
23 |
(Applause.)
|
24 |
MR. ELIASBERG: Thank you, Frank.
|
25 |
Dietrich Kleemann is head of the task force on |
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ex post assessment of merger decisions, Directorate
|
2 |
General for Competition, European Commission.
|
3 |
Dietrich, welcome.
|
4 |
Can we just check with the panelists,
|
5 |
double-check to be sure the Blackberries are off. Thank
|
6 |
you.
|
7 |
MR. KLEEMANN: Frankly spoken, at first I think
|
8 |
I'm not the best place to speak to you here today in
|
9 |
this hearing because of our more than 16 years since the
|
10 |
beginning of your merger work, I was a member of the
|
11 |
merger task force and today a proud member and followed
|
12 |
the European Commission.
|
13 |
However, I think that there are quite
|
14 |
significant similarities between remedies under merger
|
15 |
regulation and remedies that would be called abuse cases
|
16 |
under Article 82 of what you would call attempt to
|
17 |
monopolize.
|
18 |
But let me just take a short look at our
|
19 |
experience in the remedies.
|
20 |
Since we started, we have had more than 3000
|
21 |
final decisions in European merger control, but out of
|
22 |
them, only 19 prohibitions and maybe 28 restores in the
|
23 |
second phase.
|
24 |
That is what you would call a second request,
|
25 |
more or less, which is normally like a prohibition |
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decision.
|
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On the other hand, we had 140 clearance
|
3 |
decisions with remedies in the first place and 79
|
4 |
decisions with remedies in phase two. And frequently
|
5 |
these decisions were not only related to the remedy but
|
6 |
to the whole package.
|
7 |
So I think one can say that around 8 percent of
|
8 |
all our cases we intervened by way of remedies, and the
|
9 |
question is now can the antitrust practice use a benefit
|
10 |
from this rich experience in merger control.
|
11 |
I said there are similarities. However, there
|
12 |
are also differences between the remedies in merger
|
13 |
control and antitrust.
|
14 |
First of all, from a more formal point of view,
|
15 |
our remedies are based on commitments proposed by the
|
16 |
parties.
|
17 |
The remedies in abuse cases are imposed by the
|
18 |
authority on the parties. However, I would say this is
|
19 |
a more formal difference because of costs.
|
20 |
In a merger case the Commission would always
|
21 |
negotiate remedies with the merging parties and give
|
22 |
guidance and indicate what would be necessary to clear a
|
23 |
case at the end for the parties to have any incentive to
|
24 |
follow this guidance in order to avoid the prohibition
|
25 |
decision. |
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I think more important is the difference between
|
2 |
behavioral and structural remedies.
|
3 |
As my colleague, Per Hellstrom, certainly
|
4 |
outlined this morning, for cases under violation 1 of
|
5 |
2003, behavioral remedies are the rule and structural
|
6 |
remedies are only the exception.
|
7 |
I think we will come back to this point later in
|
8 |
the discussion certainly.
|
9 |
By contrast, in merger control, because it deals
|
10 |
with structural competition problems, not just behavior
|
11 |
of a party, the most adequate remedies are normally
|
12 |
structural ones. That meets the classical divestiture.
|
13 |
Although I must admit the borderline between
|
14 |
structural remedies and behavioral remedies is not
|
15 |
always clear. It is only clear if I limit the
|
16 |
structural remedy. There are many other instances where
|
17 |
you could say it has behavioral elements but also
|
18 |
structural elements.
|
19 |
However, having said this, in appropriate cases,
|
20 |
we accept also typical behavioral remedies. This is the
|
21 |
case that divestiture, for instance, is not feasible or
|
22 |
would not be meaningful. However, to prohibit blankly
|
23 |
the case would not be proportionate.
|
24 |
And there we have two groups in particular. To
|
25 |
one are those I would call the access remedies. I will |
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go through this later on. The other group which also
|
2 |
plays a significant role are changes to long-term
|
3 |
exclusive contracts.
|
4 |
However, as I said, we have structural remedies.
|
5 |
Here you see an overview from our so-called remedy
|
6 |
studies carried out on 96 cases between '96 and 2000.
|
7 |
And you see around 60 percent of remedies were
|
8 |
divestitures. The others were sometimes cutting links
|
9 |
between competitors by exiting a joint venture was even
|
10 |
17 percent.
|
11 |
Long-term exclusive licenses which are sometimes
|
12 |
replacing classical divestitures because they were
|
13 |
partially related to what they call -- they have limited
|
14 |
competition.
|
15 |
You can't divest forever a brand because there
|
16 |
would then -- there would be more companies in different
|
17 |
countries.
|
18 |
So we intend to exercise and that, I must say,
|
19 |
wasn't always very successful. Not surprisingly, the
|
20 |
most successful remedy was to find in the right place
|
21 |
the transfer of a stand-alone business, where you didn't
|
22 |
have to make a package, a remedy to cut off all
|
23 |
services. It was a clear-cut business which was sold.
|
24 |
I emphasize the importance of access remedies in
|
25 |
merger. |
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They are maybe related to the access to
|
2 |
infrastructure, for instance, to a network, platforms,
|
3 |
the telecommunications sector and so on, to technology,
|
4 |
which implies the licensing of intellectual property
|
5 |
sometimes and access to what I would call essential
|
6 |
inputs.
|
7 |
This talks about, for instance, in the media
|
8 |
sector, the content, TV content and so on or, for
|
9 |
instance, in the electricity sector, we had the case
|
10 |
where we organized auctions to open up the market to
|
11 |
give excess electricity in a situation where we had a
|
12 |
merger structure.
|
13 |
The main purpose was always either to avoid
|
14 |
foreclosure effect, maybe resulting from vertical links,
|
15 |
where we had to get control of our essential upstream
|
16 |
facilities, such as a decoder base, for instance, and so
|
17 |
on.
|
18 |
And the second purpose which went way off with
|
19 |
the first one together was to lower barriers to entry so
|
20 |
as to outbalance the loss of competition but open up the
|
21 |
market to new competitors.
|
22 |
A crucial issue, however, with these kind of
|
23 |
remedies, much more than was with structural remedies,
|
24 |
is the way how you implement it.
|
25 |
First of all, sometimes nearly part of the |
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problem is how to determine from the outset the terms of
|
2 |
access, price to be paid, for instance, the general
|
3 |
conditions.
|
4 |
It has taken one to lead a very strong and
|
5 |
mandatory, which is very often not feasible for the
|
6 |
Commission itself. You wouldn't set up otherwise a task
|
7 |
force for 10 years for an individual case.
|
8 |
So we need there to rely on trustees, sometimes
|
9 |
in a very official way on regulators, which help us to
|
10 |
monitor these remedies.
|
11 |
And the last one is the best one, a kind of
|
12 |
safeguard by the market when you impose a rapid
|
13 |
evaluation procedure, a fast resolution period.
|
14 |
And just not to run out of time, I will give you
|
15 |
at the end maybe a practical example which was the case,
|
16 |
Newscorp Telepiu, a case of pay TV in Italy where one of
|
17 |
two TV players controlled by Newscorp acquired Telepiu,
|
18 |
the by far leading pay TV player in Italy.
|
19 |
The case led virtually to a monopoly. On the
|
20 |
other hand, we were confronted with a scenario where
|
21 |
although this was not a failing company case, there was
|
22 |
quite a high likelihood that the second player would
|
23 |
accept the market over time, and that would mean we
|
24 |
would have had a monopoly in any event.
|
25 |
So on balance, it was better for the consumer |
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and better for the market to have some kind of a
|
2 |
regulator place a number of far reaching commitments
|
3 |
which were all designed to facilitate new entry into
|
4 |
this pay TV market so to have at least a chance that in
|
5 |
the future in the evolving market there won't be this
|
6 |
problem.
|
7 |
We see typically a set of remedies which are
|
8 |
here combined but are used separately. The first was
|
9 |
limiting exclusivity for TV rights so to make them
|
10 |
available for newcomers.
|
11 |
There we had a commitment getting the output
|
12 |
rights for early termination for existing, limiting on,
|
13 |
the other hand, distribution of future output use or
|
14 |
football rights to two, prospectively three years, and
|
15 |
limiting the exclusivity to the DTHI, their viewers, so
|
16 |
as to enable user companies pay for the other TV spot.
|
17 |
It was such as the upcoming ADSL such that the
|
18 |
DVD or such as the cable network, which are not very
|
19 |
much involved in Italy, get a chance to get premier
|
20 |
content on their transmission means.
|
21 |
The second one will also enable them further to
|
22 |
have immediately the necessary anchor channels you need
|
23 |
for a successful pay TV.
|
24 |
So Telepiu had to grant access to third parties
|
25 |
to its premier content, the premium sport channels and |
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the premium Hollywood TV channels.
|
2 |
Of course, this raised the question how to
|
3 |
calculate the price. We did that at a fixed rate and
|
4 |
so-called retail market basis.
|
5 |
That means looking at the retail price of
|
6 |
Telepiu and deducting the costs of that on the basis of
|
7 |
a wholesaler. It means the costs added on some other
|
8 |
factors like benchmarking were similar to situations in
|
9 |
other countries.
|
10 |
As a counterpart, they had to grant access to
|
11 |
third parties to their technical platform, the
|
12 |
condition, the related services, which would enable a
|
13 |
new entrant to access the old channels now on DTH,
|
14 |
because without access to the similar decoder base of
|
15 |
Telepiu, this would not have been possible.
|
16 |
There was a classic element that said if you had
|
17 |
to divest this DTT business, the two channels, in this
|
18 |
evolving market, in particular in Italy, all this was
|
19 |
subject to a detailed dispute resolution arrangement,
|
20 |
and here in particular the most sensitive parts were
|
21 |
taken over by the Italian media and telecom regulator,
|
22 |
the so-called Ajicom, which was committed to apply his
|
23 |
own word in dispute settlements to this specific case,
|
24 |
and in fact did it very successfully.
|
25 |
I think two years ago in the decision they |
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reduced the price for the wholesale offer for premium
|
2 |
content by around 40 percent.
|
3 |
Having said this, this is a typical example, but
|
4 |
also you have a very limited number of cases where you
|
5 |
have this complex set of remedies which we thought were
|
6 |
the appropriate solution in this specific situation.
|
7 |
You may notice that many of the features in this
|
8 |
case or general features of merger committees could also
|
9 |
play a major role in antitrust abuse cases.
|
10 |
But on balance, I would say antitrust can
|
11 |
benefit from our experience in merger control, certainly
|
12 |
as the implementation is concerned, all the technical
|
13 |
stuff with trustees and so on.
|
14 |
But I think also in certain instances in terms
|
15 |
of the substantive solution.
|
16 |
Thanks.
|
17 |
(Applause.)
|
18 |
MR. ELIASBERG: Thank you, Dietrich.
|
19 |
Our last speaker before the break is Andrew
|
20 |
Joskow.
|
21 |
Andrew is senior vice president and director of
|
22 |
NERA's Washington, D.C. office.
|
23 |
Dr. Joskow is a former deputy assistant attorney
|
24 |
general for economics at the Antitrust Division and also
|
25 |
a senior staff economist on the President's Council of |
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Economic Advisors and a member of the joint FTC/DOJ task
|
2 |
force on efficiencies that drafted the efficiency
|
3 |
sections of the 1992 horizontal guidelines.
|
4 |
Andy, welcome.
|
5 |
DR. JOSKOW: Thanks for inviting me.
|
6 |
It is very nice to see some old Department of
|
7 |
Justice colleagues here. Thanks for coming.
|
8 |
When I was listening to Professor Fisher talk
|
9 |
about the IBM case, it became clear to me that these
|
10 |
cases just infect people's beings over time.
|
11 |
The expert that Professor Fisher was talking
|
12 |
about was a professor at the school where I went to
|
13 |
undergraduate college. And as an alumnus -- I will keep
|
14 |
you guessing -- as an alumnus, I met him a number of
|
15 |
years later, and it was clear to me that he never
|
16 |
recovered.
|
17 |
So in that vein, what I want to talk about today
|
18 |
is this issue of structure versus conduct.
|
19 |
What I want to do is take it from the point of
|
20 |
view of merger remedies, which is a somewhat settled
|
21 |
area, and try to talk a little bit about the principles
|
22 |
that make us say structure, yes in mergers. Behavioral,
|
23 |
no. But in Section 2, maybe less yes, structural, maybe
|
24 |
more yes, conduct.
|
25 |
And as I said, it is quite well developed and |
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the Antitrust Division has a merger policy guide, and it
|
2 |
kind of lays out things quite simply.
|
3 |
But when we start talking about Section 2, we
|
4 |
just see a whole host of issues where there are lots of
|
5 |
possibilities, but each possibility seems to create
|
6 |
problems.
|
7 |
We talk about divestiture or breakup, all kinds
|
8 |
of organizational design problems. If you make a
|
9 |
mistake, you can't go back.
|
10 |
Exclusive dealing contracts, you can prohibit
|
11 |
them, but there are lots of ways or often ways to
|
12 |
recreate those contracts in other ways.
|
13 |
You can prohibit the tie in a tying case, but
|
14 |
you risk the loss of certain integration efficiencies in
|
15 |
certain cases.
|
16 |
Predatory pricing, I don't know what to do in
|
17 |
that case. I will talk about that a little bit later.
|
18 |
You have all kinds of various cease and desist
|
19 |
orders, some of which could be beneficial, but at the
|
20 |
same time you risk them being anticompetitive or outside
|
21 |
the violation being discussed.
|
22 |
So mergers, there is a single goal. The remedy
|
23 |
isn't trying to make competition better than it was
|
24 |
before the merger, just trying to restore competition.
|
25 |
The structure seems to strongly prefer a way to |
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do that, a structural remedy, usually through divesting
|
2 |
assets or an existing business, and all that with the
|
3 |
hope of preserving any efficiencies inherently in the
|
4 |
merger.
|
5 |
Quoting from the guideline, "restoring
|
6 |
competition is the only appropriate goal with respect to
|
7 |
crafting a merger."
|
8 |
It is interesting that these guidelines are
|
9 |
written almost in the negative in the sense they talk
|
10 |
about why conduct remedies would be bad, less why
|
11 |
structure would be good.
|
12 |
Why are conduct remedies bad in a merger case?
|
13 |
Well, there is the direct cost of just monitoring a
|
14 |
conduct remedy through the life of a consent decree.
|
15 |
That should be "cost," not "coast."
|
16 |
Indirect costs of evading the spirit of a
|
17 |
decree. For example, you could say you have to have a
|
18 |
price cap, but there are lots of ways of undermining a
|
19 |
particular price cap, and, of course, that doesn't
|
20 |
necessarily get to all -- prices don't necessarily get
|
21 |
to all the aspects you want to preserve in a competitive
|
22 |
market.
