From PLI’s Course Handbook
50th Annual Antitrust Law Institute
#18840
4
MONOPOLIZATION
R. Hewitt Pate
Amanda L. Wait
Hunton & Williams LLP
These materials are current through
February 25, 2009
i
Table of Contents
I.
Sherman Act § 2 Overview ....................................................................................................1
A.
Monopolization ..............................................................................................................1
1. Monopoly Power ......................................................................................................1
2. Willful Acquisition and Maintenance of Monopoly
Power .............................................................................................................................3
B.
Attempted Monopolization ............................................................................................5
1. Predatory or Anticompetitive Conduct ....................................................................5
2. Specific Intent to Monopolize..................................................................................5
3. Dangerous Probability of Achieving Monopoly Power...........................................6
C.
Conspiracy to Monopolize .............................................................................................7
1. Combination or Conspiracy .....................................................................................7
2. Overt Act ..................................................................................................................8
3. Specific Intent to Monopolize..................................................................................8
II.
Recent Attempts at Clarity and Guidance ..............................................................................8
III. The Monopoly Power Element: Practical Problems and Emerging
Issues 12
A.
Background ..................................................................................................................12
B.
Defining Relevant Markets ..........................................................................................12
1. The Relevant Product or Service Market ...............................................................13
2. The Relevant Geographic Market ..........................................................................15
C.
Defining Market Power................................................................................................15
1. Monopoly Power v. Market Power ........................................................................15
2. Presumptions Versus Proof ....................................................................................16
3. The Courts and the Enforcement Agencies ...........................................................16
4. Current Market Share Versus Historic or Future Market
Share ............................................................................................................................17
IV. The Exclusionary Conduct Element: Recent Cases and
Developing Issues ..........................................................................................................................17
A.
Background ..................................................................................................................17
1.
2.
3.
4.
5.
Predatory Pricing ...................................................................................................18
Predatory Purchasing/Raising Rivals’ Costs .........................................................20
Refusals to Deal .....................................................................................................22
“Price Squeeze” Claims .........................................................................................24
Exclusive Dealing ..................................................................................................25
ii
6. Bundled Discounts .................................................................................................27
7. Exclusionary Conduct in Standard Setting ............................................................30
8. Exclusionary Conduct in Category Captain
Arrangements ...............................................................................................................32
V.
Conclusion: More Guidance Is Needed ...............................................................................34
iii
I.
Sherman Act § 2 Overview
Section 2 of the Sherman Act broadly prohibits monopolization, attempted
monopolization, and conspiracies to monopolize. Section 2 provides that “[e]very person who
shall monopolize, or attempt to monopolize, or combine or conspire with any other person or
persons, to monopolize any part of the trade or commerce among the several States, or with
foreign nations, shall be deemed guilty of a felony.”1 Unlike Sherman Act Section 1, which
requires proof of concerted action, Section 2 prohibits offenses that can be accomplished
unilaterally (as well as through concerted action).
A.
Monopolization
To prove a violation of Section 2 for monopolization, a plaintiff must show (1) that the
defendant has monopoly power, and (2) that the defendant willfully acquired, maintained, or
created that monopoly power through exclusionary conduct.2
1.
Monopoly Power
The first element of a claim for monopolization under Section 2 of the Sherman Act
requires a showing that the defendant has monopoly power. Monopoly power is “the ability to
control prices and exclude competition in a given market.”3
To satisfy this element of
monopolization, it is sufficient that monopoly power exists; it need not have been exercised.4
A plaintiff can prove the existence of monopoly power through “direct evidence of
supracompetitive prices and restricted output” or by inference “from the structure and
composition of the relevant market.”5
Market share in the relevant market typically is
considered the most important factor in assessing whether monopoly power exists.6 Although no
1
15 U.S.C. § 2 (2004).
2
United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).
3
Grinnell Corp., 384 U.S. at 571.
4
Am. Tobacco Co. v. United States, 328 U.S. 781, 811 (1946).
5
Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3d Cir. 2007).
6
United States v. Microsoft Corp., 253 F.3d 34, 56-57 (D.C. Cir. 2001).
1
concrete rules exist, the Second Circuit famously noted that a market share of 90% “is enough to
constitute a monopoly” but “it is doubtful whether sixty or sixty-four percent would be enough”
and “certainly thirty-three per cent is not.”7 Other courts have said that market power is rare at
market shares less than seventy percent,8 that “a share significantly larger than 55%” is required
to show monopoly power,9 and that a share of 75-80% is “more than adequate to establish a
prima facie case” of monopoly power.10 The Department of Justice’s recently released Report
on Section 2 of the Sherman Act suggests that a safe-harbor for firms holding less than 50% of a
market is appropriate: “[W]e are aware of no court that has found monopoly power when
defendant’s share was less than fifty percent, suggesting instances of monopoly power below
such a share, even if theoretically possible, are exceedingly rare in practice.”11 The DOJ would
apply a rebuttable presumption that a firm possesses monopoly power if it “has maintained a
market share in excess of two-thirds for a significant period and the firm’s market share is
unlikely to be eroded in the near future… .”12 Great uncertainty exists for market shares between
50% and 70%.13
Market share, however, “is only a starting point for determining whether monopoly
power exists, and the inference of monopoly power does not automatically follow from the
7
United States v. Aluminum Co. of Am., 148 F.2d 416, 424 (2d. Cir. 1945); see also Am.
Tobacco Co. v. United States, 328 U.S. 781, 813-814 (1946) (finding 90% market share
sufficient to find monopoly power).
8
Exxon Corp. v. Berwick Bay Real Estate Partners, 748 F.2d 937, 940 (5th Cir. 1984).
9
United States v. Dentsply Int’l, Inc., 399 F.3d 181, 187 (3d Cir. 2005).
10
Id. at 188; see Eastman Kodak Co. v. Image Technical Servs., 504 U.S. 451, 481
(1992) (It is generally accepted that a market share in excess of 70% can establish a prima facie
finding of monopoly power.).
See U.S. DEP’T OF JUSTICE, COMPETITION AND MONOPOLY: SINGLE-FIRM CONDUCT
UNDER
SECTION
2
OF
THE
SHERMAN
ACT
24
(2008),
at
www.usdoj.gov/atr/public/reports/236681.pdf [hereinafter DOJ SECTION 2 REPORT].
11
12
DOJ SECTION 2 REPORT, supra note 12, at 30.
13
See ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS 232 n.39 (6th
ed. 2007) (collecting cases) [hereinafter ANTITRUST LAW DEVELOPMENTS].
2
possession of a commanding market share.”14 Additional factors considered in ascertaining the
existence of monopoly power include the existence of barriers to entry (such as legal license
requirements, control of natural resources or supplies, intellectual property rights, exclusivity
arrangements, entrenched buyer preferences, and high capital costs), and network effects (which
exist when the value of a product or service increases the more others use the same product or
service).15 “A firm also lacks market power when its competitors have excess production
capacity and can produce more than the market demands at a competitive price.”16
A plaintiff may also prove the existence of monopoly power through direct evidence of
anticompetitive effects.17 Showing market power by direct effects does not relieve a plaintiff of
the obligation to allege at least the “rough contours of a relevant market.” 18 Plaintiffs showing
direct evidence of monopoly power, however, do not need to define the relevant market with the
same level of precision as required when alleging monopoly power by showing market share.19
2.
Willful Acquisition and Maintenance of Monopoly Power
Monopoly power in the relevant market will give rise to Section 2 liability only if that
power was willfully acquired or maintained, rather than resulting from “growth or development
14
Smith Wholesale Co. v. Philip Morris USA, Inc., 2007-1 Trade Cas. (CCH) ¶ 75,620
(6th Cir. Feb. 27, 2007) (quoting Am. Council of Certified Podiatric Physicians & Surgeons v.
