Alliance on Antitrust November Update
The last few weeks have been eventful for the Alliance on Antitrust and our allies. From the release of the House Judiciary Committee’s Subcommittee on Antitrust, Commercial and Administrative Law’s report, to our statement in response, we have been busy making the case for the consumer welfare standard and for why antitrust law should not be politicized. Alliance members and friends have been highly engaged in the fight. And our coalition is expanding. Three groups recently joined the Alliance on Antitrust. We are thrilled to welcome the Independence Institute, Mountain States Legal Foundation and the Market Institute.
Although much of the public’s attention this month has focused on the election and on the debate over social media content moderation, we should not forget the importance of staying engaged in the antitrust debate. Decades of hard-fought progress are at stake. Take, for example, the House Judiciary Committee’s recent report, which accurately describes itself as being “an attack on how America has approached antitrust for the past 40 years.” The report has implications far beyond Big Tech, which is why it would be a mistake to ignore any of the recommendations, especially with a possibility of Democrats talking both chambers of Congress.
Regardless of whether they do, the recommendations still have a lot of political momentum. Although the report came from the left side of the aisle, many of these arguments are coming from the right side of the aisle as well. This is because the antitrust debate is somewhat of a microcosm of a larger debate between conservatives and their relationship with big government. It has long been inevitable that there would come a time when conservatives would have to choose between a politicized approach to antitrust and conservative principles.
And that time has arrived. Joshua Wright and Jan Rybnicek make this case in their recent article in National Affairs, A Time for Choosing: The Conservative Case Against Weaponizing Antitrust, reminding us that:
The conservative legal movement, powered by the intersection of economic analysis and law, brought the rule of law to the wild and untamed progressive antitrust vision of the 1960s. Grounding antitrust law in a disciplined and tractable framework not only promotes the rule of law while preventing arbitrary and capricious enforcement, it also creates a stable and predictable environment for private actors and firms to invest and innovate. Of course, no doctrine is perfect and today’s antitrust is not without its own flaws. But it is tethered to robust economic evidence and common-law developments that promote competitive outcomes and, like the common law, has built-in mechanisms to improve and evolve in response to empirical evidence. But the coherent and principled makeup of antitrust should not and cannot be taken for granted.
“This wolf comes as a wolf,” they write, and “[t]he modern progressive antitrust agenda is part of a broader, more radical program—self-described as Neo-Brandeisian Antitrust—to turn antitrust law upside down so that it may be weaponized to shape and plan all sectors of the economy.”
For this update, I’ll first summarize what is going on in Congress, executive agencies, and the courts, give some key takeaways, and then highlight some of the great work that is being done by coalition members and other allies.
CONGRESS
Earlier this month the House Judiciary Committee’s Subcommittee on Antitrust, Commercial and Administrative Law released a report on the state of competition in the digital marketplace that was the result of a 16 month-long investigation. The report describes itself as being “an attack on how America has approached antitrust for the past 40 years.”
While most conversations have focused on Big Tech, the report includes recommendations that would impact all industries, and these recommendations are some of the most radical ones in the report. Here are a few I’d like to highlight:
Broad changes to the Clayton Act and the Sherman Act:
Strengthening the Clayton Act to prohibit acquisitions of potential rivals and nascent competitors;
Extending the Sherman Act to prohibit abuses of dominance (which could be...pretty much anything?).
Bright-line market share guidelines that would prohibit mergers across all industries;
Codifying bright-line rules for merger enforcement, including structural presumptions. Under a structural presumption, mergers resulting in a single firm controlling an outsized market share, or resulting in a significant increase in concentration, would be presumptively prohibited under Section 7 of the Clayton Act;
Creating a statutory presumption that a market share of 30% or more constitutes a rebuttable presumption of dominance by a seller, and a market share of 25% or more constitute a rebuttable presumption of dominance by a buyer.
