Business Testimony

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1	UNITED STATES FEDERAL TRADE COMMISSION
2	and
3	UNITED STATES DEPARTMENT OF JUSTICE
4
5
6	SHERMAN ACT SECTION 2 JOINT HEARING
7	BUSINESS TESTIMONY
8	TUESDAY, FEBRUARY 13, 2007
9
10
11	HELD AT:
12	UNIVERSITY OF CHICAGO
13	GRADUATE SCHOOL OF BUSINESS
14	EXECUTIVE CENTER - 450
15	NORTH CITYFRONT PLAZA DRIVE
16	CHICAGO, ILLINOIS 60611
17	9:30 A.M. TO 4:00 P.M.
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19
20
21
22
23	Reported and Transcribed by:
24	PAMELA A. STAFFORD, CSR, RMR
25

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1	APPEARANCES:
2
3	MODERATORS:
4
5	Morning Session:
6	JAIME TARONJI, JR.
7	Attorney, Policy Studies,
8	Federal Trade Commission
9	and
10	JOSEPH J. MATELIS, II
11	Attorney Advisor, Legal Policy Section
12	Antitrust Division, Department of Justice
13	and
14	WILLIAM COHEN
15	Deputy General Counsel for Policy Studies
16	Federal Trade Commission
17
18
19	PANELISTS:
20
21	Morning Session:
22	David Balto
23	Patrick Sheller
24	Ron Stern
25

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1	APPEARANCES CONTINUED:
2
3	MODERATORS:
4
5	Afternoon Session:
6	JOSEPH J. MATELIS, II
7	Attorney Advisor, Legal Policy Section
8	Antitrust Division, Department of Justice
9	and
10	KAREN GRIMM,
11	Assistant General Counsel for Policy Studies
12	Federal Trade Commission
13
14
15	PANELISTS:
16
17	Afternoon Session:
18	Sean Heather
19	Bruce Sewell
20	Bruce Wark
21
22
23
24
25

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

30

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

31

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

32

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

33

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

34

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

35

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

36

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

37

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

38

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

39

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

40

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

41

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

42

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

43

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

44

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

45

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

46

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

47

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

48

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

49

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

50

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

51

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

52

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

53

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

54

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

55

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

56

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

57

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

58

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

59

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

60

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

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

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

63

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

64

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

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

66

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

67

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

68

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

69

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

70

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

71

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

72

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

73

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

74

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

75

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

76

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

77

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

78

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

79

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

80

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

81

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

82

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

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

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

85

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

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

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

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

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

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

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

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

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

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

95

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

96

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

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

98

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

99

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

100

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

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

102

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

103

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

104

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

105

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

106

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

107

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

108

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

183

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

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

185

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

186

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

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

188

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

189

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

190

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

191

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

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

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

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

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

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

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

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

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

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

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

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

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

204

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

205

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

206

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

207

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

208

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

209

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

210

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

211

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

212

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

213

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

214

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

215

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

216

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

217

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

218

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

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

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

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

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

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1	I would like to ask our panelists if they
2	have any additional questions or observations
3	they'd like to make.
4	MR. WARK: Just to simply
5	extend my thanks again for the opportunity.
6	MS. GRIMM: And I'd like to
7	thank all of you for joining us here today.
8	The weather is very challenging, and we
9	really appreciate your taking time off from
10	your very busy schedules to be with us and
11	prepare for these hearings. Your remarks
12	have been very insightful, and we appreciate
13	your sharing your views with us. Can we all
14	give them a hand of applause?
15	(Applause)
16	MS. GRIMM: Thank you all
17	and have a safe trip home.
18	(Which were all the
19	proceedings had in the
20	above-entitled cause this
21	date and time.)
22
23	* * *
24
25

224

1	CERTIFICATE OF REPORTER
2
3	I, PAMELA STAFFORD, Certified Shorthand
4	Reporter for the State of Illinois, do hereby certify
5	that the
6	foregoing was reported by stenographic and mechanical
7	means, which matter was held on the date, and at the time
8	and place set out on the title page hereof and that the
9	foregoing constitutes a true and accurate transcript of
10	same.
11	I further certify that I am not related to any of the
12	parties, nor am I an employee of or related to any of the
13	attorneys representing the parties, and I have no
14	financial
15	interest in the outcome of this matter.
16	I have hereunder subscribed my hand on the
17	day of , .
18
19
20
21
22	PAMELA STAFFORD, CSR

Updated January 2, 2024