Am. Bd. of Podiatric Surgery, Inc., 185 F.3d 606, 623 (6th Cir. 1999)). Cf. GSI Group v. Sukup
Mfg. Co., 2007-2 Trade Cas. (CCH) ¶ 75,880 (C.D. Ill. July 27, 2007) (noting “market share is
not always sufficient to establish market power at summary judgment”).
15
ANTITRUST LAW DEVELOPMENTS, supra note 14, at 233-38.
16
Smith Wholesale Co., 2007-1 Trade Cas. (CCH) ¶ 75,620 (citing Rebel Oil Co., Inc. v.
Atl. Richfield Co., 51 F.3d 1421, 1441 (9th Cir. 1995)).
17
See In re Compensation of Managerial, Professional & Technical Employees Antitrust
Litigation, 2008 U.S. Dist. LEXIS 63,633, at *6 (D.N.J. Aug. 20, 2008) (“If a plaintiff can show
that a defendant’s conduct exerted an actual adverse effect on competition, this is a strong
indicator of market power.”) (quoting Todd v. Exxon, 275 F.3d 191, 206 (2d Cir. 2001)).
18
Id. at *24.
19
Id. at *26.
3
as a consequence of a superior product, business acumen, or historic accident.”20 Thus, a
monopolist that simply competes aggressively and pursues legitimate business objectives will
not be subject to Section 2 liability.21 The antitrust laws protect competition, not competitors.
Therefore, “[c]onduct that merely harms competitors … while not harming the competitive
process itself, is not anticompetitive.”22
To satisfy this element of a successful claim for monopolization under Section 2, the
acquisition or maintenance of monopoly power must be the result of “competition on some basis
other than the merits.”23 “Any conduct by the defendant that secures market share by means
other than the competitive merits of the defendant’s product may qualify as anticompetitive.”24
If the conduct at issue is economically irrational but for an adverse impact on competition, it can
give rise to liability.25 Additionally, conduct that contributes to monopoly power that also
violates non-antitrust laws, such as business torts and violations of regulatory requirements, has
given rise to Section 2 liability.26
Grinnell Corp., 384 U.S. at 570-71; see Rambus Inc. v. Fed. Trade Comm’n, 522 F.3d
456, 463 (D.C. Cir. 2008) (“It is settled law that the mere existence of a monopoly does not
violate the Sherman Act.”) .
20
21
See, e.g., Endsley v. City of Chicago, 230 F.3d 276, 283-84 (7th Cir. 2000).
22
Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297, 308 (3d. Cir. 2007).
Id. at 308 (citing Verizon Commcn’s Inc. v. Law Offices of Curtis V. Trinko, LLP, 540
U.S. 398, 407 (2004)); see also Cascade Health Solutions v. PeaceHealth, 502 F.3d 895, 904 (9th
Cir. 2007) (“Anticompetitive conduct is behavior that tends to impair the opportunities of rivals
and either does not further competition on the merits or does so in an unnecessarily restrictive
way.”).
23
Univac Dental Co. v. Dentsply Int’l, 2008 U.S. Dist. LEXIS 46,910, at *16 (M.D. Pa.
June 17, 2008).
24
25
See, e.g., Advanced Health-Care Servs. v. Radford Cmty. Hosp., 910 F.2d 139, 148
(4th Cir. 1990) (“[I]f a plaintiff shows that a defendant has harmed consumers and competition
by making a short-term sacrifice in order to further its exclusive, anti-competitive objectives, it
has shown predation by that defendant.”).
26
ANTITRUST LAW DEVELOPMENTS, supra note 14, at 298-300.
4
With respect to the role of the monopolist’s intent, there is general agreement that a
monopolist’s intent to win the competitive struggle is not damning. Rather, the focus must be on
the propriety of the monopolist’s conduct, with intent simply informing the analysis of that
conduct.27 Thus, proffered business justifications are an important factor in determining whether
conduct reaches the level of “willful acquisition or maintenance of monopoly power.”28
B.
Attempted Monopolization
Similarly, a successful claim for attempted monopolization requires proof that the
defendant (1) has engaged in predatory or anticompetitive conduct; with (2) a specific intent to
monopolize; and (3) a dangerous probability of achieving monopoly power.29
1.
Predatory or Anticompetitive Conduct
The same conduct required to establish liability of a monopolization claim is required to
establish a claim for attempted monopolization. Thus, the same analysis used to distinguish
legitimate business behavior from anticompetitive behavior in monopolization cases is used to
determine whether conduct constitutes an illegal attempt to monopolize.30
2.
Specific Intent to Monopolize
The second element required for a successful claim of attempted monopolization under
Section 2 is that the defendant had a “specific intent to destroy competition or build
monopoly.”31 “[S]pecific intent refers not to the defendant’s general intent to do a particular act,
27
See Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039 (8th Cir. 2000).
28
Id. at 1062.
29
Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993).
30
Spectrum Sports, 506 U.S. at 459-58; see Broadcom Corp. v. Qualcomm, Inc., 501
F.3d 297, 317 (3d Cir. 2007); Kinderstart.com LLC v. Google, Inc., 2007-1 Trade Cas. (CCH)
¶ 75,643.
31
Times-Picayune Publ’g Co. v. United States, 345 U.S. 594, 626 (1953).
5
but to an overall anticompetitive intent expressed through its actions to destroy competition or
build monopoly.”32
An intent to drive a competitor out of business through legitimate means is not sufficient
to show a “specific intent to monopolize.”33 Specific intent may be proven by direct evidence, or
it can be inferred from evidence of anticompetitive acts.34 For example, in Aspen Skiing, the
Supreme Court noted that evidence of irrational business conduct may be indirect evidence of a
specific intent to monopolize.35
3.
Dangerous Probability of Achieving Monopoly Power
In assessing whether a defendant has a dangerous probability of achieving monopoly
power, courts typically examine the same factors they would in assessing whether a defendant
possesses market power, that is, market share and other market factors.36 A plaintiff must allege
facts sufficient to show that the defendant has market power that, if the defendant’s alleged
unlawful conduct remains unchecked, will approach monopoly power.37
32
Schoenbaum v. E.I. DuPont de Nemours & Co., 517 F. Supp. 2d 1125 (E.D. Mo. 2007)
(citing Gen. Indus. Corp. v. Hartz Mountain Corp., 810 F.2d 795, 802 (8th Cir. 1987)); see
Babyage.com, Inc. v. Toys “R” Us, Inc., 558 F. Supp. 2d 575, 586 (E.D. Pa. 2008) (finding
plaintiffs had sufficiently alleged specific intent to monopolize by alleging that defendant sought
minimum resale price maintenance agreements with the goal of acquiring a monopoly share in
each of the relevant markets); Kinderstart.com LLC, 2007-1 Trade Cas. (CCH) ¶ 75,643 (finding
that the plaintiff did not sufficiently allege a specific intent to monopolize when the plaintiff
described the anticompetitive conduct in the complaint but did “not allege that Google engaged
in this activity with an intent to gain a monopoly”).
33
Abcor Corp. v. AM Int’l, Inc., 916 F.2d 924, 927 (4th Cir. 1990).
34
M&M Med. Supplies & Serv., Inc. v. Pleasant Valley Hosp., 981 F.2d 160, 166 (4th
Cir. 1992); Schoenbaum, 517 F. Supp. 2d at 1146.
35
Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 608 n.39 (1985).
36
See, e.g., Kelco Disposal v. Browning-Ferris Indus., 845 F.2d 404, 409 (2d Cir. 1988)
(explaining market share over 55%, along with other market characteristics, can establish
dangerous probability of success); see also Rescue Phone, Inc. v. Enforcement Tech. Group,
Inc., 2007-2 Trade Cas. (CCH) ¶ 75,768 (E.D. Va. 2007) (“Facts relevant to a determination of
‘a dangerous probability of success’ in monopolizing the market include market share, ease of
entry into the market, and unjustified exclusionary conduct.”).
37
DSM Desotech Inc. v. 3D Sys. Corp., 2009 U.S. Dist. LEXIS 5980, at *21 (N.D. Ill.
Jan. 26, 2009).