Eliminating the need to define the market while shifting the burden of proof:
Clarifying that market definition is not required for proving an antitrust violation, especially in the presence of direct evidence of market power;
Shifting the evidentiary burden of proof by creating a presumption that vertical mergers are anticompetitive when either of the merging parties is a dominant firm operating in a concentrated market, or presumptions relating to input foreclosure and customer foreclosure.
Overriding 20+ Supreme Court cases (there aren’t many more than that), including but not limited to:
Overriding the legal requirement that monopoly leveraging “actually monopolize” the second market, as set out in Spectrum Sports, Inc. v. McQuillan;
Clarifying that proof of recoupment is not necessary to prove predatory pricing or predatory buying, overriding the Supreme Court’s decisions in Matsushita v. Zenith Radio Corp., Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., and Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co.;
Overriding judicial decisions that have treated unfavorably essential facilities and refusal to deal-based theories of harm (this would include Trinko and LinkLine);
Conditioning access to a product or service in which a firm has market power to the purchase or use of a separate product or service is anticompetitive under Section 2, as held by the Supreme Court in Jefferson Parish Hosp. Dist. v. Hyde;
Congress should consider whether making a design change that excludes competitors or otherwise undermines competition should be a violation of Section 2, regardless of whether the design change can be justified as an improvement for consumers (this would require overriding Allied Orthopedic Appliances v. Tyco Health Care);
Overriding Ohio v. American Express by clarifying that cases involving platforms do not require plaintiffs to establish harm to both sets of customers;
Overriding United States v. Sabre Corp., clarifying that platforms that are “two-sided,” or serve multiple sets of customers, can compete with firms that are “one-sided.”
...and a law review article:
Clarifying that the views set out by then-Professor Frank Easterbrook in The Limits of Antitrust do not reflect the views of the Congress in enacting the antitrust laws;
Clarifying that “false positives”—or erroneous enforcement—are not more costly than “false negatives”—or erroneous non-enforcement—and that, in relation to conduct or mergers involving dominant firms, “false negatives” are costlier.
And, in case all of the recommendations for increased public enforcement are not enough, the Subcommittee recommends lowering the pleading requirement, abolishing standing requirements, and banning arbitration agreements in order to create an easy path for class lawsuits:
Eliminating court-created standards for “antitrust injury” and “antitrust standing,” which undermine Congress’s grant of enforcement authority to “any person...injured...by reason of anything forbidden in the antitrust laws”;
Lowering the heightened pleading requirement introduced in Twombly;
Reducing procedural obstacles to litigation, including through eliminating forced arbitration clauses and undue limits on class action formation.
EXECUTIVE AGENCIES & STATES
On October 20, 2020, the Department of Justice and the attorneys general of 11 states filed a complaint in the Federal District Court for the District of Columbia alleging that Google violated antitrust laws to maintain its dominance in online search and search advertising. The complaint alleges violations of Section 2 of the Sherman Act, claiming that Google engaged in behavior that has anticompetitive effects in general search services, search advertising, and general search text advertising markets.
Key Takeaways:
The complaint is relatively narrow, and it is designed to look like U.S. v. Microsoft. However, Google is not controlling the distribution of their competitor’s products or impairing their ability to function, as was the case in U.S. v. Microsoft. Nothing limits the ability of users to switch to another search engine if they choose to do so. This will make it hard to establish anticompetitive harm.
Default positions are not exclusionary, and securing a default position does not constitute anticompetitive conduct. Nothing is stopping Microsoft or Yahoo from doing the same. Similarly, in 2014 Yahoo outbid Google when they struck a deal with Mozilla to become the default search engine in the Firefox browser. These default positions are not anticompetitive distribution deals. To make an analogy, this is not much different than paying higher rents to occupy the storefront closest to the entrance of a shopping mall.