|
23 |
If you constrain pro-competitive behavior, for
|
24 |
example, prohibiting price discrimination could
|
25 |
eliminate the possibility for efficient pricing in some |
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cases and just generally constrain the ability of the
|
2 |
merger, of a firm to flex its muscles in the market.
|
3 |
It seems clear that structure is the way to go.
|
4 |
And mergers are about changing structure, and what you
|
5 |
want to get out of competition is lower prices, improved
|
6 |
quality, more innovation.
|
7 |
And the way to get that is to maintain rivalry
|
8 |
within the market, and that means separating assets.
|
9 |
If you went the other way, as I said, price
|
10 |
protection as an example, that really undermines the
|
11 |
multiple -- it doesn't preserve the multiple dimensions
|
12 |
of competition that we were talking about.
|
13 |
This is the benefit of the Hart-Scott-Rodino
|
14 |
Act. It allows assets to be divested before they are
|
15 |
scrambled so you don't have to deal with this problem of
|
16 |
where do we put Bill Gates and these assets. Everything
|
17 |
is already separate.
|
18 |
Now, there is a preference in these situations
|
19 |
to divest an existing business entity.
|
20 |
That is something that Dietrich mentioned in one
|
21 |
of his examples. And that begins to get to the issue
|
22 |
of, well, what is it we are trying to do, once you have
|
23 |
found a violation in a merger, what is the but-for world
|
24 |
that you are looking for?
|
25 |
Are you trying to get the Herfindahl back to |
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1800 if you went from 1800 to now? Well, not
|
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necessarily because once you get to the remedy phase,
|
3 |
you are really looking to make sure you created an
|
4 |
entity that will allow competition to be restored.
|
5 |
That may mean taking more than just bringing the
|
6 |
merger back to 1800. We need to have sufficient assets
|
7 |
in order to make sure the firm has the incentive to
|
8 |
compete.
|
9 |
In a sense, there has been a market test in a
|
10 |
merger case because the business is already designed.
|
11 |
You have a sense of what assets are necessary in order
|
12 |
to compete in the premerger world.
|
13 |
Even so, after all that, being kind of the
|
14 |
general way to go, the FTC studied these things back in
|
15 |
1999, and they found kind of a mixed bag in the success
|
16 |
of structural remedy.
|
17 |
So even in a merger case, you really need to be
|
18 |
careful. One of the things that actually came out of
|
19 |
that study was the increased preference for an ongoing
|
20 |
business that already existed as a form of public
|
21 |
remedy.
|
22 |
So what about in the Section 2 case? The
|
23 |
conduct arises from the existence of monopoly power. So
|
24 |
the thought would be, well, you want to change the
|
25 |
firm's structure so that it doesn't have the ability or |
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incentive to restrain competition in the future.
|
2 |
But what does that mean? You want the remedy to
|
3 |
be tied to the violation, as Professor Fisher said.
|
4 |
But how far do you want to go? This is
|
5 |
something maybe we can talk about in discussion.
|
6 |
What is the but-for market structure? If
|
7 |
Microsoft had an 80 percent market share and whatever it
|
8 |
did violating Section 2 brought it to a 90 percent
|
9 |
market share, does that mean we just want to bring it
|
10 |
back to 80 percent or do we say that's not enough, it
|
11 |
will just happen again and you want the Baby Bills?
|
12 |
Exactly where do we want to go?
|
13 |
I think the difficulty in going very far is
|
14 |
because the structural remedy is very difficult because
|
15 |
firms just aren't divided up this way.
|
16 |
In the case of a horizontal divestiture, it is
|
17 |
not necessarily neatly divided in that way.
|
18 |
What are the necessary assets, what are the
|
19 |
necessary intellectual property, what are the necessary
|
20 |
employees to create a going concern and have these
|
21 |
separated entities?
|
22 |
It seems that the risk of failure in a situation
|
23 |
is quite great, that you just don't create the right
|
24 |
firm. The market essentially unravels and goes back to
|
25 |
the way it was. |
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And I think this is why we really don't see this
|
2 |
very much, this type of remedy, the horizontal
|
3 |
divestiture.
|
4 |
We have to go back to 1911 for the Standard Oil
|
5 |
case and the American Tobacco case to see that. It was
|
6 |
rejected later in the United Shoe case. And I think the
|
7 |
horizontal, "let's turn Microsoft into three," was
|
8 |
fairly quickly rejected early on.
|
9 |
What about vertical divestitures? Does that
|
10 |
work?
|
11 |
There you would think that the lines within a
|
12 |
firm may be clearer. You have the input part of the
|
13 |
firm, the output part of the firm. You can see how
|
14 |
changing the vertical relationship between two companies
|
15 |
might change the incentives for foreclosure.
|
16 |
So this is what happened in AT&T. We had a form
|
17 |
of a vertical divestiture. But even there, when we had
|
18 |
structural relief, we had it seemed like limitless
|
19 |
ongoing needs to monitor the lines of business the Bell
|
20 |
operating companies were in.
|
21 |
There were connecting issues simply because
|
22 |
there had to be an ongoing relationship between the two
|
23 |
companies, not just two companies, but the long distance
|
24 |
companies and the operating companies.
|
25 |
In Microsoft, again, maybe it would have been |
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easier to split along operating system lines and
|
2 |
application system lines.
|
3 |
But I sort of agree that even if there weren't
|
4 |
huge loss of efficiencies, it is not clear to me that
|
5 |
this indirect type of divestiture would have led to the
|
6 |
ultimate entry of a competing operating system company.
|
7 |
It seemed highly theoretical.
|
8 |
Again, it could have -- because of the network
|
9 |
effects, it could have easily unraveled and gotten the
|
10 |
market right back to where it was.
|
11 |
There is just no practical experience really in
|
12 |
having a world of competing operating systems. It seems
|
13 |
like quite a leap to think "well, we can just do it."
|
14 |
So in thinking about structure, it seems that in
|
15 |
mergers, the benefits are pretty high to having some
|
16 |
type of structural or divestiture remedy, whereas, the
|
17 |
costs are pretty low. They often can be accomplished
|
18 |
without forgoing efficiencies.
|
19 |
When you have to forgo a lot of efficiencies,
|
20 |
the case for divestiture might be weaker, but in general
|
21 |
I think it is pretty strong.
|
22 |
In Section 2 cases, on the other hand, it seems
|
23 |
like the costs are pretty high. You don't really have
|
24 |
much experience in competition in the particular market,
|
25 |
and it is not clear that the competitive process would |
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necessarily be enhanced if the market just reverted back
|
2 |
to monopoly.
|
3 |
It would be difficult to determine how far to go
|
4 |
with structure if your goal is really just to try to
|
5 |
apportion how much of the monopoly was gained as a
|
6 |
result of the anticompetitive conduct.
|
7 |
The efficiency losses could be pretty
|
8 |
substantial.
|
9 |
Still, most likely you will require ongoing
|
10 |
monitoring anyway, particularly in the vertical case and
|
11 |
possibly even in the horizontal case.
|
12 |
So what about behavioral remedies in Section 2?
|
13 |
Well, like any behavioral remedy, there is ongoing
|
14 |
monitoring.
|
15 |
Evasion clearly can be a problem. But it seems
|
16 |
to me that in certain cases, exclusive dealing, tying,
|
17 |
bundled discounts, they can be prohibited fairly broadly
|
18 |
within consent decrees.
|
19 |
And they do get at this issue of, well, what is
|
20 |
the incremental effect of the anticompetitive conduct.
|
21 |
Because it focuses on the effect on facilitating entry,
|
22 |
and even if there is some loss of efficiency to the
|
23 |
dominant firm, it seems like that loss in many cases is
|
24 |
worthwhile in order to in a sense help rivals and
|
25 |
improve and facilitate entry. |
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Dentsply is a particular example of a pretty
|
2 |
simple remedy, not attempting to break up Dentsply.
|
3 |
That leaves us with attempted monopolization,
|
4 |
which seems to me to fall outside of both of these
|
5 |
cases, structural versus conduct.
|
6 |
Is there an irremediable violation? That
|
7 |
question has been asked. This one has bothered me for a
|
8 |
long time.
|
9 |
It seems that whenever anyone thinks of
|
10 |
prohibiting lower end prices, that seems
|
11 |
anticompetitive, expanding output, that seems
|
12 |
anticompetitive, limiting the magnitude of price cuts,
|
13 |
that seems also anticompetitive.
|
14 |
Breaking up the airline doesn't seem to be the
|
15 |
way to go if you think about the American Airlines case
|
16 |
because there are strong network effects. There aren't
|
17 |
many hub airports with two hub carriers.
|
18 |
So, again, that seems really not the way to go.
|
19 |
Maybe fines are a remedy, although in the American
|
20 |
Airlines case, you really didn't have recoupment.
|
21 |
I'm not sure if this would be a disgorgement or
|
22 |
some kind of fine for deterrence.
|
23 |
Is guess that leaves open the question if you
|
24 |
don't have a remedy, is there a case.
|
25 |
The agencies have the obligation to enforce the |
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antitrust laws, but they certainly have an interest in
|
2 |
deterring what they think to be anticompetitive
|
3 |
predatory pricing.
|
4 |
But it seems to me that this may be a situation
|
5 |
where there is no clear structural or conduct remedy
|
6 |
that one could put forward in any kind of very
|
7 |
broad-based fix, such as thou shalt not violate Section
|
8 |
2, or something like that.
|
9 |
It just seems like it doesn't really get at the
|
10 |
specific conduct and it is just adding a criminal
|
11 |
contempt portion to one's obligations under the Sherman
|
12 |
Act.
|
13 |
So just in summary, it seems that in mergers,
|
14 |
the structural remedies and the basis for those remedies
|
15 |
seem pretty clear.
|
16 |
In Section 2 cases, I think the case is weaker.
|
17 |
That's not to say never, but I think that the historical
|
18 |
experience has been limited, which would probably limit
|
19 |
one's desire to go in that direction.
|
20 |
So I think in the case of Section 2, I think it
|
21 |
is more likely desirable to focus on some form of
|
22 |
conduct remedy.
|
23 |
Thank you.
|
24 |
(Applause.)
|
25 |
MR. ELIASBERG: Thank you, Andy. |
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Why don't we take a 10-minute break and come
|
2 |
back for the last two speakers.
|
3 |
Thank you.
|
4 |
(Recess.)
|
5 |
MR. ELIASBERG: Welcome back.
|
6 |
Our first speaker will be John Thorne, who is
|
7 |
senior vice president and deputy general counsel at
|
8 |
Verizon, where he works on antitrust trade regulation,
|
9 |
merger review and strategic initiatives. He is coauthor
|
10 |
of several academic treatises, including "Federal
|
11 |
Communication Law and Federal Broadband Law."
|
12 |
John, welcome.
|
13 |
MR. THORNE: Thank you very much. I don't have
|
14 |
any slides. So you can relax your eyes a little bit.
|
15 |
The first thing I want to say is I did read in
|
16 |
preparation for this session Richard Epstein's new book
|
17 |
on consent decrees, and I cannot praise it enough. It
|
18 |
is a wonderful concise summary of an awful lot of
|
19 |
history, and I found it very useful in preparation here.
|
20 |
I recommend it to the Commission. I wanted to
|
21 |
offer my own gift to the people studying this topic,
|
22 |
partly because this is a book that was written in 1992.
|
23 |
It has been revised and it is way out of date. You
|
24 |
can't find it anyplace.
|
25 |
But it has a full history of the AT&T breakup |
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decree and prior decrees in a way that you can't find.
|
2 |
When we rewrote the treatise, even though this
|
3 |
is longer, there is hardly anything in here about Judge
|
4 |
Green anymore.
|
5 |
Dan, I want to give you those as a present.
|
6 |
MR. ELIASBERG: Thank you, John. We greatly
|
7 |
appreciate it. But Richard's book was only 144 pages.
|
8 |
MR. THORNE: I'm serious. You may actually find
|
9 |
those are useful as references. Put it in the library.
|
10 |
MR. ELIASBERG: Thank you very much.
|
11 |
MR. THORNE: My experience and the reason I'm
|
12 |
the token business person on this panel is I worked on
|
13 |
the AT&T breakup remedy from 1983 to 1996.
|
14 |
I also worked on several antitrust consent
|
15 |
decrees along the way, for example, most recently the
|
16 |
Verizon-MCI merger decree, which is still pending before
|
17 |
Judge Emmett Sullivan in the D.C. Court.
|
18 |
I wrote some books about the experience. There
|
19 |
is an awful lot to say about the AT&T breakup decree,
|
20 |
and I'm attempting to tell you interesting stories about
|
21 |
it.
|
22 |
The first story I will tell is it was actually
|
23 |
the third of three government cases that resulted in
|
24 |
consent decrees against the AT&T company.
|
25 |
In fact, the second one, the one that resulted |
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in a consent decree the year I was born, 1956, it is
|
2 |
interesting. If we have time, maybe if we have
|
3 |
questions, I want to come back to it.
|
4 |
I know a current question relating to my friend
|
5 |
Qualcom or Microsoft or others is should we take all of
|
6 |
their intellectual property and let other people have it
|
7 |
at either free or at discounted nondiscriminatory terms.
|
8 |
That question was answered and implemented in a
|
9 |
consent decree in 1956 against the Bell system.
|
10 |
There is some interesting history there. The
|
11 |
one decree I was going to focus on for a couple minutes
|
12 |
is this 1982 AT&T breakup decree implemented in 1984.
|
13 |
It was agreed to by the parties and approved in
|
14 |
1982. A lot of litigation preceded that. I could talk
|
15 |
about that. I won't.
|
16 |
Starting in 1982, that was not -- when you think
|
17 |
of settlement, consent decree, that's the end of the
|
18 |
case, done. The lawyers go home, the parties now start
|
19 |
complying.
|
20 |
That was actually the beginning of more
|
21 |
litigation than had preceded the decree. There were
|
22 |
7,782 briefs filed with Judge Green, plus an additional
|
23 |
large number.
|
24 |
I didn't actually count them. I can get the
|
25 |
numbers if you guys want the number, a large number of |
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briefs, hundreds if not thousands of briefs filed with
|
2 |
the Department of Justice, which had its own shadow
|
3 |
docket.
|
4 |
In fact, every week, if you went to the DOJ
|
5 |
offices, they had an updated table of what was pending
|
6 |
at DOJ, the motions docket on the purple table.
|
7 |
Judge Green issued countless orders. There was
|
8 |
a criminal trial and a conviction of NYNEX for
|
9 |
criminally violating the decree's provisions. It was
|
10 |
overturned in the D.C. Circuit.