6
Courts specifically have considered the existence of barriers to entry in determining
whether the plaintiff has a “dangerous probability” of achieving monopoly power.38
Less evidence is required to prove a “dangerous probability of achieving monopoly
power,” than to prove that the defendant has monopoly power.39 A plaintiff, however, must
allege something more than just “labels and conclusions.”40 As one district court recently
explained: “Although Plaintiff need not necessarily quantify [the defendant’s] market share with
precision, Plaintiff must assert some facts in support of its assertions of market power that
suggest those assertions are plausible.”41
C.
Conspiracy to Monopolize
A plaintiff may also challenge conspiracy to monopolize under Section 2 of the Sherman
Act.
A successful claim for conspiracy to monopolize requires: (1) the existence of a
combination or conspiracy; (2) an overt act in furtherance of the conspiracy; and (3) specific
intent to monopolize.42
1.
Combination or Conspiracy
The first element of a claim for conspiracy to monopolize requires proof of a
“combination or conspiracy,” as evidenced by an agreement to commit the underlying offense of
monopolization. Such an agreement can be established by direct or indirect proof.43 As in
See Babyage.com, Inc. v. Toys “R” Us, Inc., 558 F. Supp. 2d 575, 586 (E.D. Pa. 2008)
(finding that the plaintiffs sufficiently had alleged the “dangerous probability” element by
alleging “significant barriers to entry in the form of stringent industry regulation and high startup cost” in the relevant markets).
38
39
See Tops Mkts., Inc. v. Quality Mkts., Inc., 142 F.3d 90, 100-01 (2d Cir. 1998)
(finding that the same evidence supports an attempt to monopolize, but not a monopolization
claim).
40
See Bell Atl. Corp. v. Twombly, 550 U.S. 544, at 555 (2007).
41
Korea Kumho Petrochemical v. Flexsys Am. LP, 2008 U.S. Dist. LEXIS 68,559 (Mar.
11, 2008).
42
United States v. Yellow Cab Co., 332 U.S. 218, 225 (1947).
43
Am. Tobacco Co. v. United States, 328 U.S. 781, 809 (1946).
7
Section 1 cases, the question of whether a combination or conspiracy exists is typically a factual
question.44
Unlike the other possible offenses under Section 2—monopolization and attempted
monopolization—which can be committed by a single actor acting unilaterally, an agreement to
conspire to monopolize necessarily requires two or more distinct entities. Pursuant to the
doctrine enunciated in Copperweld Corp. v. Independence Tube Corp.,45 a parent and its wholly
owned subsidiary constitute a single economic entity that is incapable of conspiring with itself.
The Copperweld doctrine is applicable to conspiracy to monopolize claims.
A plaintiff
challenging conduct as an anticompetitive conspiracy to monopolize must allege distinct entities
that are legally capable of conspiring with each other.
2.
Overt Act
While an overt act that is itself a violation of the antitrust laws will satisfy this element,
any overt act in furtherance of the conspiracy will suffice.46
3.
Specific Intent to Monopolize
As in a claim for attempted monopolization, specific intent may be proven by direct
evidence or it can be inferred from evidence of anticompetitive acts.47
II.
Recent Attempts at Clarity and Guidance
The application of Section 2 of the Sherman Act to unilateral conduct currently is quite
confused. One antitrust scholar in the United States has written that exclusionary conduct
doctrine “uses a barrage of conclusory labels to cover for a lack of any well-defined criteria for
sorting out desirable from undesirable conduct that tends to exclude rivals.”48 Another charges
that “[a] number of contemporary cases on exclusionary practices tend to be noncommittal if not
44
Seagood Trading Corp. v. Jerrico, Inc., 924 F.2d 1555, 1573-75 (11th Cir. 1991).
45
467 U.S. 752, 776 (1984).
46
See Am. Tobacco Co., 328 U.S. at 809.
47
Id.
48
Einer Elhauge, Defining Better Monopolization Standards, 56 STAN. L. REV. 253, 342
(2003).
8
obfuscatory” in their usage of terms such as “anticompetitive.”49 Commentators on the other
side of the Atlantic have been similarly unsparing.50
Many commentators have called for increased clarity and improvement of Section 2 legal
standards.51 In recent years, the Department of Justice has attempted to distill from the Supreme
Court’s Section 2 case law an objective, transparent, and economically based framework for
assessing single-firm conduct.52 The “no economic sense” test advocated by the DOJ in its
Amicus brief in Trinko is consistent with the case law as it has developed up to this point.53
On September 8, 2008, the Antitrust Division released a report entitled “Competition and
Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act.”54 This report originated
in an eleven-month series of hearings on Section 2 of the Sherman Act conducted jointly by the
Antitrust Division of the Department of Justice and the Federal Trade Commission.
The
hearings began on June 20, 2006, and were intended to “encompass a thorough examination of
49
Eleanor Fox, What is Harm to Competition? Exclusionary Practices and
Anticompetitive Effect, 70 ANTITRUST L.J. 371, 383 (2002).
50
See, e.g., John Vickers, Abuse of Market Power, Speech to the 31st Conference of the
European Ass’n for Research in Industrial Economics, Berlin (Sept. 3, 2004), available at
http://www.oft.gov,uk/NR/rdonlyres/948B9FAF-B83C-49F5-B0FAB25214DE6199/0/spe0304.pdf; see also Competition Committee, Directorate for Financial and
Enterprise Affairs, Organisation for Economic Co-operation and Development, Competition on
the Merits – Background Note, DAF/COMP(2005) 3 n.4 (May 9, 2005) (collecting sources).
See REPORT AND RECOMMENDATIONS, ANTITRUST MODERNIZATION COMM’N, at
recommendation 15 (2007), available at www.amc.gov.
51
52
See Br. for the United States and the Fed. Trade Comm. as Amici Curiae Supporting
Petitioner 17, Verizon Commcn’s, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398
(2004), available at http://www.usdoj.gov/atr/cases/f201000/ 201048.pdf (proffering an
approach which would require a court to examine whether, on the basis of information available
to a firm at the time of the challenged conduct, the challenged conduct would have made
economic sense even if it did not reduce or eliminate competition).
53
See id. at 16 (citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585,
608, 610-11 (1985); General Indus. Corp. v. Hartz Mountain Corp., 810 F.2d 795, 803 (8th Cir.
1987); Stearns Airport Equip. Co. v. FMC Corp., 170 F.3d 518, 523-524 & n.3 (5th Cir. 1999);
Advanced Health-Care Servs. v. Radford Cmty. Hosp., 910 F.2d 139, 148 (4th Cir. 1990)).
54
DOJ SECTION 2 REPORT, supra note 12.
9
single-firm conduct under the antitrust laws.”55 Panelists at the hearings considered a broad
range of issues relating to Section 2 of the Sherman Act, including: bundled loyalty discounts
and market share discounts; product tying and bundling; exclusive dealing; predatory pricing;
refusals to deal; product design; and misleading or deceptive statements or conduct.
For several types of conduct that may implicate Section 2, the DOJ SECTION 2 REPORT
outlined specific tests and safe harbors. These specific tests and safe harbors are discussed in
detail below. When one of those specific tests does not apply, however, the Division took a
slightly different analytical direction from its prior advocacy of the “no economic sense” test and
advocated a “disproportionality” test as a general enforcement analytical tool. Although the
Division outlined conduct-specific tests and safe harbors, “in general, the Department believes
that, when a conduct-specific test is not applicable, the disproportionality test is likely the most
appropriate test identified to date for evaluating conduct under section 2.”56
The
disproportionality test finds conduct anticompetitive if the anticompetitive harm substantially
outweighs the procompetitive benefits. The Division has not, however, entirely abandoned the
“no economic sense” test. One of the Division representatives involved in drafting the Report
noted that, for ex ante counseling, the “no economic sense” test is a useful tool, but it has
enforcement drawbacks.57
Obtaining clarity in the law of Section 2 was a goal of both the Division and Federal
Trade Commission for these hearings.58 Ultimately, however, such clarity did not result. The
Division’s Report was not joined by the Federal Trade Commission. In fact, the same day the
Division’s Report issued, three of four current FTC Commissioners issued a statement
55
Overview of the Hearings, available at
http://www.usdoj.gov/atr/public/hearings/single_ firm/sfchearing.htm#overview.