Market definition is key, and the relevant markets identified by the DOJ are arbitrarily defined. It seems as if the DOJ gerrymandered three overlapping markets in which Google has substantial market share and threw them out to see if one sticks. Additionally, establishing that Google has market power is not enough. Still, the DOJ has to show that Google exercised this power to secure anticompetitive default position deals, and that in doing so it harmed consumers.
The DOJ doesn’t even attempt to explain how this harms consumers until page 53 of the 64-page complaint, and then only offers this short explanation: “By restricting competition in general search services, Google’s conduct has harmed consumers by reducing the quality of general search services (including dimensions such as privacy, data protection, and use of consumer data), lessening choice in general search services, and impeding innovation.” However, the conditions set forth in the contracts that are used likely improve privacy and set conditions on the use of consumer data (not to mention that it should be up to Congress to pass data privacy legislation), consumers can still exercise the choice to download other search engines (and often do), and given this lack of constraints on consumers’ ability to choose, these distribution deals gives companies more, not less, incentive to develop and innovate.
Notably, the case against Google is being brought under Section 2, not Section 1, of the Sherman Act. It maybe would have been more fitting for the case to be brought under Section 1, which relates to coordinated conduct that restrains trade and commerce, whereas Section 2 involves unilateral conduct. The DOJ did not name any specific remedies. However, with a Section 2 case, the DOJ could have a lot more room to seek broad, structural remedies aimed at Google’s business model.
Meanwhile, NY continues to lead a large, bipartisan group of state attorneys general in a separate antitrust investigation of Google. Texas is also leading an antitrust investigation targeting Google’s advertising business. California might have its own probe as well.
The next suit in the antitrust pipeline, however, might be the FTC’s impending case against Facebook. The case against Facebook is likely to focus on the acquisition of its competitions, particularly Instagram and WhatsApp. One thing to watch for is the FTC’s choice of forum. The FTC has the option of filing the case in its in-house administrative court or in federal district court. Filing an administrative complaint would not allow the FTC to seek monetary penalties, but it would give the agency more control over the process and a greater ability to shape the remedies. We will probably find out the nature of the complaint and what route the FTC decides to take sometime in the near future.
COURTS
Litigation Update:
Ninth Circuit Denies En Banc Rehearing in FTC v. Qualcomm
Last week, the Ninth Circuit Court of Appeals denied a request for en banc rehearing of Federal Trade Commission v. Qualcomm without issuing an opinion. In August, the Ninth Circuit reversed the Federal Trade Commission's win in the agency's case accusing Qualcomm of violating antitrust law through its licensing practices for standard-essential patents covering cellular technology. “The fact that not one judge on the Ninth Circuit thought it necessary to consider the merits of the FTC’s petition or to even ask for a response from Qualcomm validates the strength and clarity of the panel’s thorough analysis and conclusions,” the company said in a statement.
The unanimous and bipartisan Ninth Circuit opinion in August made quite clear that: “Anticompetitive behavior is illegal under federal antitrust law. Hypercompetitive behavior is not. But profit-seeking behavior alone is insufficient to establish antitrust liability.” “Antitrust economists, and in turn lawyers and judges, tend to treat novel products or business practices as anticompetitive” and “are likely to decide cases wrongly in rapidly changing dynamic markets,” the opinion notes.
The Ninth Circuit panel concluded that a potential breach of contract does not constitute an antitrust violation, writing that: “Qualcomm is under no antitrust duty to license rival chip suppliers. To the extent Qualcomm has breached any of its FRAND commitments, a conclusion we need not and do not reach, the remedy for such a breach lies in contract and patent law. Second, Qualcomm’s patent-licensing royalties and ‘no license, no chips’ policy do not impose an anticompetitive surcharge on rivals’ modem chip sales. Instead, these aspects of Qualcomm’s business model are ‘chip-supplier neutral’ and do not undermine competition in the relevant antitrust markets.”
