Section 2 of the Sherman Act, which governs monopolization and attempted monopolization claims, is back in the antitrust limelight. Bold statements by new top officials in the Antitrust Division of the Department of Justice (DOJ) signal a dramatic shift in the DOJ’s Section 2 enforcement policy. Meanwhile, the European Commission (EC) announced a $1.4 billion fine against chipmaker Intel.
In the wake of these events, many antitrust practitioners anticipate that there will be a renewed focus on single-firm “exclusionary” conduct by dominant firms. Consequently, any firm that might be considered a “market leader” should take heed of the messages emanating from these agencies. At the same time, smaller competitors and customers that believe they may be the victims of a dominant firm’s improper conduct should consider the invitation to report their concerns to the agencies. Below we offer a summary of this activity and our thoughts on what clients can expect to see from the agencies in the Section 2 arena.
In her first speech as the Assistant Attorney General in charge of the Antitrust Division, Christine Varney announced that the DOJ “must change course and take a new tack” in its enforcement policy. The speech was particularly devoted to the DOJ’s enforcement of Section 2 of the Sherman Act, after a period of what was generally considered the laissezfaire approach to antitrust enforcement by the DOJ under the Bush Administration. Varney promised an increase in the number of investigations of exclusionary conduct by dominant firms, as well as intervention in support of private litigants in this area.
Assistant Attorney General Varney announced the immediate withdrawal of the DOJ’s report entitled “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act” (the Section 2 Report). The DOJ issued the Section 2 Report last year after reviewing the record of hearings, jointly conducted by the DOJ and the Federal Trade Commission (FTC), on a variety of Section 2 issues. The Section 2 Report was criticized by some in the antitrust bar as too lenient in its approach to dominant firm conduct. Among the most vocal detractors were three FTC Commissioners: Commissioners Harbour, Leibowitz and Rosch, who issued a statement (the FTC Statement) harshly criticizing the report and urging courts to ignore it.
Varney emphasized that there had been too much concern by her predecessors over “the risks of over-deterrence” and too much deference to possible efficiencies at the expense of preventing anticompetitive conduct. She identified three leading monopolization decisions as guiding her thinking: Lorain Journal v. United States, Aspen Skiing Co. v. Aspen Highlands Skiing Corp. and United States v. Microsoft. Her discussion of these cases suggests an intent to resurrect the use of Section 2 against dominant firms’ refusals to deal or cooperate with their smaller rivals.
The reference to Aspen Skiing is especially provocative since the U.S. Supreme Court in 2004 characterized that decision as “at or near the outer boundary” of antitrust liability in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP. Rather than perceiving Trinko and another recent Supreme Court decision, Pacific Bell Telephone Co. v. Linkline Communications, Inc., as further limiting the boundary of Section 2 liability,
Varney asserted that the decisions “reaffirmed Aspen Skiing’s limits on a monopolist’s ability to engage in exclusionary or predatory conduct.” Varney’s speech culminated in a promise of reinvigorated antitrust enforcement focused on the benefits to consumers of competition. This reinvigorated policy stance stems from recent developments that, Varney asserted, make it clear that the marketplace alone can no longer be relied upon to ensure that competition and consumers will be protected. In fact, the Assistant Attorney General maintained that tough economic times require more vigorous enforcement rather than relaxation of antitrust law. She rejected the idea that markets are self-policing or self-correcting without antitrust enforcement. These sentiments were echoed just a couple of days later by Carl Shapiro, the new Deputy Assistant Attorney General for Economic Analysis, during his speech on “Competition Policy in Distressed Industries.” Shapiro assured listeners that the current DOJ “will vigilantly enforce the antitrust laws to prevent monopolists from maintaining their monopoly power by engaging in predatory or exclusionary behavior, especially during tough economic times when their smaller rivals are most vulnerable.”