56
DOJ SECTION 2 REPORT, supra note 12, at 46.
James J. O’Connell, Deputy Assistant Attorney General, Antitrust Division, Dep’t of
Justice, Analysis of DOJ’s Section 2 Report (Dec. 11, 2008).
57
58
See DOJ SECTION 2 REPORT, supra note 12, at 1 (noting that the debate surrounding
Section 2 was the two agencies’ motivation for embarking on the lengthy series of hearings).
10
repudiating certain elements of the DOJ’s report.59
Specifically, Commissioners Harbour,
Leibowitz, and Rosch proclaimed that the Report, “if adopted by the courts, would be a blueprint
for radically weakened enforcement of Section 2 of the Sherman Act.”60
The three
Commissioners particularly were agitated by the Division’s advocacy of the “disproportionality”
test. They were concerned that the test places a thumb on the scale in favor of the defendant and
thereby places a nail in the coffin of Section 2.61
The current lack of clarity in the law of Section 2 of the Sherman Act is further
complicated by the new Obama Administration. President Obama has nominated former FTC
Commissioner Christine Varney as Assistant Attorney General for the Antitrust Division of the
Department of Justice. As of this writing her nomination has not been confirmed. However,
what is clear, is that new leadership will take over the reigns of the Antitrust Division and
uncertainty exists regarding how this new leadership will apply the 2008 Report released under
the Bush Administration.
Other jurisdictions also continue to struggle with the application of competition laws to
unilateral conduct. For example, the European Commission recently released a Guidance Paper
on its enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary
conduct by dominant firms.62 As with the DOJ Report, the EC Guidance is also the result of
extensive public consultation.
The EC received over one hundred comments which were
See Press Release, Fed. Trade Comm’n, FTC Commissioners React to Department of
Justice Report, “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the
Sherman Act” (Sept. 8, 2008), at http://www.ftc.gov/opa/2008/09/section2.shtm.
59
60
Press Release, Statement of Commissioners Harbour, Leibowitz and Rosch on the
Issuance of the Section 2 Report by the Department of Justice (Sept. 8, 2008), at
http://www.ftc.gov/os/2008/09/080908section2stmt.pdf.
Id. (“At almost every turn, the Department would place a thumb on the scales in favor
of firms with monopoly or near-monopoly power and against other equally significant
stakeholders.”).
61
Comm’n of European Communities, Guidance on the Commission's Enforcement
Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by
Dominant Undertakings, Feb. 9, 2009, available at
http://ec.europa.eu/competition/antitrust/art82/index.html.
62
11
discussed at public hearings and open debates starting in 2006.63 The analytical approach
employed in the EC Guidance arguably reflects a move towards the approach to unilateral
conduct followed by the United States and other jurisdictions. The Guidance, however, may
provide only limited insight into the EC’s enforcement approach. The insights offered by the
Guidance do not extend much beyond that which was already available in the case law.
On a positive note, in areas in which a settled test for the lawfulness of conduct under
Section 2 of the Sherman Act does not exist, antitrust counselors can make use of the “no
economic sense” test to guide businesses away from the conduct that is most likely to lead to
Section 2 liability. Passing the “no economic sense” test may not guarantee protection against
liability under Section 2, but failing it almost certainly will give rise to it. Recent case law
addressing specific elements and types of Section 2 offences are discussed below in detail.
III.
The Monopoly Power Element: Practical Problems and Emerging Issues
A.
Background
Determining whether a firm has monopoly power for purposes of a Section 2 case is a
critical and complicated endeavor. The practitioner or court must define the relevant product
market(s), define the relevant geographic market(s), calculate the various competitors’ market
shares in those markets, and analyze the general structure of the market for factors such as
barriers to entry and capacity constraints. Then, the practitioner or court must apply those
factors to the case law on monopoly power, which is clear at the extremes but murky in the
middle.
B.
Defining Relevant Markets
Defining the relevant market is an issue of central importance in antitrust law, including
Section 2 of the Sherman Act. How the relevant market is defined often determines whether the
activity at issue is deemed to violate the antitrust laws. In defining the relevant market, the
courts and enforcement agencies have looked to a number of factors—primarily related to the
product and geographic markets. It is often difficult to predict where a court will draw the
63
See Background, http://ec.europa.eu/competition/antitrust/art82/index.html.
12
boundary of a market between the extremes of perfect and imperfect substitutes, leading to
uncertainty and increased transaction costs. The Supreme Court has recognized this problem:
For every product, substitutes exist. But a relevant market cannot
meaningfully encompass that infinite range. The circle must be
drawn narrowly to exclude any other product to which, within
reasonable variations in price, only a limited number of buyers will
turn; in technical terms, products whose “cross elasticities of
demand” are small.64
While the Supreme Court has set forth the standard, there obviously exists a great distance
between that standard and the ultimate conclusion regarding market definition reached by a
court. In that gap exists a variety of practical problems related to defining relevant markets.
The DOJ SECTION 2 REPORT suggests that “continued consideration and study is warranted
regarding how to appropriately determine relevant markets” for purposes of Section 2.65
1.
The Relevant Product or Service Market
a.
Reasonable Interchangeability of Use
If products are reasonably interchangeable in use, then they are considered to be within
the same market.66 This “reasonable interchangeability” is determined from the perspective of
the end consumer.67 A market that is not defined in terms of the reasonable interchangeability of
use for the alleged products is legally insufficient.68
In determining whether a consumer
considers products reasonably interchangeable, courts may consider, among other factors:




customer views regarding interchangeability,
price,
cross-elasticity of demand,
the perception in the industry or public opinion regarding the scope of the market,
64
Times-Picayune Publ’g Co. v. United States, 345 U.S. 594, 612 n.31 (1953).
65
DOJ SECTION 2 REPORT, supra note 12, at 27.
66
See, e.g., Brown Shoe Co. v. United States, 370 U.S. 294, 325-326 (1962); United
States v. E.I. duPont de Nemours & Co., 351 U.S. 377, 395-400 (1956).
67
See Truck-Rail Handling, Inc. v. Burlington N. & Santa Fe Ry. Co., 2007-2 Trade Cas.
(CCH) ¶ 75,788 (9th Cir. July 13, 2007).
68
See Campfield v. State Farm Mutual Auto. Ins. Co., 532 F.3d 1111, 1118 (10th Cir.
2008).
13



the firm’s own views regarding its competitors,
differentiation in the consumer market, and
any differences in the means of bringing the goods to market.
b.
Submarkets
Submarkets may also exist within broad product market categories.
The term
“submarket” is somewhat of a misnomer. A plaintiff alleging a product “submarket” must still
be able to show that the alleged “submarket” is an economically distinct relevant market. 69
The question whether a submarket exists interjects significant uncertainty into the
analysis. As explained by the Court in Brown Shoe:
The boundaries of . . . a submarket may be determined by
examining such practical indicia as industry or public recognition
of the submarket as a separate economic entity, the product’s
peculiar characteristics and uses, unique production facilities,
distinct customers, distinct prices, sensitivity to price changes, and
specialized vendors.70
The factors listed by the Court in Brown Shoe are many of the same factors used to define a
market initially. This overlap has lead many courts and commentators to criticize use of the term
“submarket.”71
Thus, even when a market has been defined in favorable terms, the practitioner must still
be on the look out for the possibility that the court will define, on unfavorable terms, a submarket
of that market.
c.
The Battle of the Experts
Due to its complex nature, the issue of market definition often devolves into a battle of
economic and industry experts. When one side cannot clearly win that battle, then summary
judgment will likely be denied.72
69
See, e.g., Portney v. Ciba Vision Corp., 2008 U.S. Dist. LEXIS 106,551, at *15 (June
17, 2008).