SCOTUS Petitions to Watch
Comcast Corp. v. Viamedia Inc. (pending petition, filed Sept. 4)
Issues: (1) Whether the U.S. Court of Appeals for the 7th Circuit erred in holding that a refusal-to-deal claim under Section 2 of the Sherman Act may proceed despite the presence of valid business justifications for the refusal, in direct conflict with Verizon Communications Inc. v. Law Offices of Curtis V. Trinko and decisions of the U.S. Courts of Appeals for the 2nd, 9th, 10th and 11th Circuits; and (2) whether the 7th Circuit erred in allowing a plaintiff to avoid the limitations on a Section 2 refusal-to-deal claim by reframing it as some other form of anticompetitive conduct, such as tying, in direct conflict with Pacific Bell Telephone Co. v. Linkline Communications Inc. and decisions of the U.S. Courts of Appeals for the 4th, 9th and 10th Circuits.
National Football League v. Ninth Inning Inc. (relisted for the Nov. 6 conference)
Issues: (1) Whether an agreement among the members of a joint venture on how best to distribute the venture’s jointly created core product may be condemned under the Sherman Act without requiring the plaintiff to establish that defendants harmed competition in a properly defined antitrust market; and (2) whether, notwithstanding the Supreme Court’s decision in Illinois Brick Co. v. Illinois, antitrust damages claims may be brought by indirect purchasers who do not allege that they paid a price fixed by the alleged conspirators.
American Athletic Conference v. Alston (filed Oct. 15)
Issue: Whether the Sherman Act authorizes a court to subject the product-defining rules of a joint venture to full Rule of Reason review, and to hold those rules unlawful if, in the court’s view, they are not the least restrictive means that could have been used to accomplish their procompetitive goal.
National Collegiate Athletic Association v. Alston (filed Oct. 15)
Issue: Whether the U.S. Court of Appeals for the 9th Circuit erroneously held, in conflict with decisions of other circuits and general antitrust principles, that the National Collegiate Athletic Association eligibility rules regarding compensation of student-athletes violate federal antitrust law.
In other Court-related news, antitrust made an appearance in the confirmation hearings for now-Justice Amy Coney Barrett, with antitrust-related questions coming from Senators Amy Klobuchar (D-MN), Thom Thillis (R-NC), and Josh Hawley (R-MO).
In one of her (excellent) responses, Barrett said: “The text of the Sherman Act, as the court has determined over time, essentially permits the court to develop a common law...because it’s largely been left to judicial development that is controlled by precedent for the most part.”
RECENT WORK
Check out some of the great work being done by Alliance on Antitrust members and other allies at the links below:
The House Judiciary Committee’s Report on Competition in Digital Markets
Andrew Lautz broke down some of the most harmful proposals in the report in his post on the National Taxpayer’s Union’s blog. Andrew also emphasizes the need for further analysis:
The Subcommittee’s report is more than 400 pages long, so there is certainly more to analyze and break down in the weeks ahead. However, the Subcommittee’s policy recommendations indicate that lawmakers are considering some truly harmful changes to decades of antitrust precedent, in the courts and at the federal agencies responsible for enforcement. Lawmakers who support a robust economy and a fair legal system for American businesses should reject the approaches advanced by the Subcommittee.
Andrea O’Sullivan of the James Madison Institute writes in her Reason op-ed, Big Tech Is Just the Beginning: House Dems Seek Major Changes to Antitrust Law:
A great strength of the consumer welfare standard is that it's, well, a standard. Some of us are workers, some of us are entrepreneurs, some of us own businesses, but we are all consumers. Setting the most inclusive group as the focus of attention removes the potential for inconsistently biasing exclusive groups.
Citizens Against Government Waste has a post from its president, Thomas A. Schatz, that gets right to the point about the subcommittee’s report:
Increasing a company’s ability to provide new and innovative services through mergers and acquisitions is a perfectly normal business activity in any industry. It does not ipso facto create a monopoly or require existing antitrust laws to be set aside for a more stringent regulatory regime. If consumers are unhappy with the services of any of the digital platforms, they can use another platform. Members of Congress who care about economic growth, innovation, free markets, and retaining America’s global leadership in technology should put the report in the circular file (real or virtual) where it belongs.