|
11 |
Besides that appeal, there were 15 other
|
12 |
consolidated groups of appeals in the D.C. Circuit.
|
13 |
There were about a half a dozen certiorari issues.
|
14 |
The '82 decree itself was summarily affirmed in
|
15 |
the Supreme Court, over a dissent by three justices. It
|
16 |
was written by then Justice Rehnquist, who wasn't the
|
17 |
chief at that point.
|
18 |
He was concerned that Judge Green was embarking
|
19 |
on a nonjudicial function. He did not want to
|
20 |
inadvertently create a judicial branch, the common
|
21 |
carrier bureau of the FCC, and he was worried that might
|
22 |
ensue. He recognized that was a bad thing.
|
23 |
If you go over to the D.C. court's new annex
|
24 |
where they built that sort of circular structure right
|
25 |
next to the old Barrett Prettyman Courthouse building, |
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you will see a series of exhibits.
|
2 |
I contributed one of the exhibits. It is about
|
3 |
Judge Green and the legacy he left, because in fact he
|
4 |
did create something like the FCC's common carrier
|
5 |
bureau.
|
6 |
He and the 1982 decree were put out of business
|
7 |
with the 1996 act of Congress called the
|
8 |
Telecommunications Act of 1996.
|
9 |
Now, there is an interesting debate. I don't --
|
10 |
I will just give you my view of it quickly, an
|
11 |
interesting debate on whether the AT&T decree did any
|
12 |
substantive good at all in terms of competition.
|
13 |
People who say it did a lot of good claim that
|
14 |
the decree brought down long distance prices by 70
|
15 |
percent and gave us colored telephones.
|
16 |
Both of those statements are not true. Long
|
17 |
distance prices did come down very substantially, but
|
18 |
more than 100 percent of the price decrease is
|
19 |
attributable to a different phenomenon that was going on
|
20 |
over at the FCC, a reduction of access charges. Major
|
21 |
costs for long distance prices came down almost as much
|
22 |
as the access prices came.
|
23 |
The colored telephones, the plethora of new
|
24 |
devices, that is something the FCC accomplished before.
|
25 |
They came up with a plug and play rule. You have a plug |
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147
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in the side of your wall, and you start mixing and
|
2 |
matching telephones.
|
3 |
That was not a benefit of the decree. There was
|
4 |
a different effect from the breakup, and that is that
|
5 |
the breakup disbursed the power of a single firm.
|
6 |
A very powerful single firm was broken up into
|
7 |
eight or 10 or 11 entities. It was AT&T, which was the
|
8 |
long distance manufacturing arm initially, seven
|
9 |
regional local telephone companies.
|
10 |
They had a jointly owned separate services
|
11 |
company, Bellcorp, and there was Cincinnati Bell and
|
12 |
Southern New England Telephone, which had been partially
|
13 |
owned by AT&T.
|
14 |
The diversity of behaviors of the different
|
15 |
firms you would have expected. If you sliced up one
|
16 |
thing and sent the pieces off on their own, the
|
17 |
diversity was largely stifled by line of business
|
18 |
restrictions that attached to seven of the firms.
|
19 |
Judge Green had said in approving the decree
|
20 |
that we the public would not tolerate a king over the
|
21 |
means of our political processes or economic processes,
|
22 |
in his view much better to have local warlords.
|
23 |
That's what we got. Some of the efficiencies of
|
24 |
a larger firm were sacrificed. Many of those
|
25 |
efficiencies have been recreated since, reachieved since |
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the divestiture happened.
|
2 |
But the topic here is not what is the applicable
|
3 |
structure of telecommunications markets. The question
|
4 |
is what did we learn about remedies, both structural and
|
5 |
conduct remedies.
|
6 |
The AT&T decree involved both kinds of remedies.
|
7 |
Both the structural and the conduct aspects of
|
8 |
the AT&T decree derived from a belief held by Bill
|
9 |
Baxter -- maybe there's some in the room who worked with
|
10 |
him -- the belief that vertical integration by a
|
11 |
regulated monopoly firm is a bad thing.
|
12 |
So the solution was in part structural, take
|
13 |
apart the vertically integrated pieces, separate things
|
14 |
that are competitive from the regulated monopoly
|
15 |
businesses.
|
16 |
And there was a regulatory component. Let's
|
17 |
forbid the reintegration of the new vertical, things
|
18 |
that will sprout, let's quarantine the regulated
|
19 |
monopoly.
|
20 |
The structural remedy was very painful, it was
|
21 |
expensive. It changed an awful lot of things.
|
22 |
It made an opportunity for me personally. So
|
23 |
Green that he was able to pull it off. He was an expert
|
25 |
administrator and he got it done. |
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The conduct regulation is what created the 8,000
|
2 |
briefs filed afterward.
|
3 |
The basic idea was almost everything was
|
4 |
prohibited and it required Judge Green repeatedly and
|
5 |
the Justice Department even more so to keep answering
|
6 |
these two kinds of questions, what is allowed, what is
|
7 |
okay and, on the other hand, can we have an exception,
|
8 |
please.
|
9 |
So, for example, I can't do this justice -- the
|
10 |
books do it justice -- but March 22, 1985, Judge Green
|
11 |
issued this order from his court, "Pacific Bell" -- that
|
12 |
was one of the telecoms in California, now it is AT&T --
|
13 |
"is permitted to provide telephone service to Mrs. Mary
|
14 |
Campbell who lives in the Plymouth exchange in the
|
15 |
Stockton, California LATA via the Placerville central
|
16 |
office in the Sacramento, California LATA."
|
17 |
September 10, 1991, June Green ordered,
|
18 |
"Wisconsin Bell may provide interLATA cross-boundary
|
19 |
foreign exchange service to Ms. Vicky Mallard and
|
20 |
Mr. Ricky Schultz."
|
21 |
There is a category of behaviors or services
|
22 |
called information services. Green ruled it was okay to
|
23 |
provide time and weather announcements as a public
|
24 |
service and separately a kind of wireless service that
|
25 |
had been prevalent, paging services -- nobody in this |
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room uses paging services anymore, but people used to
|
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carry pagers to be summoned.
|
3 |
Green said it was okay for the local telephone
|
4 |
companies to provide paging services, provide time,
|
5 |
provide paging, but not okay to provide the time over a
|
6 |
paging signal to your wristwatch. He ruled that was not
|
7 |
okay.
|
8 |
The telephone companies were forbidden from
|
9 |
manufacturing customer telephone equipment or network
|
10 |
telephone equipment.
|
11 |
And the question came up what if it breaks, can
|
12 |
you fix it, is repair a permitted or prohibited
|
13 |
manufacturing function.
|
14 |
Judge Green answered the detailed question "what
|
15 |
does it mean to manufacture." And Bell Atlantic -- I
|
16 |
was there at the time -- filed a brief which we called a
|
17 |
certificate of compliance, which was our way of trying
|
18 |
to get an answer to a further question.
|
19 |
We were going to tell them how we are going to
|
20 |
comply with his definition of manufacture. We said we
|
21 |
understood we could continue providing advice, not
|
22 |
repair, but advice to manufacturers to help fix product
|
23 |
defects.
|
24 |
Judge Green issued an order saying I refuse, the
|
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court refused to clarify the point. |
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Instead, he declared some of what we were
|
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proposing may be forbidden and it would be subject to
|
3 |
enforcement proceedings.
|
4 |
That's 1988. Judge Green directed us to seek
|
5 |
guidance from the Department of Justice. The Justice
|
6 |
Department refused to provide guidance because it has
|
7 |
neither the obligation nor the resources to do so.
|
8 |
But later the Justice Department told a
|
9 |
different Bell company it could engage in some repair
|
10 |
functions.
|
11 |
We took that as a good sign. DOJ asked Judge
|
12 |
Green to confirm the DOJ interpretation because, quote,
|
13 |
"the decree's manufacturing prohibition is ambiguous
|
14 |
with respect to repairs."
|
15 |
Judge Green refused to consider the DOJ request.
|
16 |
Three years later, it was my son's birthday, I
|
17 |
remember this. It was July 10. All of the telephone
|
18 |
networks in suburban Maryland and Northern Virginia and
|
19 |
Washington, D.C. went out.
|
20 |
There was a problem with signaling machinery
|
21 |
that was generating a bunch of garbage messages. All
|
22 |
the networks went down.
|
23 |
Bell Atlantic thought they had people who knew
|
24 |
how to fix this. They flew to Texas to Alcatel here are
|
25 |
our ideas for how to solve the problem. |
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I called up whoever was on duty at DOJ that day.
|
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I think it was Connie Robinson. She may have been on
|
3 |
holiday or something. Don Russell had to take the call.
|
4 |
I said, "Don, we want to send people to try to
|
5 |
fix the phone." I don't remember if I called or not;
|
6 |
the phones weren't working.
|
7 |
I got a message through to DOJ, "we will try to
|
8 |
help repair this, is that okay with you?" They said
|
9 |
"well, we don't know."
|
10 |
They had an emergency motion in front of Judge
|
11 |
Green, asked can we go help try to fix the telephone
|
12 |
networks that had been out for several days.
|
13 |
Green agreed and immediately authorized it and
|
14 |
wrote "repair and fixing and troubleshooting and so on
|
15 |
are things that are normally done, that are
|
16 |
appropriately done. I don't think can by any stretch of
|
17 |
the imagination can they be regarded as either the
|
18 |
manufacture or design of the equipment."
|
19 |
Wireless service is now a big business. There
|
20 |
are now more wireless phones. Everybody has one, just
|
21 |
in case you get summoned for something.
|
22 |
1983, that was not the case. 1983 AT&T is in
|
23 |
the middle of the divestiture negotiations. We signed
|
24 |
the decree in '82 implementing it and drawing these
|
25 |
boundaries around what are the permitted calling areas. |
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They were drawn with respect to the land
|
2 |
facilities, the 99.9 percent of what the local Bell
|
3 |
companies had.
|
4 |
AT&T went to DOJ and said, wait a minute, these
|
5 |
wireless phones won't fit neatly in the land boundaries,
|
6 |
moving customers don't respect the geography the same
|
7 |
way, the networks will have different scales.
|
8 |
And DOJ said, wait a minute, of course wireless
|
9 |
is confined to the LATA boundaries, just like the land
|
10 |
services are.
|
11 |
This was probably, in contract terms, a mistake
|
12 |
of law, a mistake of fact. There had been no meeting of
|
13 |
the minds on how to treat wireless.
|
14 |
We went to Judge Green, and Green ruled wireless
|
15 |
would be confined. So for 13 years, every time we
|
16 |
wanted to expand a wireless service area, we had to go
|
17 |
back to Judge Green to get it preapproved.
|
18 |
The long distance prohibition, very easy in
|
19 |
concept, a difference between local and long distance
|
20 |
calls.
|
21 |
Left to answer were things like can you switch a
|
22 |
long distance call. It is not carrying a long distance
|
23 |
call but can the local switches switch a call, can they
|
24 |
provide directory assistance or operator service, is it
|
25 |
okay to put out a local pay phone that is capable of use |
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for long distance calls.
|
2 |
These were all big issues and briefed
|
3 |
extensively.
|
4 |
Small number of lessons from this experience.
|
5 |
One -- and you will hear this more from Richard, I
|
6 |
expect, or certainly read it in his book -- is a lesson
|
7 |
that humility is much to be preferred than exuberance,
|
8 |
enthusiasm of ambitious remediers.
|
9 |
Richard's subtitle, "less is more," that is
|
10 |
absolutely right.
|
11 |
When markets and technologies are changing,
|
12 |
nobody, not even the very good staff of the Justice
|
13 |
Department, is accurately able to predict how that will
|
14 |
end up.
|
15 |
We have examples of what seemed like very
|
16 |
reasonable predictions on which much was staked that all
|
17 |
came to nothing.
|
18 |
I suggest as a very positive concrete idea the
|
19 |
Antitrust Division manual on remedies, which goes
|
20 |
through lots of boilerplate. It ought to be added
|
21 |
something about considering the limits of your knowledge
|
22 |
for predicting the future.
|
23 |
There is an obvious connection between the
|
24 |
quality and the sureness, the certainty of your
|
25 |
substance and how good the remedy is going to be. |
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Section 2 is a harder thing to figure out,
|
2 |
whether you actually have a violation. It translates
|
3 |
immediately into the difficulty of coming up with a good
|
4 |
remedy.
|
5 |
Bill Baxter, God bless him, wanted to forbid all
|
6 |
vertical integration by a regulated monopoly. It was
|
7 |
premised in a kind of regulation that was going out of
|
8 |
style then.
|
9 |
That remedy ignored the other technologies that
|
10 |
were looming, wireless and Internet. It resulted in a
|
11 |
freeze of things as they existed in 1982, so simple
|
12 |
things like telephone service or complex things like
|
13 |
whether there were vertical deficiencies or vertical
|
14 |
problems.
|
15 |
In one important respect, the Bell decree was
|
16 |
very, very bad. Probably the worst thing about it was
|
17 |
it reached out and covered markets that had not been the
|
18 |
subject of the litigation.
|
19 |
There was a category of activities that had been
|
20 |
part of a bill in Congress that hadn't passed called
|
21 |
information services.
|
22 |
The government, thinking it is a competitive
|
23 |
business, just like long distance or equipment
|
24 |
manufacturing, said let's prohibit any involvement with
|
25 |
overly regulated monopolies in information services. |
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That had effects that ranged from tiny to significant.
|
2 |
On the tiny side, useful services like voice
|
3 |
mail were delayed by my estimate about four years. It
|
4 |
turns out that voice mail, if you don't answer the phone
|
5 |
and someone takes a message, that's something a local
|
6 |
telephone company can provide for you more efficiently
|
7 |
than any external service provider.
|
8 |
Four years of delay getting that. More
|
9 |
significant effects were wireless business which was not
|
10 |
litigated or really meant to be covered by the decree.
|
11 |
I think that was crippled compared to Europe.
|
12 |
We were delayed compared to Europe in deployment
|
13 |
of wireless services as a result of the restrictions on
|
14 |
wireless.
|
15 |
I personally think, not to go through this in
|
16 |
detail, that our development of the Internet was delayed
|
17 |
by about a decade by these restrictions.
|
18 |
We had the second string building the Internet
|
19 |
instead of the people that had more of the core assets
|
20 |
needed to do a good job of it.
|
21 |
It is important before I sign off here to
|
22 |
compliment Judge Green, give him and the staff of DOJ
|
23 |
the highest compliments that are possible.
|
24 |
Judge Green had -- I have anecdotes about Judge
|
25 |
Green being a great administrator before he got the job |
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and when he got the job.