70
Brown Shoe, 370 U.S. at 325.
See, e.g., Allen-Myland, Inc. v. IBM, 33 F.3d 194, 208 n.16 (3d Cir. 1994) (“The use
of the term ‘submarket’ is somewhat confusing, and tends to obscure the true inquiry.”); Satellite
Television & Associated Res., Inc. v. Cont’l Cablevision of Va., Inc., 714 F.2d 351, 355 n.5 (4th
Cir. 1983) (“The use of the term ‘submarket’ is to be avoided; it adds only confusion to an
already imprecise and complex endeavor.”).
71
14
2.
The Relevant Geographic Market
The Supreme Court has defined the relevant geographic market as the “area of effective
competition … in which the seller operates, and to which the purchaser can practicably turn for
supplies.”73
Courts consider a variety of factors in determining the bounds of a geographic market,
including:



Sales patterns,
Transportation costs, and
Geopolitical barriers to trade.
As is evident from this list of factors often considered, a geographic market is often malleable
and may change significantly over short periods of time.
C.
Defining Market Power
1.
Monopoly Power v. Market Power
The more typical question that arises in Section 2 litigation is whether a firm possesses
monopoly power. As defined by the courts, monopoly power is “the power to control market
prices or exclude competition.”74 The Supreme Court has stated that “[m]onopoly power under §
72
See, e.g., Spirit Airlines, Inc. v. Northwest Airlines, Inc., 431 F.3d 917, 945 (6th Cir.
2005) (“We conclude that this ‘intellectual disagreement’ among the parties’ experts creates
material factual disputes on the relevant market and the appropriate measure of costs for the
service at issue so as to preclude an award of summary judgment.”).
73
Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961) (emphasis omitted);
see Portney v. Ciba Vision Corp., 2008 U.S. Dist. LEXIS 106,551, at *15 (June 17, 2008)
(noting that a relevant geographic market is not necessarily defined by the geographic area in
which a seller operates if buyers could not practically turn to certain geographic areas in which
the seller operates for supplies).
74
United States v. E.I. Du Pont de Nemours & Co., 351 U.S. 294, 391 (1962); see
Hypertherm, Inc. v. Am. Torch Tip Co., 2007 U.S. Dist. LEXIS 67,579, at *19-20 (Sept. 11,
2007) (“[M]arket power consists of having sufficient economic muscle to permit [the
monopolist] to raise prices well in excess of competitive levels without inducing customers to
turn elsewhere.”) (quoting SMS Sys. Maint. Servs., Inc. v. Digital Equip. Corp., 188 F.3d 11, 16
(1st Cir. 1999).
15
2 requires . . . something greater than market power under § 1,”75 but there is no generally
accepted description of where market power ends and monopoly power begins.
The overlap between the definitions of monopoly power and market power has led
commentators to criticize the current doctrine:
The Court defines “monopoly power” as “the power to control
prices or exclude competition.” This definition raises a problem
because the standard economic definition of any “market power” is
a power to raise prices over the competitive level. Given this,
doesn’t all market power necessarily give a defendant “control”
over its prices and thus make it a monopolist?76
2.
Presumptions Versus Proof
In Illinois Tool Works, Inc. v. Independent Ink, Inc., the Supreme Court reversed the
Federal Circuit’s conclusion that a patentee should be presumed to possess market power in the
market for its patented product or process.77 The Supreme Court emphasized the possible
procompetitive bases for tying arrangements as reasons for eliminating a presumption of market
power.78 Independent Ink may reflect a shift in the Court away from presumptions relating to
market power. The Court expressed its unwillingness to allow a market to be defined by the
scope of a legal right. Instead, the Court seemed more intent upon requiring proof of the actual
contours of the market as defined by consumers.
3.
The Courts and the Enforcement Agencies
Courts have at times used a variety of verbal formulations in an attempt to describe the
nature of market power.79
75
Eastman Kodak Co. v. Image Technical Servs., 504 U.S. 451, 481 (1992).
76
Einer Elhauge, Defining Better Monopolization Standards, 56 STAN. L. REV. 253, 25758 (2003) (footnotes omitted).
77
126 S.Ct. 1281 (2006).
78
See, e.g., id. at 1291-93.
See, e.g., Eastman Kodak Co., 504 U.S. at 464 (“Market power is the power ‘to force a
purchaser to do something that he would not do in a competitive market.’ It has been described
as ‘the ability of a single seller to raise price and restrict output.’”) (quoting Jefferson Parish
Hosp. Dist. No. 4 v. Hyde, 466 U.S. 2, 14 (1984); Fortner Enters., Inc. v. U.S. Steel Corp., 394
U.S. 495, 503 (1969)).
79
16
The Horizontal Merger Guidelines, issued jointly by the Federal Trade Commission and
the Antitrust Division of the Department of Justice define market power as “the ability profitably
to maintain prices above competitive levels for a significant period of time.”80
4.
Current Market Share Versus Historic or Future Market Share
Another issue that arises in the determination of monopoly power is whether courts
should examine market power as a snapshot, or assess market power over some period of time.
The enforcement agencies have explained that:
The Agency normally will calculate market shares for all firms (or
plants) identified as market participants in Section 1.3 based on the
total sales or capacity currently devoted to the relevant market
together with that which likely would be devoted to the relevant
market in response to a 'small but significant and nontransitory'
price increase.81
Section 1.3 clarifies that, “[t]hese supply responses must be likely to occur within one year and
without the expenditure of significant sunk costs of entry and exit… .”82 Applying this “small
but significant and nontransitory price” (“SSNIP”) increase analysis in the Section 2 context
after the exercise of monopoly power could result in markets being defined too broadly.83
IV.
The Exclusionary Conduct Element: Recent Cases and Developing Issues
A.
Background
The canonical formulation of the exclusionary conduct element of monopolization is in
United States v. Grinnell Corp.84
In Grinnell, the Supreme Court described exclusionary
conduct as “the willful acquisition or maintenance of [monopoly] power as distinguished from
U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 0.1
(1997) [hereinafter Horizontal Merger Guidelines]; see also U.S. Dep’t of Justice & Fed. Trade
Comm’n, Commentary on the Horizontal Merger Guidelines 1 (March 2006).
80
81
Horizontal Merger Guidelines, supra note 81, § 1.41.
82
Id. § 1.32.
See DOJ SECTION 2 REPORT, supra note 12, at 26 (explaining the “Cellophane
83
Fallacy”).
84
384 U.S. 563 (1966).
17
growth or development as a consequence of a superior product, business acumen, or historic
accident.”85 Unfortunately for firms trying to conduct their business without running afoul of
Section 2, the Grinnell formulation provides very little guidance. Over three decades after
Grinnell, a court surveying the jurisprudential landscape could accurately observe that
“[a]nticompetitive conduct can come in too many different forms, and is too dependent on
context, for any court or commentator to have enumerated all the varieties.”86
Notwithstanding the vague Grinnell standard and the wide variety of conduct that has
been found to be exclusionary, courts have provided more intelligible guidance (at least
marginally) with respect to certain categories of allegedly exclusionary conduct. A review of
governing law and recent developments in the most prominent of these categories follows.
B.
Recent Cases
1.
Predatory Pricing
One type of exclusionary conduct for which the Supreme Court has been able to provide
more concrete guidance is predatory pricing.87 In addition to the other elements of its claim, a
plaintiff alleging predatory pricing must prove (1) pricing below an appropriate measure of costs,
and (2) the possibility of recoupment or actual recoupment.88 This is a high standard, intended to
guard against false-positives that could deter legitimate price-cutting that benefits consumers.89
There is a long-standing split in the case law on what constitutes the appropriate measure
of cost in the price-cost comparison element of predatory pricing.90 The starting point for every
cost discussion is the Areeda-Turner test: (1) a price at or above the defendant’s average variable
85
Id. at 570-71.