Others expressed a similar sentiment, although perhaps less literally. Professor Herbert Hovenkamp and I discussed “Antitrust Populism and the Conservative Movement” in a virtual event for the Federalist Society, during which he said of the Cicilline report, "I can't say I've read every word, but I read more than I should have." (To be fair to the Professor, this was recorded hours after the report was released.) You can watch the event video here or catch it as a podcast here.
Also, Taxpayers Protection Alliance’s Grace Morgan and Patrick Hedger put together a video on TPA’s YouTube Channel talking about antitrust and tech, which analyzes the subcommittee’s report. At just over 10 minutes, the video is worth watching and sharing with allies and those looking for a quick understanding of the key issues at stake in this debate. Patrick also has a post discussing the subcommittee’s report and Amazon’s Prime Day.
Jennifer Huddleston at American Action Forum makes the case against the HJC’s Glass-Steagall-like proposal and breaks down Why Technology Should Not Be Regulated Like Finance:
There are important lessons to learn from financial regulation for the current policy conversation around Big Tech—just not the lessons that advocates of finance-style regulations might want. The lessons policymakers should learn from past financial regulation is that even well-intentioned regulation can have consequences and tradeoffs as well as fail to solve the underlying concerns.
Richard Epstein at the Hoover Institution asks, Is There An Antitrust Crisis In Big Tech? and provides thoughtful insights into the subcommittee report. The entire post is a must-read. Here is one highlight:
The tech industry depends on rapid movement from planning to implementation, and any costly administrative oversight will delay urgently needed innovations. If a small firm can attract independent VC support to expand or go public it will do so, as did both Google and Facebook, by steering clear of large firm takeover offers that undervalue their true potential.
The DOJ’s Suit Against Google
In a recent op-ed, Beware of Politicizing Antitrust Lawsuits, The Pelican Institute’s Eric Peterson draws a great parallel of the government using its power against companies it doesn’t like:
The New York attorney general’s office is a particularly egregious offender of this practice, often using its power for political purposes. And while the office’s lawsuits against entities ranging from energy companies to the National Rifle Association have been without merit, the lawsuits still caused those groups millions in legal fees and potential reputational damage. The case against Google seems to be no different. Even if the company is able to prove it hasn’t been acting as a monopoly, the case will likely take years and cost millions. In a way, the process is the punishment.
Over at the American Action Forum, Jennifer Huddleston contemplates the larger implications of the suit for the tech industry in a post, What Does the Department of Justice Case Against Google Mean for Calls to Break Up Big Tech?:
The result may be that larger companies are more hesitant to engage in acquisitions or explore certain expansions for fear it may draw the attention of regulators and result in antitrust enforcement action…Like with the deterrent effect on companies involved in an antitrust case, consumers may miss out on the lower prices, improved efficiencies, or new products that might have emerged from such actions. Further, far from being in a “kill zone” in which large companies acquire small companies before they can grow to be future rivals, some small companies see acquisition as an exit strategy and are seeking to improve existing products to attract such acquisition. In light of greater antitrust scrutiny, both large and small companies may find their choices change or are more limited.
On the Federalist Society’s blog, Neil Chilson analyzes the suit:
Overall, the complaint alleges very little that is new. It focuses on contracts that have been debated repeatedly (particularly in Europe) and refined over time in response to objections and political pressure. More generally, DOJ faces the perennial antitrust problem: vigorous competition harmful to competitors is often great for consumers. Many of the behaviors described in the complaint have pro-consumer, pro-competition explanations, even if competitors dislike them.
On the National Taxpayer Union’s blog, Andrew Lautz points out the DOJ’s failure to adequately prove consumer harm, writing that the “DOJ spends a good portion of its complaint attempting to explain Google’s relationship with American consumers, but it fails to even make an attempt at estimating consumer harm until page 53 of a 64-page complaint.”