|
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But he could not keep up with the pace of
|
3 |
regulation that this decree produced. That means it
|
4 |
can't be done by anybody. I have statistics on that.
|
5 |
But that's gilding the lily.
|
6 |
One last point, then. I think there is a strong
|
7 |
connection from the certainty of your substance to how
|
8 |
the remedy is going to work.
|
9 |
But there is an opposite effect as well. There
|
10 |
is sort of a feedback from problems of remedy to
|
11 |
substance.
|
12 |
You see this reflected in the recent Trinko
|
13 |
decision, where Justice Scalia writes, "Effective
|
14 |
remediation of violations of regulatory sharing
|
15 |
requirements ordinarily require continuing supervision
|
16 |
of a highly detailed degree. We think Professor Oleto
|
17 |
got it right that no court should impose a duty to deal,
|
18 |
a substantive requirement that it can't explain or
|
19 |
adequately and reasonably supervise."
|
20 |
If a problem is irremediable by antitrust law,
|
21 |
we shouldn't have that as a problem, or, in my terms,
|
22 |
you shouldn't be setting yourself up to find violations
|
23 |
you can't fix. It is better to cut the law off.
|
24 |
This comes up probably most vividly in the
|
25 |
current debates over whether discounted bundles should |
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be Section 2 problems. Microsoft offers you a
|
2 |
discounted bundle of multiple products, should that be a
|
3 |
violation.
|
4 |
And if you can't fix that, then the answer
|
5 |
probably is it shouldn't be a violation. I will stop
|
6 |
there.
|
7 |
(Applause.)
|
8 |
MR. ELIASBERG: Thank you, John.
|
9 |
Richard Epstein is the James Parker Hall
|
10 |
distinguished service professor of law, faculty director
|
11 |
of curriculum and director, law and economics program,
|
12 |
University of Chicago Law School, where he has taught
|
13 |
since 1972.
|
14 |
He has also been the Peter and Kirstin Senior
|
15 |
Fellow at the Hoover Institution since 2000.
|
16 |
He served as editor of the Journal of Law and
|
17 |
Economics from 1991 to 2000.
|
18 |
Richard has written on a wide range of legal and
|
19 |
interdisciplinary subjects, including the recent book on
|
20 |
antitrust called "Consent Decrees and Practice" that
|
21 |
John just mentioned.
|
22 |
Richard, welcome.
|
23 |
MR. EPSTEIN: Thank you.
|
24 |
You see that John and I have very different
|
25 |
styles. And in fact, if I had talked to John before I |
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wrote the stuff on the AT&T decree, it would have been a
|
2 |
much longer book because I would have had to go through
|
3 |
all of these situations.
|
4 |
Let me see if I can talk a little bit about
|
5 |
this, and I'm going to I think start with a point that
|
6 |
John ended on, which is the relationship between your
|
7 |
confidence in the substantive law and your ability to
|
8 |
design remedies on the other.
|
9 |
Before I actually came back to look at antitrust
|
10 |
laws in some detail, I had sort of forgotten there was a
|
11 |
Section 2 and always thought the only thing a sensible
|
12 |
antitrust law could do was to try to regulate horizontal
|
13 |
behavior by controlling such cases as cartels and
|
14 |
divisions of markets, and then as the more difficult
|
15 |
task to figure out what should happen with respect to
|
16 |
mergers.
|
17 |
The reason why the first task is relatively easy
|
18 |
and the second task is more moderately difficult is in
|
19 |
the first case, you are generally but not always
|
20 |
confident that the efficiency gains are very small from
|
21 |
horizontal collusive arrangements but the restrictive
|
22 |
practices are large.
|
23 |
Then as you start going over to the merger
|
24 |
areas, you are never quite sure what the relative
|
25 |
magnitudes are going to be. So you have a lot of |
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problems to worry about.
|
2 |
Now, when you come to Section 2, after I figured
|
3 |
out what this was all about, you realize that there the
|
4 |
worm may have completely turned and that virtually every
|
5 |
practice which is going to be attacked under Section 2
|
6 |
will be the kind of practice which will have some
|
7 |
substantial efficiency gain.
|
8 |
So you will have to go into a question of
|
9 |
whether or not its restrictive component is going to be
|
10 |
large enough so as to justify losing that particular
|
11 |
gain in question.
|
12 |
If your basic intuition is that the magnitudes
|
13 |
are going to be roughly of equal proportion at best and
|
14 |
you know that the administrative solutions are going to
|
15 |
be far more difficult than in the other areas, there is
|
16 |
a part of me -- it is not the part of me which I
|
17 |
actually believe in 100 percent -- which says maybe we
|
18 |
should call the whole thing off and the way in which we
|
19 |
solve the problem of remedies under Section 2 is to get
|
20 |
rid of liability under Section 2 of the Sherman Act so
|
21 |
you don't have anything to worry about at all.
|
22 |
I have become reluctantly persuaded that there
|
23 |
are a number of cases in which the strategies of
|
24 |
foreclosure by contract and otherwise may have some
|
25 |
modicum of success. |
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I guess I backed off that provision and I now
|
2 |
believe an ideal operation of either the FTC or the FCC
|
3 |
or the DOJ might be able to bring some positive good to
|
4 |
this area, even though I think to some extent it is a
|
5 |
long shot.
|
6 |
In doing this, I should say that I have worked
|
7 |
both with Microsoft, although not on the antitrust case
|
8 |
here but on other matters, and certainly I worked with
|
9 |
John Thorne with respect to the various things having to
|
10 |
do with the implementation of the 1996 Act.
|
11 |
And indeed, I think I gave him the single worst
|
12 |
advice he ever received in the history of mankind when I
|
13 |
told him that the statute was actually drafted, this '96
|
14 |
Act, in an intelligent fashion.
|
15 |
The lesson I learned from that is it wasn't the
|
16 |
statute is so difficult. It is one of the things you
|
17 |
worry about is the constant drift between a statute
|
18 |
which seems to have a game plan that is moderately
|
19 |
coherent and administrative implementation and
|
20 |
interpretation of it, which can easily run awry.
|
21 |
So the whole question of drift within
|
22 |
administrative agencies is to me one of the single
|
23 |
biggest problems you have with legislative reform.
|
24 |
Where you start off, the various questions, and
|
25 |
how it is that you manage to keep the relative balance |
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on the remedial side direct to the administrative issue
|
2 |
to the judicial enforcement is to me a very major
|
3 |
problem.
|
4 |
In dealing with this, what I did -- and this was
|
5 |
an inspired thing that Microsoft asked me to do -- is
|
6 |
write a history of some of the consent decrees that
|
7 |
actually emerged from the various sorts of litigation
|
8 |
under Section 2.
|
9 |
The first case was a Section 1 case which I
|
10 |
talked about, which had to do with the meatpackers case.
|
11 |
Though it was a Section 1 case, all the mistakes
|
12 |
came in Section 2 guise. What I mean by that is you had
|
13 |
there a situation in which there was evident collusion
|
14 |
among the packers with respect to the distribution of
|
15 |
their goods, but the remedies decided to impose on each
|
16 |
of the companies restrictions on what they could do
|
17 |
unilaterally in those markets in which they had no
|
18 |
monopoly to begin with.
|
19 |
Essentially what happened when the thing was
|
20 |
subject to litigation is Justice Cardozo was a good
|
21 |
common lawyer and said "you make a bed of nails by
|
22 |
contract with the Justice Department, you expect to be
|
23 |
stung and burned every time you try to roll over on this
|
24 |
bed of nails, and I'm not going to let you out of it."
|
25 |
So you have this weird situation where the |
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government continues, in many cases for 30 or 40 years,
|
2 |
to insist upon the enforcement of provisions that are in
|
3 |
the contract without making any independent evaluation
|
4 |
of why it is that they have the slightest bit of good
|
5 |
they can confer on anybody.
|
6 |
The first lesson one learns about consent
|
7 |
decrees is that shorter is better, 40 years is too long,
|
8 |
open-ended is simply inexcusable. Once you get over
|
9 |
three or five years out, it is almost sure you are going
|
10 |
to be making a mistake.
|
11 |
What you want to do is to recognize that
|
12 |
Shakespeare was right when he said that brevity is the
|
13 |
soul of wit. You don't want these things to run on.
|
14 |
The explanation was given the movement of
|
15 |
companies and technologies are almost always
|
16 |
unanticipated.
|
17 |
The packers case and Swift and Company actually
|
18 |
had its final litigation in the 1960s and had to do with
|
19 |
an acquisition of the Greyhound Bus Company.
|
20 |
So you can see that the continuity across these
|
21 |
cases was in fact something which simply could not be
|
22 |
sustained.
|
23 |
As you start to move on -- I will not talk about
|
24 |
all the cases. But let me talk about one which I think
|
25 |
is perhaps the poster child of inept management with |
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respect to unilateral practices, although, again, it is
|
2 |
not quite a unilateral practice case, and that has to do
|
3 |
with the United Shoe Machinery case.
|
4 |
This is a transaction which began with the
|
5 |
merger of United Shoe in 1899. To the extent it is a
|
6 |
merger case, of course it is not a pure unilateral
|
7 |
practices case.
|
8 |
The logic behind this merger was in fact one of
|
9 |
immense economic advantage in that shoe making was an
|
10 |
extremely complicated process and that you had separate
|
11 |
companies, each of whom owned patents which controlled
|
12 |
separate stages in the processes.
|
13 |
And if you tried to negotiate piecemeal
|
14 |
transactions amongst them, what you did is you ran into
|
15 |
a classic version of the double, triple, quadruple
|
16 |
marginalization problem.
|
17 |
When you all the companies, essentially what you
|
18 |
did is you created a patent pool which allowed somebody
|
19 |
to smoothly price the entire process from soup to nuts.
|
20 |
What was interesting is that the antitrust
|
21 |
sophistication circa 1910 was probably greater than the
|
22 |
antitrust sophistication circa 1960 on this matter, and
|
23 |
the Supreme Court let this thing go, understanding
|
24 |
exactly what was happening, even though it would not
|
25 |
have used language like "double marginalization" or any |
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of the terms we use today.
|
2 |
What happened is after the merger took place,
|
3 |
the government just would not let go. This was part of
|
4 |
Woodrow Wilson's exuberant progressivement.
|
5 |
What you then do is you try to attack various
|
6 |
kinds of contractual restrictions that are imposed upon
|
7 |
the various lessees of United Shoe Machinery's
|
8 |
equipment, most of which had some degree of exclusivity
|
9 |
associated with them.
|
10 |
To take a simple kind of provision, if it turns
|
11 |
you want to use one of our particular machines, you have
|
12 |
to use all of our particular machines, and you have to
|
13 |
use them for certain periods of length.
|
14 |
All these clauses, at least if you take the view
|
15 |
of the modern law, essentially engage in the sin known
|
16 |
as foreclosure, which means by virtue of the fact that
|
17 |
you now control something at one stage of the market,
|
18 |
you will preclude competition from taking place at
|
19 |
something either upstream or downstream from the thing
|
20 |
that you control.
|
21 |
The lesson I think one has to learn from this is
|
22 |
extremely important, and it actually carries over I
|
23 |
think very well to the Microsoft cases.
|
24 |
What happens is the government managed after
|
25 |
some great deliberation to win these cases, and all of |
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these offending clauses in the first round of litigation
|
2 |
were removed.
|
3 |
So now the question is what's going to happen in
|
4 |
the marketplace. And the answer in this particular case
|
5 |
was absolutely nothing.
|
6 |
It turned out that there may have been a 2
|
7 |
percent or a 5 percent difference, but that there were
|
8 |
huge efficiency advantages associated with being able to
|
9 |
get all of your equipment from a single supplier such
|
10 |
that if any part of the stream went down, you would know
|
11 |
whom to turn to for repair, and that vertical
|
12 |
integration was prized by customers, who did not love
|
13 |
the thought of trying to mix and match 27 different
|
14 |
pieces from 14 different companies, knowing that the
|
15 |
interconnections would never be quite right and having
|
16 |
each company say that the other fellow had done it
|
17 |
wrong.
|
18 |
If it is a 15 percent monopoly premium you are
|
19 |
paying for piece of mind, it is money well spent in the
|
20 |
eyes of many people.
|
21 |
What happens is that the clauses themselves
|
22 |
turned out to have very little value with respect to the
|
23 |
way in which United Shoe continued to operate its
|
24 |
business.
|
25 |
There is a very important lesson to be learned |
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from this, which is if you keep the clauses in place and
|
2 |
start to fight over them, all of a sudden somebody will
|
3 |
actually believe you know something about the way in
|
4 |
which your business runs, and by making such a big deal
|
5 |
of it as a defendant, all you do is you create the
|
6 |
impression that they have greater causal efficacy than
|
7 |
in fact they do in the marketplace.
|
8 |
So I have a piece of free advice to all clients
|
9 |
of mine or nonclients of mine, which is that any time
|
10 |
somebody wants to attack one of your contractual
|
11 |
provisions on the grounds that it creates market power,
|
12 |
exclusion foreclosure, whatever it is, you just
|
13 |
surrender, pull the damn thing out and let business go
|
14 |
on exactly the same way as it did before.
|
15 |
Here I think I disagree a little bit with Frank
|
16 |
Fisher with respect to the question about how potent
|
17 |
were the various exclusionary provisions Microsoft that
|
18 |
had with respect to the kind of things that go on his
|
19 |
desktop and so forth.
|
20 |
I thought Microsoft made a horrific set of
|
21 |
mistakes in terms of the way in which it handled the
|
22 |
early stages of the litigation, by hanging on to these
|
23 |
clauses as if everything depended upon them.
|
24 |
When in fact once they were removed, it turned
|
25 |
out that the modifications that were made with respect |
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to Microsoft Explorer probably had much more to do with
|
2 |
the decline of Netscape than any kind of contractual
|
3 |
provisions that you have.
|
4 |
So what you say in effect is this. If you keep
|
5 |
the contractual injunction in place in these sorts of
|
6 |
situations, everybody is now going to impute high
|
7 |
restrictive, low efficiency value with respect to the
|
8 |
particular practice in question, and you won't have a
|
9 |
laboratory experiment which will allow you to sort these
|
10 |
things out.
|
11 |
If my intuitions about end-to-end services are
|
12 |
correct -- and I think those intuitions are right as
|
13 |
much in the United Shoe case as they are in the
|
14 |
Microsoft case and vice versa -- what you want to do is
|
15 |
pull the plug on the restriction and then simply rely on
|
16 |
the efficiency with respect to the products that you
|
17 |
want.