It is important to note that the remarks by Varney and Shapiro pertain to the DOJ’s enforcement efforts. From the perspective of many antitrust practitioners, a shift toward a more aggressive enforcement policy is not necessary at the FTC. While in recent years the DOJ may have curtailed its investigation of single-firm conduct, the same cannot be said of the FTC. This is evidenced in part by the FTC Statement wherein three FTC Commissioners criticized the DOJ’s Section 2 Report. Indeed, the FTC Statement may serve as an indicator of how the Obama Administration DOJ might apply Section 2 to such practices as bundled discounts, loyalty rebates and exclusive dealing by dominant firms.
In contrast to the DOJ, the FTC during the Bush Administration remained relatively consistent in its enforcement efforts, bringing a number of cases against unilateral firm conduct, including most notably conduct by firms involved in standard setting (e.g., Rambus) and against pharmaceutical companies alleged to have foreclosed generic competition (e.g., Solvay). In addition, according to published reports, the FTC is currently investigating Intel’s use of discounts and a leading condom manufacturer’s use of category captain practices to exclude or disadvantage rivals. Many believe that these types of investigations exemplify the kind of robust use of Section 2 that we may come to see from the Obama DOJ.
Outside the U.S., antitrust enforcers continue to bring headline-grabbing cases asserting “abuse” by dominant firms. In general, the EC has been more aggressive than the U.S. agencies in recent years. At times, U.S. officials have even criticized EC actions. Assistant Attorney General Varney, at her confirmation and in her recent speech, promised more dialogue between the enforcers during her tenure.
Perhaps not coincidentally, shortly after Varney’s speech, the EC announced a decision in its eight-year old proceeding against chipmaker Intel. The EC fined Intel more than $1.4 billion for what the agency determined to be unlawful exclusionary conduct and abuse of the firm’s dominant position. The EC found that Intel engaged in a variety of predatory practices to exclude rival chipmaker AMD from the market, including, for example, conditioning significant volume rebates upon a computer manufacturer’s commitment to purchase all or almost all of its chips from Intel.
The recent activity surrounding the antitrust agencies’ treatment of single firm conduct – particularly Assistant Attorney General Varney’s speech – conveys a stern warning to leading firms and extends an invitation to those who have complaints to register. Although much of the recent chatter has focused on high-tech industries, any company perceived as dominant or a market leader in its industry should take heed. The above-mentioned FTC investigation of a leading condom manufacturer is proof enough of that.
Regardless of the type of industry at issue, it will no longer be sufficient for a firm that attracts antitrust scrutiny to point to efficiencies as a primary defense for conduct that the agencies believe to threaten an anticompetitive effect. While efficiencies may have insulated some kinds of questionable conduct in recent years, going forward, the agencies have indicated that they intend to focus more robustly on consumer welfare. Consistent with this shift, punishment and deterrence are expected to motivate many of the agencies’ enforcement decisions.
During her speech, Varney declined the opportunity to address specific industries or specific cases. Instead, she used the speech to emphasize her broad policy direction. Nevertheless, it is easy to find clues throughout her statement about what companies can expect. For example, she mentioned a desire to “explore vertical theories and other new areas of civil enforcement, such as those arising in high-tech and Internet-based markets.” Closely related to this is the treatment of intellectual property rights. Varney noted the importance of finding “the right balance to ensure that when intellectual property is at issue, competition is not thwarted through misuse or illegal extension.”
The FTC, like the DOJ, exhibits a keen interest in exclusionary uses of intellectual property rights. Although the FTC recently dismissed the complaint in its long-running case against Rambus Inc. (in the wake of a reversal and remand from the D.C. Circuit), the agency appears undeterred in its efforts to challenge abusive patent holdup conduct in connection with industry standards development processes.
In the months ahead, the true test of the agencies’ mettle – particularly the DOJ’s – will be in how they step up their enforcement efforts. There is no doubt that there will be an increase in investigations. What is less certain, though, is the range of conduct that will be considered to violate Section 2 and the remedies that will be sought for such violations. That determination is likely to wend its way through the federal courts before it is finally resolved. In the meantime, any firm that may be considered “dominant” is encouraged to consider its practices in light of these recent developments.