More on Antitrust, Conservatism, and Free Markets
Dan Schneider of the American Conservative Union and I had a brief discussion on How Antitrust Laws are Being Weaponized for Political Purposes for the CPAC Live video series.
National Taxpayers Union’s Andrew Lautz had two great blog posts related to last month’s hearing. The first one was a preview that explained, “...one thing should be abundantly clear: aggressive antitrust action from unelected federal regulators is not a conservative solution to any real or alleged problems with bias.”
In his second post after the hearing, Andrew wrote: “Consumers generally provide a more effective and timely check on businesses by opting to take their time, membership, or money to firms that provide the best goods and services. Public options might theoretically also be accountable to the people, but do not respond to market signals like private businesses.”
Josh Withrow from FreedomWorks wrote in his blog post, Conservatives Shouldn't Seek Common Cause with the Left on Antitrust:
It’s noteworthy that just like back during the “robber baron” days, many of the complaints against companies like Google or Amazon are that their prices are too low. In this sense, once again, breaking up these big companies stands to benefit other companies, but not consumers. In a free market, companies can attain great wealth and dominant market shares because they are producing products or services that others desire better than their competitors. If their success leads them to stagnate, or if their competitors simply innovate to provide a better product, that market dominance can go away seemingly overnight.
Also from FreedomWorks, John Tamny observed in his RealClearMarkets op-ed, With Facebook, Antitrust Officials Advertise Astonishing Ignorance, that: “[s]ince antitrust officials by definition cannot detect monopoly profits ahead of time, they’re as a rule looking backwards. And in looking backwards, they’re penalizing the successful for having had the temerity to push aside the mediocre.”
Similarly, James Czerniawski from Libertas Institute provided perspective in the Washington Times on the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy and Consumer Rights September hearing. He wisely advises that “[p]olicymakers should strive to gain a more complete understanding of market processes before rushing to make drastic and foundational changes to institutions and laws that directly impact them.”
On the Goldwater Institute’s In Defense of Liberty blog, Timothy Sandefur writes:
[T]he “consumer welfare standard” helped courts turn away from the unjust decisions of the past and to create a legal environment more hospitable to innovation, efficiency, and lower prices. In fact, the consumer welfare standard in antitrust law has proven so beneficial to the American economy that it would be no exaggeration to say that it is one of the greatest free-market successes of the past century. The consumer welfare standard is to the free market what the Endangered Species Act is to the environmental movement.
The Foundation for Economic Education featured a post by TechFreedom’s Asheesh Agarwal, who asks, Does Big Tech Violate Antitrust Law? Let the Courts Decide, Not Congress. He concludes that “[i]n particular, most scholars, including senior enforcement officials from both Republican and Democratic administrations, continue to support the principle that antitrust law should focus on consumer welfare, rather than political concerns or the outdated idea that ‘big is bad.’ To abandon that touchstone would invite chaos.”
Regulating Big Tech Will Hurt Small Business, is one argument being made by Dirk Auer at Truth on the Market. Dirk explains, “[t]he trillion dollar question is whether it is possible to regulate this thriving industry without stifling its unparalleled dynamism. If Rep. Cicilline’s House report is anything to go by, the answer is a resounding no.”
In other news, The Bork Foundation launched earlier this month. One of the foundation’s projects includes bringing The Antitrust Paradox back into print by 2021.
On the Horizon: This fall, the Global Antitrust Institute will release it’s Report on the Digital Economy. The report will serve as a primer on key economic concepts fundamental to the understanding of the digital economy, an analysis of the state of competition in digital markets, and an evaluation of the many policy proposals offered by academics, think tanks, and legislators to modify the antitrust and regulatory institutions in order to better address the digital economy. The report is GAI’s biggest project yet, and will include more than 30 chapters. For more information, you can watch the report announcement here.
Thanks for reading!