|
18 |
As it turns out, I think in this world, monopoly
|
19 |
is not necessarily an ideal situation, but it is
|
20 |
certainly one which is not necessarily less preferable
|
21 |
than other situations in which you have coordination
|
22 |
problems to replace it.
|
23 |
To use the very fancy language some people use
|
24 |
today, when you start having to put together equipment
|
25 |
from multiple players, it is kind of like a self-imposed |
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anticommons problem. You have this guy here, that guy
|
2 |
there, everybody is getting in everybody else's way.
|
3 |
And it may well be that empirically the commons
|
4 |
problem, taking everything from a single supplier, even
|
5 |
if it is able to expand its control by virtue of the
|
6 |
network it has, is a better solution for you than
|
7 |
anything else.
|
8 |
So now, having said all this, how do we start to
|
9 |
think about these questions of design?
|
10 |
I will not take too much more time because I
|
11 |
think the discussion is important. But I want to say a
|
12 |
couple things about John Thorne's remarks.
|
13 |
It is not that I disagree with him, but
|
14 |
strangely enough, I don't think that John actually
|
15 |
talked about the single worst features associated with
|
16 |
the decree which were the original structural choices
|
17 |
that were made with respect to.
|
18 |
If you go back, the FCC was not the world's most
|
19 |
nimble agency in the '60s and '70. But by the
|
20 |
mid-1970s, after the MCI case and so forth, it did begin
|
21 |
to tinker with the prospect that the way in which you
|
22 |
try to handle the common carrier system as a common
|
23 |
carrier issue was to mandate various kinds of
|
24 |
interconnections between the central system and anybody
|
25 |
else who wanted to get on. |
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What happened is if you had kind of a trunk
|
2 |
line, other people could hook on and start to add their
|
3 |
service. And the theory would be that the function of
|
4 |
the legal system would be to make sure that any rival
|
5 |
competitor could reach any customer on the AT&T system,
|
6 |
and if you could start on the AT&T system, you could
|
7 |
reach anybody from a rival competitor.
|
8 |
Of course, if you had two rival competitors in
|
9 |
different places, then you would have to be able to go
|
10 |
from rival A through AT&T, if need be, back to rival B.
|
11 |
So that what happens is that the way in which
|
12 |
you expanded competition under these things is to
|
13 |
mandate intersection.
|
14 |
The question is how do you do it. If I
|
15 |
understand the situation correctly, what you simply do
|
16 |
is ensure compatibility, just as you would in the
|
17 |
Microsoft case, and you don't worry very much about
|
18 |
pricing issues.
|
19 |
The brute fact of the matter is early on if you
|
20 |
were tiny in the AT&T system as B, you are getting a
|
21 |
subsidy by virtue of the interconnection.
|
22 |
What is nice about this subsidy is that it
|
23 |
shrinks with time, because as you become larger now, it
|
24 |
turns out access to your customers by the main carrier
|
25 |
is more valuable than it was to begin with, and after a |
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while you get yourself into a nice equilibrium.
|
2 |
In my view, if they had done that first in the
|
3 |
1982 decree and if they had basically blown up all of
|
4 |
the unbundled network pricing elements associated with
|
5 |
the 1996 Act, you would have been able to see a fairly
|
6 |
coherent expansion of what has happened.
|
7 |
The thing that I wanted to stress about this is
|
8 |
when you are talking about these network industries, of
|
9 |
which I think both the computing and I think the
|
10 |
telecommunications industries qualify -- but United Shoe
|
11 |
does not -- what you want to do in effect is to make
|
12 |
sure that interconnections can be obtained at the lowest
|
13 |
possible cost and to do nothing else thereafter.
|
14 |
It is not that you are going to get yourself
|
15 |
into a perfect solution.
|
16 |
But I think if there is anything that I learned
|
17 |
from the AT&T decree is this constant, mindless, numbing
|
18 |
rhetoric about how it is when you force people to sell
|
19 |
things to other people at prices that administrators
|
20 |
will now determine, incorrectly as a matter of force and
|
21 |
effect, that we have somehow removed ourselves closer to
|
22 |
a competitive system.
|
23 |
The truth about the matter is John I think was
|
24 |
right when he alluded to the fact that the rate cap
|
25 |
system was a pretty sensible way in which to run that |
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business, because what rate caps essentially did is you
|
2 |
didn't try to use cost-plus pricing, but you took into
|
3 |
account the fact that generally speaking, there are
|
4 |
always going to be greater efficiencies in telecom.
|
5 |
So if you just lower in real terms the rates by
|
6 |
2 or 3 percent a year and do nothing else, they will get
|
7 |
a little monopoly profits, you will get a lot of
|
8 |
administrative savings, and there will be a huge amount
|
9 |
of administration underneath the kind of caps that take
|
10 |
place.
|
11 |
So that kind of mix on remedies is I think
|
12 |
exactly what you are after.
|
13 |
Here is the way in which I start to think about
|
14 |
Section 2 in a word, is that I think basically damages
|
15 |
are not particularly important one way or another when
|
16 |
you are bringing these government suits, which is why
|
17 |
they have not been brought.
|
18 |
I think the invalidation of certain kinds of
|
19 |
contractual provisions is certainly appropriate and
|
20 |
relatively easy to implement, and my advice to both
|
21 |
firms is that you basically pull them out of the
|
22 |
agreement so that you don't have to fight that battle
|
23 |
under adverse terms.
|
24 |
And most of the structural remedies are a case
|
25 |
of too much at too high a cost. And in general, I can |
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think of no cases that succeeded on this.
|
2 |
I would guess that it was in the trillions of
|
3 |
dollars over the last 25 years that we could attribute
|
4 |
to bad remedial design in telecommunications, a really
|
5 |
very big and substantial number.
|
6 |
United Shoe was a small little case. But
|
7 |
remember, when they finally got frustrated at the
|
8 |
inability to make the contractual restrictions change
|
9 |
the behaviors in markets, they broke up the firm, and it
|
10 |
sort of went belly up.
|
11 |
I think one has to remember that. I'm a lawyer.
|
12 |
I don't start with existence theorems about how the
|
13 |
government can improve things by picking the optimal
|
14 |
choice.
|
15 |
I'm a guy who believes that you start with a
|
16 |
breach and realize it is substantial, and unless you can
|
17 |
find a clean kill, the best thing to do is to stay your
|
18 |
hand.
|
19 |
Thank you.
|
20 |
(Applause.)
|
21 |
MR. ELIASBERG: Thank you, Richard.
|
22 |
Before we get into the moderated discussion, why
|
23 |
don't we go down the panel here and see if any of the
|
24 |
speakers would like to take a moment or two to comment
|
25 |
on what the other speakers have said. |
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So with the request that it just be a minute or
|
2 |
two, Franklin, let me start with you. Any thoughts?
|
3 |
DR. FISHER: Yes. I can't resist it.
|
4 |
MR. ELIASBERG: Try to speak into the
|
5 |
microphone, please, for the court reporter.
|
6 |
DR. FISHER: Sure.
|
7 |
I can't resist it. I think the dictum that
|
8 |
every practice under Section 2 has large efficiency
|
9 |
gains is wrong.
|
10 |
I think it is correct -- that every practice
|
11 |
under Section 2 is likely to be defended as having large
|
12 |
efficiency gains is not the same thing.
|
13 |
MR. ELIASBERG: Okay.
|
14 |
Dietrich, anything?
|
15 |
MR. KLEEMANN: Maybe to John's remark about the
|
16 |
remedies, actual remedies.
|
17 |
I remember you said maybe in a Section 2 cases,
|
18 |
behavior, yes. However, it is not too clear.
|
19 |
I want to add something which is I would say any
|
20 |
intervention of the state in terms of structural
|
21 |
remedies is an intervention into the right of property.
|
22 |
If you see a merger case, there the parties,
|
23 |
they change themselves, the market such so you can say
|
24 |
if they do this in an anticompetitive way, it might not
|
25 |
so much be covered by their right of property to do |
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this, and you can't intervene against such operation.
|
2 |
By contrast, in that case, nobody changes the
|
3 |
market structure in the same sense. Simply they use a
|
4 |
given market structure to achieve some anticompetitive
|
5 |
goals.
|
6 |
And for me, it is not so obvious that you can
|
7 |
intervene in such a situation easily into the property
|
8 |
rights of a party which is always some kind of action as
|
9 |
if you would an expropriation.
|
10 |
On the other hand, you can say commercial
|
11 |
property is certainly not to be used in an absolutely
|
12 |
free way.
|
13 |
It is subject to some fundamental applications.
|
14 |
And these fundamental applications certainly include the
|
15 |
respect of the basic rules for market economy.
|
16 |
And if you heard these basic rules in a very
|
17 |
clear, blatant way, it might be justified to intervene
|
18 |
into the property rights. But I repeat it probably is
|
19 |
in legal terms as opposed to merger control a last
|
20 |
resort.
|
21 |
Therefore, the hurdle is much higher.
|
22 |
MR. ELIASBERG: Thank you.
|
23 |
Andy, any thoughts?
|
24 |
DR. JOSKOW: Just one thing. I think there is
|
25 |
some consensus about what we are saying with regard to |
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structure versus conduct.
|
2 |
What I hear what I think is happening is what we
|
3 |
are saying about remedies is actually tying it back to
|
4 |
what one might say about what is a real good liability
|
5 |
case.
|
6 |
If we are saying that, well, you can probably
|
7 |
make something out of cases where we can limit or remove
|
8 |
certain contractual provisions, at least to foreclosure
|
9 |
and reductions of competition, in some cases I think we
|
10 |
are in the types of legitimate cases we may be talking
|
11 |
about.
|
12 |
I think that is important too.
|
13 |
MR. ELIASBERG: Thank you.
|
14 |
John, any thoughts?
|
15 |
MR. THORNE: Can I ask a question instead of
|
16 |
making a comment?
|
17 |
MR. ELIASBERG: Well, you may ask, yes.
|
18 |
MR. THORNE: This is a question for Dietrich.
|
19 |
In your remarks, you talked about access
|
20 |
remedies as being one of the primary ways you resolve
|
21 |
mergers.
|
22 |
Then the first issue you listed under the topic
|
23 |
of access grants is setting the terms for the access
|
24 |
grants, price and other terms.
|
25 |
I wondered, you have a large body of mergers |
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where you have insisted on access grants. How do you
|
2 |
deal with the effect of that requirement on investment,
|
3 |
investment either by the firm where the requirement is
|
4 |
placed, which might want to invest less in stuff it has
|
5 |
to give away on regulated terms or incentives of the
|
6 |
demanders for access who might not build as much of
|
7 |
their own stuff if they can borrow it for free from
|
8 |
others?
|
9 |
MR. KLEEMANN: First of all, I think I have to
|
10 |
say access remedies are the most important behavior
|
11 |
remedies, certainly not in general the most important,
|
12 |
which are still clear-cut remedies such as divestiture.
|
13 |
However, there are situations, in particular in
|
14 |
industries where you have essential facilities and where
|
15 |
there is the high risk of foreclosure combining
|
16 |
essential facilities vertically with players where you
|
17 |
have to find a way out.
|
18 |
It is certainly true an eternal argument of all
|
19 |
incumbents in the possession of platforms or networks
|
20 |
that if you interfere with their strategies, you stifle
|
21 |
any kind of new investment.
|
22 |
Take only the current debate in Germany or in
|
23 |
Europe about the demands of the German Telecom to get
|
24 |
for their super quick DSL network, fiber network, an
|
25 |
exception from the generally regulated rule. Otherwise, |
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as I said, they would not invest.
|
2 |
In my view, this can, however, not be an excuse
|
3 |
to do something, to simply accept that one guy is going
|
4 |
to foreclose a market at the outset with all the severe
|
5 |
consequences for the future development.
|
6 |
Having said this, if you go to impose such an
|
7 |
access remedy, you have, however, to be fair.
|
8 |
I just mentioned in my short statement our
|
9 |
solution in the Telepiu case, where we started with the
|
10 |
certain bases, a price which is feasible, including a
|
11 |
certain margin for them and also some benchmarking with
|
12 |
other similar situations, other markets.
|
13 |
I think this is a realistic approach, and I
|
14 |
don't think that Telepiu's investment over the last
|
15 |
three or five years has been harmed by this.
|
16 |
Having said this, of course you should do all
|
17 |
this in a careful way and not going to impose easily
|
18 |
without carefully examination of this kind of
|
19 |
commitment.
|
20 |
But to confuse and generally to renounce this
|
21 |
kind of commitment, even in blunt cases of market
|
22 |
foreclosure, I would say would be a general kind of
|
23 |
resignation in this area.
|
24 |
And I saw in some statements if you are caught,
|
25 |
if it is communicated as it is, and I found this kind of |
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resignation, in particular, given the importance of
|
2 |
these kind of markets that have these remedies is not
|
3 |
acceptable.
|
4 |
MR. ELIASBERG: Richard, do you have a comment?
|
5 |
MR. EPSTEIN: I have a couple comments.
|
6 |
One, I think with respect to the whole problem
|
7 |
about Section 2, I think there are some of these
|
8 |
practices which are inefficient. I think they have
|
9 |
small efficiency gains and small inefficiencies.
|
10 |
One of the things that is most striking about
|
11 |
many of these contractual restrictions is they did a
|
12 |
little foreclosure and they did a little good. And
|
13 |
getting rid of the provisions didn't change things very
|
14 |
much.
|
15 |
One of the things you always worry about when
|
16 |
people knock down contractual terms is if you leave
|
17 |
freedom of price, so whatever you couldn't get in the
|
18 |
contract term you may well get in the price term.
|
19 |
So it is not at all clear you made some major
|
20 |
sort of social advancement with respect to these things.
|
21 |
With respect to what was just said about the
|
22 |
European approach on the remedy side, it is probably
|
23 |
something more that David can speak to than I.
|
24 |
But the striking differences between the EU
|
25 |
remedies with respect to the Microsoft and the American |
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remedies are very dramatic. What happens is there are
|
2 |
two dangers here, and I think he has only alluded to
|
3 |
one.
|
4 |
The first danger is, of course, that monopoly
|
5 |
foreclosure will take place.
|
6 |
The other danger is while subsidization through
|
7 |
expropriation of the transactions, where you no price
|
8 |
term associated with them for the divestiture of
|
9 |
intellectual property or patents of some kind or another
|
10 |
or prices that are well below the cost and, in fact, one
|
11 |
of the problems about John's industry which I think
|
12 |
shows this is if you go back to the history of telereg
|
13 |
pricing, what those guys managed to dream up in the FCC
|
14 |
was they gave you a very small rate and said they would
|
15 |
be depreciating it on you.