86
Caribbean Broad. Sys. Ltd. v. Cable & Wireless PLC, 148 F.3d 1080, 1087 (D.C. Cir.
87
See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993).
88
Id. at 222.
89
Id. at 222-23.
90
See, e.g., McGahee v. N. Propane Gas Co., 858 F.2d 1487, 1501-04 (11th Cir. 1988).
1998).
18
cost is conclusively deemed lawful, and (2) a price below the defendant’s average variable cost is
conclusively deemed unlawful.91 The courts generally have not adopted this test, but instead
have some adopted some variation.92
The Supreme Court has adopted the parties’ agreement to use average variable cost as the
appropriate measure of cost in one case, but declined to fully adopt it as the correct measure in
all cases.93 This leaves the question of the appropriate measure of costs to use in predatory
pricing cases unsettled. In Spirit Airlines, Inc. v. Northwest Airlines, Inc., the Sixth Circuit
reversed a grant of summary judgment on a predatory pricing claim using average variable costs
as the appropriate measure under the Brooke Group test.94 Spirit claimed that Northwest had
driven it out of the market through a combination of predatory pricing and expansion of capacity
on the routes for which it priced below costs. The Sixth Circuit rejected the district court’s claim
that Spirit’s expert’s opinion on the price-cost comparison made “no economic sense,” and
instead held a jury could reasonably find that the expert’s economic model and calculations
demonstrated marginal or average variable costs fell below price. 95 The court likewise held that
a jury reasonably could find, based on Spirit’s expert’s analysis, that Northwest recovered its
losses within months of Spirit’s exit from the market.96 Spirit Airlines, therefore, demonstrates
91
See Philip Areeda & Donald Turner, Predatory Pricing and Related Practices Under
Section 2 of the Sherman Act, 88 HARV. L. REV. 697, 733 (1975).
92
See, e.g., Spirit Airlines, Inc. v. Northwest Airlines, Inc., 431 F.3d 917, 938 (6th Cir.
2005) (“[I]f the plaintiff proves that the defendant's prices were below average variable cost, the
plaintiff has established a prima facie case of predatory pricing and the burden shifts to the
defendant to prove that the prices were justified without regard to any anticipated destructive
effect they may have on competitors.” (internal quotation marks and citations omitted));
McGahee, 858 F.2d at 1503 (explaining that if price is above average total cost, there is no
predation; if price is below average total cost and above short run marginal cost, there is
circumstantial evidence of predation; if price is below short run marginal cost, there is a
presumption of predation).
93
See Brooke Group, 509 U.S. at 222 n.1.
94
431 F.3d 917 (6th Cir. 2005).
95
Id. at 945.
96
Id. at 947-48.
19
the critical nature of expert testimony in a predatory pricing case. The grant and reverse of
summary judgment turned largely, if not solely, on the credibility of Spirit’s experts. It also
demonstrates that predatory pricing claims can make it past summary judgment, albeit rarely.
The DOJ, however, did not adopt the “average variable cost” measure used in Spirit
Airlines in its Section 2 Report. The Report explained that “a major shortcoming of average
variable cost is that it measures the average cost of the entire output, not just of the incremental
output that is the focus of the predation claim.”97 The DOJ advocated “average avoidable cost”
as the correct measure of cost.98 The Report defines “average avoidable cost” as including “all
costs, including both variable costs and product-specific fixed costs, that could have been
avoided by not engaging in the predatory strategy.”99 The calculation “omits all fixed costs that
were already sunk before the time of the predation… .”100
A successful predatory pricing claim also requires a showing of a “dangerous
probability” that the defendant will recoup its below-cost losses. The DOJ SECTION 2 REPORT
indicates that the Division would be willing, in appropriate cases, to consider both in- and out-ofmarket effects in assessing recoupment.101
2.
Predatory Purchasing/Raising Rivals’ Costs
In 2007, the Supreme Court held in Weyerhaeuser v. Ross-Simmons Hardwood Lumber
Co. that the test applied to predatory pricing claims in Brooke Group also applies to predatory
bidding claims.102 Plaintiff Ross-Simmons Hardwood Lumber Co. alleged that Weyerhaeuser
attempted to monopolize the finished alder lumber market by overbidding on inputs and raising
Ross-Simmons’ costs. The jury found for Ross-Simmons and awarded a verdict that was trebled
97
DOJ SECTION 2 REPORT, supra note 12, at 63.
98
See id. at 67.
99
Id. at 64.
100
Id.
101
Id. at 69.
102
549 U.S. 312, 314 (2007).
20
to approximately $79 million. The Ninth Circuit affirmed on appeal.103 The Court of Appeals
rejected Weyerhaeuser’s principal argument: that Brooke Group’s high standards for liability on
the sell-side of the market should also apply on the buy-side. The court reasoned that “an
important factor distinguishes predatory bidding cases from predatory pricing cases: benefit to
consumers and stimulation of competition do not necessarily result from predatory bidding the
way they do from predatory pricing.”104 The Ninth Circuit held that it was enough that the
defendants purchased more inputs than needed and paid a higher price for the inputs than
necessary to establish the anticompetitive conduct element.105
The Supreme Court unanimously reversed, holding that the Brooke Group test for
predatory pricing claims also applies to predatory bidding claims.106 The Court explained that
“the general theoretical similarities of monopoly and monopsony combined with the theoretical
and practical similarities of predatory pricing and predatory bidding convince us that our twopronged Brooke Group test should apply to predatory-bidding claims.”107 The “first prong of
Brooke Group’s test requires little adaptation for the predatory-bidding context. A plaintiff must
prove that the alleged predatory bidding led to below-cost pricing of the predator's outputs.”108
Because of the risk of “chilling procompetitive behavior with too lax a liability standard,” “only
higher bidding that leads to below-cost pricing in the relevant output market will suffice as a
basis for liability for predatory bidding.”109 With regard to the second prong of the Brooke
Group test, a “predatory-bidding plaintiff also must prove that the defendant has a dangerous
103
Confederated Tribes of Siletz Indians of Ore. v. Weyerhaeuser Co., 411 F.3d 1030,
1036 (9th Cir. 2005), cert. granted sub nom., Weyerhaeuser Co. v. Ross-Simmons Hardwood
Lumber Co., Inc., 549 U.S. 312 (2007).
104
411 F.3d at 1037.
105
Id. at 1037 n.8.
106
Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., 549 U.S. 312, 314
107
Id. at 325.
108
Id.
109
Id.
(2007).
21
probability of recouping the losses incurred in bidding up input prices through the exercise of
monopsony power.”110 As with predatory pricing, the recoupment prong requires “a close
analysis of both the scheme alleged by the plaintiff and the structure and conditions of the
relevant market.”111 Because Ross-Simmons conceded that it failed to satisfy the Brooke Group
standard, the Court held that its predatory bidding theory of liability could not support the jury’s
verdict.112
Similarly, a district court upheld a plaintiff’s allegation of “predatory hiring.” Predatory
hiring “occurs when talent is acquired not for purposes of using that talent but for purposes of
denying it to a competitor.”113
3.
Refusals to Deal
Absent an anticompetitive purpose, a business may deal with whomever it chooses. Mere
refusal to deal, without an agreement or conspiracy, does not violate the antitrust laws.114 The
DOJ SECTION 2 REPORT underscored this principle, by explaining that “antitrust liability for
unilateral, unconditional refusals to deal with rivals should not play a meaningful part in section
2 enforcement.”115 This leaves open the possibility that conditional refusals to deal may be
subject to liability under Section 2.
In Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, the Supreme
Court held that a purchaser of local telephone services failed to state a Section 2 claim against
local telephone monopolist Verizon, who the plaintiff alleged had limited market entry by
denying to its rivals interconnection services required by the Telecommunications Act of
110
Id.
111
Id. at 326 (quoting Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509
U.S. 209, 226 (1993)).
112
Id.