|
16 |
Since they gave you a small rate base, they gave
|
17 |
you a very low rate of return. The standard history of
|
18 |
regulated industries on pricing is if you give people a
|
19 |
large rate base, taking very little risk and they get a
|
20 |
smaller rate of return, and if give them a higher rate,
|
21 |
what they did under telereg was to give them a small
|
22 |
base and a low rate, which had really very after adverse
|
23 |
consequences.
|
24 |
The Supreme Court, they would not attack this as
|
25 |
either a statutory construction matter nor in the end as |
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a takings and regulatory kind of takings issue.
|
2 |
MR. ELIASBERG: Thank you, Richard.
|
3 |
Why don't we go to the moderated discussion.
|
4 |
And with this we will not only have our panelists, but
|
5 |
David Heiner has graciously agreed to also participate.
|
6 |
Let's take a look first at slide 4.
|
7 |
And I will go ahead and just read this into the
|
8 |
record.
|
9 |
"Finding the right remedy for antitrust
|
10 |
violations is never easy, and we have never been
|
11 |
particularly good at it."
|
12 |
And that comes from Herbert Hovenkamp's "The
|
13 |
Antitrust Enterprise."
|
14 |
Would I be correct in assuming that there is no
|
15 |
disagreement with that among any of the panelists?
|
16 |
MR. EPSTEIN: Actually, there is some. One of
|
17 |
the reasons why there is some disagreement is I think
|
18 |
Herbert got the remedies wrong.
|
19 |
He was really very harsh on the Microsoft
|
20 |
remedy. I think, for example, he wildly overrated the
|
21 |
technical efficiency of the OS 2 system and created the
|
22 |
error that I think constantly happens, which is to
|
23 |
assume whenever there is a restricted practice which we
|
24 |
have now struck down, it was that practice rather than
|
25 |
the inherent merits of the product which led to the |
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loss.
|
2 |
I thought of all the Microsoft exhibits I read
|
3 |
the one that was really devastating on that point was
|
4 |
the one prepared by Kevin Murphy which went through the
|
5 |
question of why it was all the other systems had failed,
|
6 |
given very powerful and detailed explanations based on
|
7 |
structure architecture and design.
|
8 |
Yes, I think we aren't particularly good at it.
|
9 |
It is not the case that the author of the quote is
|
10 |
necessarily immune from the criticism.
|
11 |
MR. HEINER: I could pick up on that a little
|
12 |
bit and specifically comment on the remedy that
|
13 |
Professor Fisher pointed out that Professor Hovenkamp
|
14 |
proposed in the Microsoft case.
|
15 |
First off, I would agree with the quote and I
|
16 |
would agree with the thrust of Professor Fisher's
|
17 |
presentation that remedies are certainly hard in Section
|
18 |
2 cases.
|
19 |
I have personally found that to be the case with
|
20 |
respect to the Microsoft issues that I have been dealing
|
21 |
with for many years.
|
22 |
My sense of the situation is that to some extent
|
23 |
it may be that remedies are so hard in Section 2 cases
|
24 |
because quite often the underlying structure is in fact
|
25 |
efficient and perhaps even the conduct is efficient as |
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to which there has been liability determined.
|
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But when you get to the remedy phase, you maybe
|
3 |
begin to have second thoughts about some of that.
|
4 |
That is sorted of pointed up by Professor
|
5 |
Fisher's application about the applications barrier to
|
6 |
entry in the Microsoft case.
|
7 |
The applications barrier to entry is a
|
8 |
reflection of natural economic forces, as the professor
|
9 |
said.
|
10 |
It reflects the value of compatibility to
|
11 |
consumers. They want to get a PC that is the same as
|
12 |
other PCs, it runs the same applications.
|
13 |
Many of the remedies that were proposed through
|
14 |
the years went to try to attack the applications barrier
|
15 |
to entry and thereby break compatibility.
|
16 |
People turned away from those remedies quite
|
17 |
properly because they didn't want to give up that
|
18 |
benefit. I think that was very much the case with the
|
19 |
remedy number 5 that we saw from Professor Hovenkamp.
|
20 |
The idea there was that Microsoft should be
|
21 |
obliged to conduct an auction of the Windows source
|
22 |
code, the crown jewels of the company essentially, to
|
23 |
end licensees who would then go out and offer Windows in
|
24 |
competition with one another.
|
25 |
What would have happened in that case is that |
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the value of Windows and the price would have
|
2 |
essentially tended toward zero.
|
3 |
Any time you have two or three or more firms
|
4 |
with the exact same information good with a zero
|
5 |
marginal cost, they will tend to compete the cost down
|
6 |
to zero.
|
7 |
The effect would have been quite dramatic in
|
8 |
terms of taking away the value of what is really one of
|
9 |
the most valuable products of all time.
|
10 |
The three firms, to try to break out of that,
|
11 |
would have sought to differentiate their products.
|
12 |
They would have competed with one another to add
|
13 |
different features and thereby break compatibility.
|
14 |
That would not have been maintained, and customers would
|
15 |
have lost the benefit of that.
|
16 |
That I think is why the Division did not go down
|
17 |
that path. But I do think it illustrates the broader
|
18 |
point about many times the remedies may point up that
|
19 |
the existing situation is efficient.
|
20 |
MR. ELIASBERG: Frank, did you want to make a
|
21 |
comment on that?
|
22 |
DR. FISHER: Well, I don't agree with that.
|
23 |
MR. HEINER: I know.
|
24 |
DR. FISHER: I agree that the successor firms
|
25 |
under that remedy would try to differentiate themselves |
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and try to improve their products in various ways.
|
2 |
All of them would have a great big incentive of
|
3 |
remaining compatible with the existing stock of
|
4 |
programs. I think it is unlikely they would try to
|
5 |
differentiate themselves in ways that would break
|
6 |
compatibility.
|
7 |
MR. EPSTEIN: I think the difficulty with that
|
8 |
logic is the only way they could avoid breaking down
|
9 |
compatibility is to meet with one another.
|
10 |
What you would have is a contract combination in
|
11 |
restraint of trade. It would have to take place because
|
12 |
the gains, as Frank says, from coordination are so
|
13 |
great.
|
14 |
But it can only take place underneath some sort
|
15 |
of government supervision to make sure that while those
|
16 |
folks are sitting in the room to figure out compatible
|
17 |
features they don't manage to figure themselves out on
|
18 |
compatible prices.
|
19 |
In addition to that, as everybody is trying to
|
20 |
develop products to make sure that they can make the
|
21 |
compatibility, everybody has to slow down with respect
|
22 |
to what they are doing to make sure the compatibilities
|
23 |
will survive.
|
24 |
My own view about it is so long as you allow for
|
25 |
some degree of competition on top of the operating |
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system that was designed under the Kollar-Kotelly
|
2 |
decree, that's all that you can expect.
|
3 |
I will say this, since he was my former student.
|
4 |
When Doug Ginsberg actually evaluated this particular
|
5 |
portion in the state case which Hovenkamp helped to
|
6 |
author, he did not give a Chevron deference kind of
|
7 |
answer which said we don't know what is going on there,
|
8 |
when are not smart enough to figure all this out, if she
|
9 |
thinking it is right, we are just going to let it fly.
|
10 |
He said well done. This was in fact very much
|
11 |
considered on the part of the Justice Department.
|
12 |
Frank's position lost. And frankly, well done.
|
13 |
DR. FISHER: Frank doesn't agree with that
|
14 |
either.
|
15 |
MR. EPSTEIN: I'm stunned to hear.
|
16 |
DR. FISHER: The compatibility I was talking
|
17 |
about -- we may be using the term a little bit
|
18 |
differently -- was remaining compatible so that any
|
19 |
program that ran on Windows at the time that this
|
20 |
occurred would continue to run on the operating systems
|
21 |
as they developed at the other company.
|
22 |
I was not referring to a situation in which they
|
23 |
had to remain compatible with each other other than
|
24 |
that.
|
25 |
MR. EPSTEIN: I did misunderstand you. |
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But having that understanding, it seems to me
|
2 |
that software designers who were now going to have to be
|
3 |
compatible with foreign-compatible systems are going to
|
4 |
have incentives that are less than ideal.
|
5 |
This is a case in which the monopoly platform
|
6 |
has an advantage and it is shown by virtue of the fact
|
7 |
that you can design something for a market where you
|
8 |
will get 10X as opposed to 2.5.
|
9 |
That's why it is that Macintosh, although it is
|
10 |
finally moving up there, is always essentially first we
|
11 |
do the Microsoft system and two years later you come out
|
12 |
with it.
|
13 |
What is the difference in the number of programs
|
14 |
for one system as opposed to the other?
|
15 |
MR. HEINER: It is large.
|
16 |
MR. EPSTEIN: 10, six, whatever it is.
|
17 |
That's one of the things you start to give up in
|
18 |
this game. There are no free lunches here.
|
19 |
DR. FISHER: It is true, and I thought I said
|
20 |
so, that it is probable that eventually anyway the
|
21 |
natural effects will take over and one of these things
|
22 |
will become very large again.
|
23 |
That's perfectly true. That's a defect. You
|
24 |
can't prevent that.
|
25 |
MR. EPSTEIN: So the frictions aren't worth |
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running.
|
2 |
MR. HEINER: Let's turn to that different point,
|
3 |
which is the natural tendency of the market to move on
|
4 |
in high-tech industries.
|
5 |
It is kind of interesting to see now in 2007, is
|
6 |
there a huge excitement when Microsoft comes out with
|
7 |
Windows Vista, the latest version, are people running to
|
8 |
get Vista to run Vista applications?
|
9 |
And the answer unfortunately for Microsoft seems
|
10 |
to be not as much as we might like.
|
11 |
Where is the excitement today in terms of
|
12 |
applications? It is all Internet-based services. So it
|
13 |
is the YouTubes of the world and My Space and Friendster
|
14 |
and Flicker and Yahoo and Google and all that. That
|
15 |
runs across any browser on any operating system.
|
16 |
Here is another case where technology does move
|
17 |
on, market forces tend to take care of themselves. I
|
18 |
don't know what will come in 2010 and 2012.
|
19 |
Microsoft will be offering its own
|
20 |
Internet-based services increasingly in the years to
|
21 |
come.
|
22 |
But it does feel like already the discussion we
|
23 |
had in the late '90s is moving on.
|
24 |
MR. ELIASBERG: With that in mind, looking back
|
25 |
again at the statement by Hovenkamp and putting aside |
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that people who live in glass houses should not throw
|
2 |
stones, Richard's point, I would ask particularly of
|
3 |
Frank and Richard, any Section 2 cases come to mind,
|
4 |
government Section 2 cases where the remedy was right,
|
5 |
where the agency got the remedy right?
|
6 |
MR. EPSTEIN: Microsoft.
|
7 |
MR. ELIASBERG: Frank?
|
8 |
DR. FISHER: None. I'm not suggesting it was an
|
9 |
easy task either.
|
10 |
MR. ELIASBERG: Not one case?
|
11 |
When you said no, you mean no to Microsoft or no
|
12 |
case at all?
|
13 |
DR. FISHER: I don't agree with it for
|
14 |
Microsoft, and I cannot think of any case in which it
|
15 |
has been really very well done.
|
16 |
That is partly because -- three reasons why.
|
17 |
One, I'm probably not familiar as I sit here with all
|
18 |
the cases. I think that is probably true.
|
19 |
Two, it is a very difficult problem.
|
20 |
Three, until fairly recently, my impression is
|
21 |
if you go back historically that the record of the
|
22 |
amount of thought put into this in Section 2 cases is
|
23 |
rather poor.
|
24 |
MR. ELIASBERG: Okay.
|
25 |
MR. THORNE: Let me amplify the number of |
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Section 2 cases that might have come out correctly.
|
2 |
The Seventh Circuit decision written by Judge
|
3 |
Cudahee in MCI versus AT&T drew a distinction.
|
4 |
They articulated a broad essential facilities
|
5 |
doctrine that probably does not exist in American law.
|
6 |
They drew a distinction between kinds of
|
7 |
circuits that AT&T was voluntarily selling to others.
|
8 |
When MCI came up to the windows and said "can I have
|
9 |
some of those too, please," AT&T said "no."
|
10 |
That was a violation. So that piece of it was
|
11 |
decided by the court as a violation. And the remedy was
|
12 |
you must provide to MCI what you voluntarily sell to
|
13 |
others on the same terms.
|
14 |
There was another piece where MCI came to the
|
15 |
window and said I haven't built my long distance lines
|
16 |
to San Francisco, will you give me big chunks of your
|
17 |
long distance network, and Judge Cudahee said no, we are
|
18 |
not going to give that to you. That's an asset. If you
|
19 |
want to compete for it, you have to build yourself.
|
20 |
His decision and the remedy which is if you are
|
21 |
voluntarily offering something, don't discriminate
|
22 |
against rivals, that was a pretty simple one and I think
|
23 |
correct.
|
24 |
MR. EPSTEIN: That fits with my program, which
|
25 |
is nondiscrimination is another way of saying |
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interchange which is something you mandate.
|
2 |
It is kind of a common carrier remedy. The
|
3 |
reason you do it through the antitrust situation as
|
4 |
opposed to the FCC is since they voluntarily priced it
|
5 |
so you didn't have to have a ratemaking hearing going on
|
6 |
in order to deal with that issue.
|
7 |
So that you got the real advantages of
|
8 |
essentially both halves.
|
9 |
MR. THORNE: If you are worried about investment
|
10 |
deterrents, when a firm voluntarily sets the terms, you
|
11 |
don't worry about it and you say do for others what you
|
12 |
do for others.
|
13 |
MR. EPSTEIN: To me that has always been the
|
14 |
pattern and the great mistake in the 1996 act which was
|
15 |
amplified by the administrative rules was the horrific
|
16 |
pricing with respect to the unbundled network elements.
|
17 |
That was done through legislation and then
|
18 |
through pricing at the administrative level.
|
19 |
The basic position I would take and it applies
|
20 |
to the Microsoft remedy in Europe is transferring
|
21 |
assets, no, facilitating interconnections, yes, where
|
22 |
you would like to be.
|
23 |
MR. ELIASBERG: Andy?
|
24 |
DR. JOSKOW: I'm not sure zero is the right
|
25 |
answer on the government's effectiveness. |
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I don't know effectiveness, but on what were
|
2 |
appropriate remedies.
|
3 |
I mentioned the Dentsply case which was about
|
4 |
false teeth. That was a Section 2 case. It seems to me
|
5 |
certainly the exclusive dealing contracts were the place
|
6 |
to look in that case because the jury is still out on
|
7 |
what happened.