113
McCabe Hamilton & Renny, Co., Ltd. v. Matson Terminals, Inc., 2008 U.S. Dist.
LEXIS 47,428, at *17 (D. Haw. June 17, 2008) (citing Univ. Analytics, Inc. v. MacNealSchwendler Corp., 914 F.2d 1256, 1258 (9th Cir. 1990)).
114
United States v. Colgate & Co., 250 U.S. 300, 307 (1919); see also Hilton v.
Children’s Hosp.–San Diego, 2007 U.S. Dist. LEXIS 16,517 (S.D. Cal. Mar. 7, 2007).
115
DOJ SECTION 2 REPORT, supra note 12, at 129.
22
1996.116 The Court concluded that Verizon’s alleged failures to fulfill its duties to its rivals
under the 1996 Act did not constitute anticompetitive conduct.117 According to the Court,
“Verizon’s alleged insufficient assistance in the provision of service to rivals is not a recognized
antitrust claim under this Court’s existing refusal-to-deal precedents,” and neither the 1996 Act
nor “traditional antitrust principles” justified “adding the present case to the few existing
exceptions from the proposition that there is no duty to aid competitors.”118
The principal significance of Trinko lies in its skeptical stance toward judicial policing of
refusals to deal. The effect of this stance was to sharply limit Aspen Skiing Co. v. Aspen
Highlands Skiing Corp.,119 the Court’s “leading case for § 2 liability based on refusal to
cooperate with a rival.”120 In Aspen Skiing, the Court upheld a jury verdict in a case brought by
the owner of one ski area against the owner of the other three skiing areas in Aspen. The parties
had previously cooperated in issuing a joint, multiple-day, all-area ski ticket. After the defendant
canceled the joint ticket program, “[t]he plaintiff, concerned that skiers would bypass its
mountain without some joint offering, tried a variety of increasingly desperate measures to recreate the joint ticket, even to the point of in effect offering to buy the defendant’s tickets at
retail price.”121 In Trinko, the Court emphasized the apparent profit sacrifice involved in the
Aspen Skiing defendant’s conduct.
“The unilateral termination of a voluntary (and thus
presumably profitable) course of dealing suggested a willingness to forsake short-term profits to
achieve an anticompetitive end.”122 There was no comparable profit sacrifice alleged in Trinko.
Moreover, there was no discrimination in Verizon’s alleged refusal to cooperate because the
116
540 U.S. 398, 415-16 (2004).
117
Id.
118
Id. at 410-11.
119
472 U.S. 585 (1985).
120
Trinko, 540 U.S. at 408.
121
Trinko, 540 U.S. at 408-09 (citing Aspen Skiing, 472 U.S. at 593-94).
122
540 U.S. at 409.
23
services sought—unbundled telecommunications services—were not otherwise marketed or
available to the public.123
The lower courts are in the process of determining how to implement Trinko’s emphasis
on profit-sacrifice considerations in refusal-to-deal cases. In MetroNet Servs. Corp. v. Qwest
Corp.,124 the Ninth Circuit stated that a unilateral refusal to deal claim must “entail a sacrifice of
short-term profits for long-term gain from the exclusion of competition” to fall within the Aspen
Skiing exception to the general rule of no duty to deal with competitors.125 However, other
courts have declined to dismiss complaints that lack specific profit-sacrifice allegations.126
4.
“Price Squeeze” Claims
In February 2009, the Supreme Court found that Trinko bars price-squeeze claims when
the parties have no duty to deal under antitrust law. 127
In linkLine, the plaintiffs were
independent Internet service providers who leased wholesale DSL transport services from the
defendant, AT&T, which also competed with the plaintiff for the provision of DSL service at the
retail level.128 Although the Federal Communications Commission had largely dispensed with
the obligation of incumbent telephone companies to sell transmission service to independent
DSL providers, the FCC still required AT&T to provide interconnections as a condition of its
recent merger with BellSouth.129
The plaintiffs, the beneficiaries of these mandatory
interconnection requirement, claimed AT&T unlawfully “squeezed” their profit margins by
123
Id. at 410.
124
383 F.3d 1124 (9th Cir. 2004), cert. denied, 544 U.S. 1049 (2005).
125
Id. at 1134.
126
See Covad Communications Co. v. Bell Atl. Corp., 398 F.3d 666, 675–76 (D.C. Cir.
2005); A.I.B. Express, Inc. v. FedEx Corp., 2004-2 Trade Cas. (CCH) ¶ 74,621 (S.D.N.Y. 2004);
Creative Copier Servs. v. Xerox Corp., 344 F. Supp. 2d 858, 865–66 (D. Conn. 2004).
127
Pac. Bell Tel. Co. v. linkLine Commc’ns, Inc., No. 07-512, slip op. at 1 (S. Ct. Feb.
25, 2009).
128
Id. at 2.
129
Id. at 2.
24
setting a high price for the wholesale DSL transport service at the same time as charging a low
price for DSL service to its retail customers.130 The defendant, AT&T, moved for dismissal,
arguing that AT&T did not have an antitrust duty to deal with the plaintiffs in this case at either
the retail or wholesale level and, therefore, the plaintiffs’ claims were barred under Trinko.131
The district court agreed that AT&T did not have an antitrust duty to deal with the plaintiffs, but
noted that Trinko did not address price-squeeze claims and denied the AT&T’s motion.132 On
interlocutory appeal, the Ninth Circuit also held that Trinko did not involve price-squeeze claims
and, therefore, the plaintiffs’ complaint “stated a potentially valid claim under §2.”133
The question presented to the Supreme Court was “whether such a price-squeeze claim
may be brought under §2 of the Sherman Act when the defendant is under no antitrust obligation
to sell the inputs to the plaintiff in the first place.”134 The Court noted that although it is
“technically true” that Trinko did not address “price-squeeze” claims, “AT&T could have
squeezed its competitors’ profits just as effectively by providing poor-quality interconnection
service to the plaintiffs, as Verizon allegedly did in Trinko.”135 Finding that Trinko applies to
“price-squeeze” claims, the Supreme Court reversed the Ninth Circuit and remanded the case for
further proceedings.136
5.
Exclusive Dealing
Exclusive dealing arrangements expressly of implicitly require a buyer to purchase all or
substantially all of their supply of a specific good or service from the seller. One possible
antitrust concern with exclusivity clauses is that “unilaterally imposed quantity discounts can
130
Id. at 1.
131
Id. at 3.
132
Id. at 3-4.
133
Id. at 4.
134
Id. at 1.
135
Id. at 10.
136
Id. at 17.
25
foreclose the opportunities of rivals when a dealer can obtain its best discounts only by dealing
exclusively with the dominant firm.”137
Express contract language requiring exclusivity is not required in order for an agreement
with a customer to “effectively foreclose[] the business of competitors” in violation of Section
2.138 In LePage’s, the plaintiff alleged that 3M entered into express exclusivity contracts with
some customers and made payments to other customers “that were designed to achieve solesource status.”139 The court found that, even in the absence of express exclusivity clauses,
“[o]nly by dealing exclusively with 3M in as many product lines as possible could customers
enjoy the substantial discounts.”140 The court upheld the jury’s finding that the conduct violated
Section 2.141
Exclusive dealing clauses can be procompetitive, even when engaged by firms with large
market shares. They have been upheld when there is no significant adverse effect on competition
or where the arrangements were supported by procompetitive justifications.142 Exclusive dealing
can enable manufacturers to overcome free-rider issues misaligning the incentives to verticallyrelated firms to satisfy the demands of consumers most effectively.143
LePage’s Inc. v. 3M, 324 F.3d 141, 158 (3d Cir. 2003) (citing 3A PHILLIP E. AREEDA
& HERBERT HOVENKAMP, ANTITRUST LAW ¶ 768b2, at 148 (2d ed. 2002)).
137
138
LePage’s, 324 F.3d at 141.
139
Id. at 157.
140
Id. at 159.