|
8 |
Visa and MasterCard, which is really a Section 1
|
9 |
case but like a Section 2 case, if there is a finding of
|
10 |
liability, the rule about allowing banks to issue cards,
|
11 |
presumably American Express cards, seemed to be where to
|
12 |
look.
|
13 |
You can argue about whether those contracts were
|
14 |
efficient, and the argument had been strong they should
|
15 |
have won the case. Once there is liability, it seems
|
16 |
like those remedies are the place to look.
|
17 |
That is consistent with what we have been saying
|
18 |
in these kind of very stark contractual cases. If there
|
19 |
is anyplace where there was a remedy, it would be in
|
20 |
those cases.
|
21 |
MR. EPSTEIN: Visa is a client. What can I tell
|
22 |
you?
|
23 |
I didn't work on this case. The Walmart case
|
24 |
which talked about the illegal tie-in between the
|
25 |
various debit and credit cards as opposed to the pin |
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debit, this is another illustration.
|
2 |
There is $3 billion paid out. They removed the
|
3 |
restrictions, and eight people decided to abandon the
|
4 |
thing, or a number like that. You can check with the
|
5 |
Visa people.
|
6 |
The change in actual on-the-ground behavior by
|
7 |
virtue of removal of the tie was nonexistent. Keeping
|
8 |
this tie is yet another version of a suicide pact that
|
9 |
many large corporations do. They overestimate the value
|
10 |
of the restraint to their business.
|
11 |
If you are sitting there and you have a bunch of
|
12 |
customers, a thousand coming in, even only 5 percent of
|
13 |
them use whatever you think to be the elicit tying
|
14 |
thing. You don't want to chase away 5 percent of your
|
15 |
business.
|
16 |
Dennis Carlton gave his most sophisticated
|
17 |
testimony and great class action stuff. In the end, it
|
18 |
is like as Rick Blaine said, it is not worth a hill of
|
19 |
beans in this crazy world.
|
20 |
DR. FISHER: Just one thing about that.
|
21 |
I am in fact the Jane Berkowitz Carlton and
|
22 |
Dennis Carlton --
|
23 |
MR. EPSTEIN: Dennis is an old and dear friend.
|
24 |
DR. FISHER: He is an old and dear friend of
|
25 |
mine too. He may in fact have given a great deal of |
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fine testimony, but it was only at the class action
|
2 |
side.
|
3 |
The guy who gave the testimony in the Walmart
|
4 |
suit generally was me.
|
5 |
MR. EPSTEIN: I stand corrected. I thought you
|
6 |
guys did a terrific job of lawyering.
|
7 |
It is interesting, this is another point which
|
8 |
we didn't talk too much about.
|
9 |
Essentially network industries tend to be
|
10 |
two-sided industries, and they don't have any unique
|
11 |
pricing equilibrium.
|
12 |
Trying to drive everybody down to marginal costs
|
13 |
gives you all the same problems that you had with the
|
14 |
marginal cost controversy and the bridge which Viccerey
|
15 |
talked about in the 1940s.
|
16 |
These are very hard things to work out. That
|
17 |
was just another case in which the tie-in arguments were
|
18 |
very eloquent but the actual change occurred after the
|
19 |
lawsuit was finished.
|
20 |
MR. ELIASBERG: Perhaps hold that thought.
|
21 |
Before we go on, did you have any questions,
|
22 |
Dan?
|
23 |
With that respect, why don't we have slide
|
24 |
number 8.
|
25 |
The slide reads "Conduct remedies are more |
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effective than structural remedies in Section 2 cases."
|
2 |
Dietrich, I will let you off the hook on this
|
3 |
one because we understand from you and Per that indeed
|
4 |
under your regulation, 2001 regulation, there is a
|
5 |
presumption in favor of civil remedies.
|
6 |
So you sort of have it mandated to you. But I
|
7 |
would like to start out with getting the reaction of the
|
8 |
other panelists.
|
9 |
Yes or no, is it more accurate or not that
|
10 |
conduct remedies are more effective than structural
|
11 |
remedies in Section 2?
|
12 |
MR. EPSTEIN: It is an ambiguous question.
|
13 |
Certainly they are if effective means does it
|
14 |
make as great or a smaller change. It makes a much
|
15 |
greater change to use a structural remedy than a conduct
|
16 |
remedy.
|
17 |
But if effectiveness means do you get more
|
18 |
social surplus from the remedy, which is more Draconian,
|
19 |
I think, in most cases, the answer is not.
|
20 |
So what you want is a remedy which is less
|
21 |
intrusive because it does modest harm and almost no bad,
|
22 |
as opposed to one which is like to create harm because
|
23 |
it is effected with the wrong sign attached to it.
|
24 |
MR. ELIASBERG: In your thinking, usually
|
25 |
conduct remedies will do less harm? |
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MR. EPSTEIN: And a little bit of good. My
|
2 |
basic schtick on that is usually the underlying business
|
3 |
doesn't change that much.
|
4 |
That's not an argument for keeping it. In my
|
5 |
book, I advocated unilateral surrender, which I said
|
6 |
that rather than even get yourself into trouble and
|
7 |
having all these learned economists, why would you want
|
8 |
to invite trouble from Dennis? What you do is pull the
|
9 |
damn thing out, and it turns out you keep 90 percent of
|
10 |
your business.
|
11 |
MR. ELIASBERG: On that score, Frank, given the
|
12 |
chair that you hold and also the positions that I
|
13 |
understood you to be making in your presentation, what
|
14 |
are your views on this, particularly with respect to
|
15 |
what you said about Microsoft?
|
16 |
DR. FISHER: I agree with the first half of what
|
17 |
Richard said. I'm not sure about the second half.
|
18 |
Conduct remedies are easier to get. They are
|
19 |
easier -- they are not as likely to do serious harm. I
|
20 |
agree with that.
|
21 |
They can be awfully difficult to supervise
|
22 |
effectively.
|
23 |
The part I don't necessarily agree with is they
|
24 |
basically have no effect.
|
25 |
I think structural -- there are not a whole lot |
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of cases with really big structural remedies, and I
|
2 |
think rightly so.
|
3 |
MR. ELIASBERG: Anybody else?
|
4 |
MR. KLEEMANN: One problem in this respect.
|
5 |
If we are talking about behavioral remedies and
|
6 |
structural remedies, it seems that there is a clear
|
7 |
distinction between those in practice.
|
8 |
There are remedies which are just at the fall
|
9 |
line. Just to give you an example, we had the case
|
10 |
where we had a monopolist in France for energy who
|
11 |
bought up a large German competitor and they would
|
12 |
remove a potential competitor.
|
13 |
We had to look at the situation. The structural
|
14 |
remedies, we cannot force EDF to sell four or five
|
15 |
French nuclear power plants. Therefore, we had to see
|
16 |
for a different way to open up the French market and to
|
17 |
create the market.
|
18 |
As a rule of thumb, to have a market, you need
|
19 |
an ability of one sort of the nature of customers.
|
20 |
And, therefore, we asked EDF to auction on a
|
21 |
regular basis 6000 megawatt capacity in so-called
|
22 |
virtual power plants.
|
23 |
At least for five years it is going on. This
|
24 |
facilitated significantly the creation of the market in
|
25 |
France in terms of protecting this. |
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You would see the first sign since we are able
|
2 |
because we asked them to behave in a certain way, you
|
3 |
would define as access to energy, gasoline comes through
|
4 |
too.
|
5 |
But we couldn't change the sector of the market
|
6 |
completely. I would be cautious to put too much
|
7 |
emphasis on difference too.
|
8 |
MR. THORNE: I agree with Richard that the
|
9 |
question is ambiguous and it depends on what kind of
|
10 |
conduct you are prohibiting or requiring.
|
11 |
The dimension on which remedies get really bad
|
12 |
is the time dimension. It is not like wine that gets
|
13 |
better if you save it.
|
14 |
Conduct remedies you enforce over long periods
|
15 |
of time. Structural remedies, you do them and then the
|
16 |
market and the firms, they get on with life.
|
17 |
Bad things that are part of a structural remedy
|
18 |
get cured in the market adjusting. Conduct remedies can
|
19 |
skew things over a long period and have much more
|
20 |
harmful effects.
|
21 |
MR. ELIASBERG: If you have a structural remedy,
|
22 |
you would be saying it is important not to have
|
23 |
something where there is a conduct remedy preventable,
|
24 |
for example, like a line of business.
|
25 |
MR. THORNE: Bill Baxter had a very good idea |
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when he came to the Antitrust Division. There were all
|
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these -- he had a program of let's root them out and
|
3 |
vacate them.
|
4 |
They way outlived their lifetime. Anything that
|
5 |
takes very long to happen is probably a bad idea.
|
6 |
DR. JOSKOW: This reads like an empirical
|
7 |
question. The problem is under the second clause,
|
8 |
structural remedies, we really don't have many examples
|
9 |
to look at.
|
10 |
I do agree with the instinct that people have
|
11 |
with regard to substantial costs and through structural
|
12 |
remedies.
|
13 |
The conduct remedies, on the other hand, you
|
14 |
can't think of conduct remedies that don't require the
|
15 |
kind of line of business intervention. You can think of
|
16 |
conduct remedies that are structural in the sense that
|
17 |
you are in or out.
|
18 |
So in that sense, in those cases they could be
|
19 |
effective.
|
20 |
MR. EPSTEIN: I would draw a distinction on the
|
21 |
conduct remedies. I think things like the early decrees
|
22 |
from United Shoe. It says these foreclosure clauses
|
23 |
will never be used again in a lease, and they lasted for
|
24 |
30, 50 years.
|
25 |
I think when the conduct remedies start to say |
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you have to provide a mix of services at certain kinds
|
2 |
of prices --
|
3 |
MR. THORNE: Let's license all patents at
|
4 |
reasonable royalties.
|
5 |
MR. EPSTEIN: Which is in many of these decrees,
|
6 |
which is a suicide pact.
|
7 |
There is a pretty good empirical reason to
|
8 |
believe if you take compulsory licenses, ideally if you
|
9 |
had to only issue compulsory licenses, you couldn't
|
10 |
practice the patent, you would want the income stream to
|
11 |
equal exactly on net what you would get if you practiced
|
12 |
the patent before, and that would leave you indifferent.
|
13 |
The theory would be if the government paid a
|
14 |
lump sum, you get the marginal cost at the back end.
|
15 |
I'm not aware of any instance associated with
|
16 |
any compulsory licensing scheme where that condition has
|
17 |
been met. Almost invariably what happens is the
|
18 |
licenses come very cheap in many industries or in
|
19 |
certain industries like the copyright stuff, the radio
|
20 |
cases, things where they have different reasons, many of
|
21 |
the licenses, the increases are so high they drive half
|
22 |
the stations out of business.
|
23 |
This is a situation where in some industries you
|
24 |
are systematically low and others you are systematically
|
25 |
high. So you don't want to be systematically in that |
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business.
|
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MR. DUCORE: To what extent do people think that
|
3 |
the efficacy of a conduct remedy would vary or would
|
4 |
depend on the kind of violation, for example, an
|
5 |
exclusive dealing violation versus a predation
|
6 |
violation?
|
7 |
MR. EPSTEIN: In exclusive dealing, you could
|
8 |
prohibit the foreclosure clauses. The ASCAP decree, the
|
9 |
first time out of the box they said you cannot license
|
10 |
one of these things where you have to take it for the
|
11 |
whole time of the station as opposed to the amount of
|
12 |
time that's being dedicated to music.
|
13 |
Over the next 70 years of that decree, nobody
|
14 |
ever argued about that provision.
|
15 |
I think with the exclusionary, you have some
|
16 |
fairly good fixes.
|
17 |
But in predation, I wouldn't know what it is.
|
18 |
Do not sell it below cost in an industry where cost
|
19 |
declines at 22 percent a year this year and 42 percent
|
20 |
next year?
|
21 |
It is so incoherent to me it seems to me what
|
22 |
you have done in the name of a conduct remedy what you
|
23 |
have done is you have a ratemaking procedure done
|
24 |
through some sort of special master.
|
25 |
MR. DUCORE: We have broken up the slide. The |
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next slide would be structural remedy.
|
2 |
I think we can talk about whichever slide is up
|
3 |
there. My next question is along the lines of similar
|
4 |
to what kind of conduct violation.
|
5 |
Does it make a difference in your views, in your
|
6 |
thinking about a structural versus a conduct remedy
|
7 |
whether the violation itself is a monopoly acquisition
|
8 |
violation versus a monopoly maintenance violation?
|
9 |
MR. EPSTEIN: By conduct? I know what it means.
|
10 |
You are not talking about mergers in the acquisition
|
11 |
side?
|
12 |
MR. DUCORE: No. But if the conduct led to the
|
13 |
monopoly that didn't exist previously, does that make
|
14 |
more of a case for a structural remedy?
|
15 |
MR. EPSTEIN: I can't think of any reason. Can
|
16 |
you? I think most of us -- we are willing to surrender
|
17 |
on both cases.
|
18 |
DR. JOSKOW: You still have to think about in
|
19 |
the business sense what the market would have looked
|
20 |
like.
|
21 |
I don't think we have any idea. That puts aside
|
22 |
the practical issues we discussed with regard to
|
23 |
structural remedy.
|
24 |
MR. DUCORE: Does it make a difference whether
|
25 |
in the trial, assuming there has been a trial, that |
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there is no evidence -- that the evidence shows that
|
2 |
there was no necessarily efficiency basis for the
|
3 |
monopoly, the monopoly was caused by the conduct? Does
|
4 |
that reduce your concern about fixing a structure?
|
5 |
MR. EPSTEIN: I think somebody, Frank or
|
6 |
somebody mentioned reversability is an extremely
|
7 |
important consideration in these things.
|
8 |
In fast-moving technological industries, you
|
9 |
can't reverse the 2006 in 2007. Given the pace in which
|
10 |
these cases run, you are typically talking years' delay.
|
11 |
I think the effort to try and get yourself back
|
12 |
to the old situation and sort of engineer forward from
|
13 |
that to where you would have been in the absence of is
|
14 |
just hopeless.
|
15 |
DR. FISHER: I agree with that. I don't want
|
16 |
you to think I'm totally negative.
|
17 |
MR. EPSTEIN: We agree on 85 percent.
|
18 |
DR. FISHER: Yes, but it is not the same 85
|
19 |
percent.
|
20 |
MR. EPSTEIN: It has to be.
|
21 |
DR. JOSKOW: The same 60 percent.
|
22 |
DR. FISHER: Anyhow, I agree with all of that.
|
23 |
The pure way the question was posed supposes
|
24 |
that the monopoly is solely the fruit of conduct that
|
25 |
has no efficiency consequences. And presumably you |
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could take that to mean that if you prohibited the
|
2 |
conduct, the monopoly would cease to exist.
|
3 |
I think that's very rare. But if that is true,
|
4 |
that would be the case with prohibiting conduct.
|
5 |
The question I think may presuppose that
|
6 |
reversability is possible.
|
7 |
MR. ELIASBERG: I want to be sure I understand.
|
8 |
For example, in United Shoe, to take a case that
|
9 |
is a little more neutral to everyone, the situation may
|
10 |
well be that the contracts involved added to monopoly
|
11 |
power, added to a larger market share. But absent it,
|
12 |
there would still be, if you will, a monopoly.
|
13 |
So is everyone saying the same thing, that is to
|
14 |
say, that in a situation like that, a structural remedy
|
15 |
would be inappropriate?
|
16 |
MR. EPSTEIN: It would create the vertical
|
17 |
difficulties that the merger managed to overcome.
|
18 |
Remember that was a situation where you had guys
|
19 |
lining patents up. The last thing you want to do is
|
20 |
destroy the efficiencies.
|
21 |
So you got rid of the clauses, and it turned out
|
22 |
it made relatively little difference. And then the
|
23 |
government had another breakup, and that made a lot of
|
24 |
difference and didn't help anybody.
|
25 |
By that time, foreign competition was real in |
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the United States. And now the major American
|
2 |
competitor is no longer.
|
3 |
I have to go in two minutes to catch a plane.
|
4 |
Can I make one little kind of observation?
|
5 |
On the intellectual property stuff --
|
6 |
MR. ELIASBERG: Which was the next slide.
|
7 |
MR. EPSTEIN: It is property. There is some
|
8 |
Supreme Court or Court of Claims case that somehow the
|
9 |
takings clause doesn't protect issued patents out there
|
10 |
which I think is most dangerous stuff.
|
11 |
The systematic attack on intellectual property
|
12 |
is often misguided. If it is not, you reform the
|
13 |
intellectual property law, change fair use. The last
|
14 |
thing you want to do is either bolster or weaken a
|
15 |
patent in the context of an antitrust dispute.
|
16 |
That's why I don't like the EU approach with
|
17 |
respect to Microsoft. In its original version, it said
|
18 |
all trade secrets shall go into the public domain.
|
19 |
It is not only in Europe. It is worldwide. The
|
20 |
last decree was awfully generous in allowing the
|
21 |
competitors to take the stuff from Microsoft and use it
|
22 |
to build rival networks.
|
23 |
I know you have gone ape over the case. It
|
24 |
can't be because you think it is the same as the
|
25 |
American decree. |
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MR. HEINER: I touched on this a little bit this
|
2 |
morning before you got here.
|
3 |
MR. EPSTEIN: You did go ape.
|
4 |
MR. HEINER: The proposition -- I think you
|
5 |
might as well put up the next slide on IP. The
|
6 |
proposition was --
|
7 |
MR. ELIASBERG: Slide 9.
|
8 |
MR. HEINER: -- should IP be treated the same as
|
9 |
other kinds of property.
|
10 |
What we are concerned about now under the
|
11 |
European approach is will IP be treated as property at
|
12 |
all.
|
13 |
That's the fundamental question, because this is
|
14 |
a case where we have a few dozen patents at issue and a
|
15 |
decision or a statement of objections recently by the
|
16 |
Commission that seems to suggest, although it is hard to
|
17 |
tell, that maybe those patents aren't worth much at all
|
18 |
and that the trade secrets are really not to be valued
|
19 |
at all and the same for the copyright, for that matter.
|
20 |
So for us, the first line of defense is just
|
21 |
should IP be treated as property, period.
|
22 |
MR. EPSTEIN: Thank you all. I have to run to
|
23 |
catch a plane.
|
24 |
MR. ELIASBERG: Let me sort of ask a follow-up
|
25 |
question that repeats a bit what David and Richard were |
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going into.
|
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In a Section 2 case, when should compulsory
|
3 |
licensing be considered? No takers on this?
|
4 |
DR. FISHER: I will give it a try. I'm doing
|
5 |
this on my feet. I'm sitting down.
|
6 |
One could imagine a case in which a patent has
|
7 |
been grossly misused and misused in such a way as to
|
8 |
preserve a monopoly.
|
9 |
One way to get around that is to say, okay,
|
10 |
let's stop the misuse. Another way to get around it is
|
11 |
possibly the only way to reverse that might be to have
|
12 |
compulsory licensing.
|
13 |
That's the best I can do with it. I'm not
|
14 |
really certain.
|
15 |
MR. ELIASBERG: I am going to put you on the
|
16 |
spot, Andy, in your position with NERA.
|
17 |
Sometimes you have to quickly make an assessment
|
18 |
and a statement. What are your views on that?
|
19 |
DR. JOSKOW: I agree with Frank.
|
20 |
MR. THORNE: There was an actual experiment run
|
21 |
in the 1956 Bell decree which required at that point the
|
22 |
premier American research facility, Bell Labs, to
|
23 |
license on reasonable terms all its patents and,
|
24 |
secondarily, not to practice them itself except to the
|
25 |
extent they were used in providing accounting for a |
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telephone service.
|
2 |
So the AT&T company was not allowed to sell
|
3 |
computers to people even though they invented them,
|
4 |
lasers or transistors or any of the gear they naturally
|
5 |
would have done if they used their own patents.
|
6 |
They could license them. I don't know if that
|
7 |
was good or bad. It was a very large experiment run on
|
8 |
a very large generator of IP.
|
9 |
MR. ELIASBERG: Let me ask you, John, if you
|
10 |
know, in that decree, was the compulsory licensing
|
11 |
royalty-free or not?
|
12 |
MR. THORNE: To a small number of favored
|
13 |
providers, they were royalty free. For most people who
|
14 |
would want to use the patents, they were on reasonable
|
15 |
terms.
|
16 |
I think in the almost 30 years that that decree
|
17 |
was in effect, I think there were maybe two disputes
|
18 |
brought to a magistrate in the District Court.
|
19 |
Otherwise, they appear to have been without dispute and
|
20 |
they were cheap and nondiscriminatory.
|
21 |
MR. ELIASBERG: Sort of a follow-up question for
|
22 |
anybody on the panel. And Dietrich, I'm also looking
|
23 |
toward you on this one.
|
24 |
When is it appropriate to have a royalty-free
|
25 |
license in a Section 2 case? Not just compulsory but |
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royalty-free.
|
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MR. KLEEMANN: If I can take a position, it is
|
3 |
with respect to the merger practice. It is not an issue
|
4 |
there so much.
|
5 |
The issue for us is a merger, for instance,
|
6 |
where one company takes over assets to which essential
|
7 |
patents relate, and essential patents are those which
|
8 |
cannot be circumvented by producing a certain product.
|
9 |
That means if a competitor gets these kind of
|
10 |
essential patents, there is a high risk that he could
|
11 |
exclude all his competitors as a consequence, and there
|
12 |
either we would have a case at all and there are cases
|
13 |
where we had this danger and the merger was abandoned
|
14 |
afterwards. Or we would at least ask in large instances
|
15 |
on the fee to spend basis, which is by the way in many
|
16 |
industries the standard.
|
17 |
In particular, if you have the standard-setting
|
18 |
bodies, they are all working on the lease rent terms.
|
19 |
That would be the type of case for us.
|
20 |
MR. ELIASBERG: It is usually not -- Frank, Andy
|
21 |
and John, anyone care to address this?
|
22 |
DR. FISHER: The only merit I can see in a
|
23 |
royalty-free licensing as opposed to compulsory
|
24 |
licensing at reasonable royalties is it prevents
|
25 |
argument about what the reasonable royalties are. |
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Apart from that, it seems to me that there isn't
|
2 |
any case for that. That seems to be simply an
|
3 |
expropriation of intellectual property.
|
4 |
I'm unable to think of a situation in which
|
5 |
that's the only way to remedy the problem.
|
6 |
MR. ELIASBERG: Okay. Andy or John?
|
7 |
DR. JOSKOW: It does seem like one can always
|
8 |
think about that in a competitive market, but for the
|
9 |
monopoly, there was some competitive prices, competitive
|
10 |
royalty that one can imagine is out there so that it is
|
11 |
hard to imagine that one would want to therefore impose
|
12 |
zero royalties.
|
13 |
Even in the merger cases, when there is
|
14 |
licensing required, what is required is paid up licenses
|
15 |
with no ongoing royalties often. But it has to do with
|
16 |
more of the ongoing interaction between the two firms.
|
17 |
But even in cases like that, you want some kind
|
18 |
of compensation for the product.
|
19 |
MR. THORNE: As a believer in the principle that
|
20 |
you learn something about whether there is a violation
|
21 |
from whether there's a remedy, I can't imagine a
|
22 |
violation that requires that as a remedy.
|
23 |
MR. DUCORE: Again, a consensus that a zero
|
24 |
royalty is never appropriate.
|
25 |
MR. THORNE: The consensus is nobody can think |
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of a violation where that would be the right remedy.
|
2 |
MR. DUCORE: Is it sort of a philosophical
|
3 |
concern that there must be value to the intellectual
|
4 |
property or is it a concern that we haven't come across
|
5 |
a fact pattern that demonstrates that but for the
|
6 |
illegal conduct, the intellectual property holder would
|
7 |
have had nothing of value to hold out to customers?
|
8 |
DR. FISHER: Had that been the case, it was
|
9 |
pretty farfetched. What is happening is there would
|
10 |
have been competing patents.
|
11 |
But the defendant has managed somehow to make
|
12 |
competing patents unprofitable or to absorb or it bought
|
13 |
up all the competing patents as we established the
|
14 |
monopoly and, therefore, has been able to charge a high
|
15 |
price for the patents.
|
16 |
The monopoly offense, the effect is to acquire
|
17 |
the patent monopoly.
|
18 |
Arguably you could say it would be worth very
|
19 |
little if they had done that. I can't think of an
|
20 |
actual case.
|
21 |
DR. JOSKOW: The patents competed in the market,
|
22 |
right?
|
23 |
DR. FISHER: They didn't because every time
|
24 |
somebody filed for a patent, these guys came along and
|
25 |
bought it up. |
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I don't know of any case like that.
|
2 |
MR. DUCORE: What about a situation where,
|
3 |
assuming the facts exist to show this, you could show
|
4 |
that but for the violation, technology would have gone
|
5 |
along in a direction that didn't infringe patents?
|
6 |
In other words, you have some kind of failure to
|
7 |
disclose and lock in and things of that nature, so that
|
8 |
by the time -- it was a fact issue clearly.
|
9 |
But the thrust of the violation is that the
|
10 |
technology practitioners would not have locked
|
11 |
themselves into this technology and then had liability
|
12 |
to the patentholders.
|
13 |
DR. FISHER: I'm not going to say anymore.
|
14 |
DR. JOSKOW: We think we know what case you are
|
15 |
talking about.
|
16 |
MR. ELIASBERG: There are no comments on that
|
17 |
one. Actually, I would -- can we have slide 6, please.
|
18 |
This is a quote from Microsoft 3. "Relief
|
19 |
should be tailored to fit the wrong creating the
|
20 |
occasion for the remedy."
|
21 |
I think all of you have talked or made allusions
|
22 |
to the different types of, different kinds of Section 2
|
23 |
violations.
|
24 |
I just wanted to go back to this.
|
25 |
Vis-a-vis conduct versus structure, this whole |
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notion of conduct versus structure, not to repeat what
|
2 |
people have said about the virtue of conduct in general
|
3 |
or the virtue of structure in general or all that, but
|
4 |
thinking of the frequent types or classifications of
|
5 |
Section 2 conduct, predatory pricing, predatory business
|
6 |
bidding, refusal to deal, bundled discounts, are there
|
7 |
any where it seems cry out for a conduct decree or any
|
8 |
that seems to on the other hand cry out for an approach
|
9 |
where structural relief would be more appropriate?
|
10 |
DR. FISHER: Can I comment on the quote?
|
11 |
MR. ELIASBERG: Yes.
|
12 |
DR. FISHER: That is one of the appropriate
|
13 |
objectives of if you want a remedy to satisfy. I would
|
14 |
be happier if it had said relief should be tailored to
|
15 |
fit the consequences of the wrong creating the occasion
|
16 |
for the remedy.
|
17 |
I don't think it is enough -- this is putting
|
18 |
the genie back in the bottle again. I don't think it is
|
19 |
enough to say we are going to tailor something that if
|
20 |
1947 ever comes around again, this wouldn't happen.
|
21 |
If you could figure it out, what you want to do
|
22 |
is restore competition. That doesn't necessarily go
|
23 |
with this.
|
24 |
MR. ELIASBERG: Anything else?
|
25 |
DR. JOSKOW: What is the wrong? Is it the |
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monopoly or is it the conduct?
|
2 |
It seems like it is hard to determine how much
|
3 |
of a monopoly is because of the behavior. So it seems
|
4 |
that this is really talking about the incremental
|
5 |
effects of the behavior. If that's what it is talking
|
6 |
about.
|
7 |
DR. FISHER: I think it assumes Judge
|
8 |
Ginsburg -- I don't think that's what he meant. I agree
|
9 |
that's what he ought to have meant.
|
10 |
MR. THORNE: One difference you haven't focused
|
11 |
on is the difference between relief that is ordered
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after an adjudication of a violation versus a consent
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decree, which is a little bit like a plea bargain, where
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the defendant is facing breaking up into eight or nine
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or 10 or 12 pieces.
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Instead, I will accept the other conditions that
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you want and then the sentence reads as relief should
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not go beyond addressing the violations that were being
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proved in the case that got started prior to the
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settlement as opposed to you have a willing defendant
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and you have thought of a lot of other good things the
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defendant could do to improve the markets and you would
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like to impose a lot of those things too and the
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defendant seems willing to agree to them.
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MR. KLEEMANN: Maybe I would subscribe totally |
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215
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to this merger control. Everything is about to avoid
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the risk of anticompetitive interpretation and not about
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the consequence.
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It is a risk situation. I wonder whether this
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could be typical in abuse cases where you are not
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creating the structural change but with a certain
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behavior which has consequences.
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MR. ELIASBERG: Well, I think we have run out of
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time. And I would request that the audience join me in
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a round of applause thanking our panel.
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(Applause.)
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(Whereupon, at 4:30 p.m., the hearing was
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concluded.)
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C E R T I F I C A T I O N O F R E P O R T E R
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I HEREBY CERTIFY that the transcript contained
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herein is a full and accurate transcript of the notes
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taken by me at the hearing on the above cause before the
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FEDERAL TRADE COMMISSION to the best of my knowledge and
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belief.
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__________________________
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