141
Id.; see also United States v. Microsoft Corp., 253 F.3d 34, 64 (D.C. Cir. 2001) (en
banc) (condemning exclusivity agreements between Microsoft and OEMs, internet access
providers, and other market participants on the ground that they barred Microsoft’s rivals from
the only “cost-effective” means of distribution); see also United States v. Dentsply Int’l Inc., 399
F.3d 181, 191-93 (3d Cir. 2005) (finding that Dentsply excluded its rivals from access to dealers
by refusing to sell to distributors that carried other suppliers’ products in violation of Section 2).
142
See J.B.D.L. Corp. v. Wyeth-Ayerst Labs., 485 F.3d 880, 891 (6th Cir. 2007)
(dismissing plaintiff’s Section 2 claims for exclusive dealing).
143
See DOJ SECTION 2 REPORT, supra note 12, at 131.
26
The DOJ has proposed a safe harbor for exclusive dealing arrangements: Any
arrangement that forecloses less than thirty percent of existing customers or effective distribution
should not be illegal.144 Some lower courts have considered similar safe harbors.145
6.
Bundled Discounts
One business practice that has received increasing scrutiny as exclusionary conduct is the
bundling of rebates allegedly leading to de facto exclusive dealing.
As the Ninth Circuit
explained in 2007, “[b]undling is the practice of offering, for a single price, two or more goods
or services that could be sold separately [and a] bundled discount occurs when a firm sells a
bundle of goods or services for a lower price than the seller charges for the goods or services
purchased individually.”146
One important recent case addressing the antitrust implications of bundled discounts is
LePage’s, Inc. v. 3M.147 LePage’s contended that “3M used its monopoly power over its Scotch
tape brand to gain a competitive advantage in the private label tape portion of the transparent
tape market . . . through the use of 3M’s multi-tiered ‘bundled rebate’ structure, which offered
higher rebates when customers purchased products in a number of 3M’s different product
lines.”148 The jury found for LePage’s, and the Third Circuit, sitting en banc, affirmed.149
The standard for exclusionary conduct emerging out LePage’s is murky. The Third
Circuit’s en banc opinion recited a litany of cases in which exclusionary conduct had been
found,150 observed that bundled rebates have the potential to “foreclose portions of the market to
a potential competitor who does not manufacture an equally diverse group of products and who
144
Id. at 141.
145
See, e.g., Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of R.I., 373 F.3d
57, 68 (1st Cir. 2004) (considering thirty to forty percent safe harbor); Minn. Mining & Mfg. Co.
v. Appleton Papers Inc., 35 F. Supp. 2d 1138, 1143 (D. Minn. 1999) (same).
146
Cascade Health Solutions v. Peacehealth, 515 F.3d 883, 894 (9th Cir. 2008).
147
324 F.3d 141 (3rd Cir. 2003) (en banc).
148
Id. at 145.
149
Id. at 169.
150
Id. at 153-54.
27
therefore cannot make a comparable offer,”151 and concluded that “[t]he jury could reasonably
find that 3M used its monopoly in transparent tape, backed by its considerable catalog of
products, to squeeze out LePage’s.”152 The Court of Appeals also credited evidence “that could
have led the jury to believe that rebates and discounts to [certain key accounts] were designed to
induce them to award business to 3M to the exclusion of LePage’s.”153 The Third Circuit gave
short shrift to 3M’s proffered business justification defense, reasoning that “3M’s business
justification defense was presented to the jury, and it rejected the claim.”154 According to the
court, “[t]he jury’s verdict reflects its view that 3M’s exclusionary conduct, which made it
difficult for LePage’s to compete on the merits, had no legitimate business justification.”155
With respect to defining exclusionary conduct, the Third Circuit’s opinion in LePage’s is
notable more for what it rejected than what it accepted. There was no dispute that 3M’s prices
after applying the bundled rebates were above cost (however cost is calculated). 156 But the court
rejected 3M’s attempt to import the Brooke Group standard from predatory pricing into bundled
discounts.157 The Third Circuit also failed to follow the lead of the Southern District of New
York’s decision in Ortho Diagnostic Systems, Inc. v. Abbott Laboratories, which requires the
plaintiff to “allege and prove either that (a) the monopolist has priced below its average variable
cost or (b) the plaintiff is at least as efficient a producer of the competitive product of the
defendant, but that the defendant’s pricing makes it unprofitable for the plaintiff to continue to
produce.”158 In fact, the Third Circuit neither required LePage’s to show that it was unable to
151
Id. at 155.
152
Id. at 157.
153
Id. at 158.
154
Id. at 164.
155
Id.
156
Id. at 147 n.5.
157
Id. at 147-52.
158
920 F. Supp. 455, 469 (S.D.N.Y. 1996).
28
make offers comparable to 3M’s nor that it would have been impossible for an equally efficient
rival to compensate for 3M’s offers.159
When 3M petitioned for certiorari, the Supreme Court invited the views of the Solicitor
General. Although the Solicitor General recommended against granting certiorari, this was due
more to the state of the record in the case rather than because the Third Circuit’s analysis was
correct or even helpful.160 The Solicitor General’s brief, in fact, lamented that “the court of
appeals’ failure to identify the specific factors that made 3M’s bundled discount anticompetitive
may lead to challenges to procompetitive programs and prospectively chill the adoption of such
programs.”161 The Supreme Court denied certiorari,162 and substantial uncertainty remains about
how antitrust courts are to evaluate claims based on bundled rebates.
Further complicating the standard for exclusionary conduct in bundling cases, the Ninth
Circuit in 2007 outright rejected the Third Circuit’s standard in LePage’s. In Cascade Health
Solutions v. PeaceHealth, the Ninth Circuit considered whether bundled discounts provided to
insurers for primary, secondary, and tertiary healthcare violated Section 2 of the Sherman Act.163
Cascade and PeaceHealth operated the only two hospital systems in the Lane County, Oregon,
area. Cascade filed suit against PeaceHealth alleging that its practice of offering discounts for
tertiary care violated Sections 1 and 2 of the Sherman Act. Specifically, Cascade alleged that
PeaceHealth offered discounts for tertiary care in the range of thirty-five to forty percent to
insurers in exchange for making the PeaceHealth system their exclusive provider for primary,
See LePage’s, 324 F.3d at 175 (Greenberg, J., dissenting) (“LePage’s did not even
attempt to show that it could not compete by calculating the discount that it would have had to
provide in order to match the discounts offered by 3M through its bundled rebates, and thus its
brief does not point to evidence along such lines.”); id. at 177 (Greenberg, J., dissenting)
(discussing concession of LePage’s expert that LePage’s was less efficient than 3M).
159
See Br. for the United States as Amicus Curiae, 3M Co. v. LePage’s Inc., No. 02-1865
(S.Ct. 2004), available at http://www.usdoj.gov/atr/cases/f203900/203900.pdf.
160
161
Id. at 18.
162
542 U.S. 953 (2004).
163
515 F.3d 883 (9th Cir. 2008).
29
secondary, and tertiary care.164 On appeal, the Ninth Circuit considered whether PeaceHealth’s
use of exclusive bundled services provisions satisfied the “anticompetitive conduct” element of
its attempted monopolization claim. The Ninth Circuit rejected the Third Circuit’s standard for
cost allocation in LePage’s. Instead, the Ninth Circuit adopted a “discount attribution” test by
which the entire discount for all services is allocated to the single product for which the plaintiff
claims exclusion. “If the resulting price of the competitive produce or products is below the
defendant’s incremental cost to produce them, the trier of fact may find that the bundled discount
is exclusionary for the purpose of § 2.”165
No consensus exists among courts as to considering the legality of bundled discounts.
The DOJ SECTION 2 REPORT suggests that when a firm offers a bundled discount and some
bundle-to-bundle competition is possible (i.e., there are other firms that could offer the same
bundle of goods) courts should consider the discount to be lawful if the price of the bundle taken
as a whole is not below an appropriate measure of cost of that bundle.166 However, when
bundle-to-bundle competition is not possible, the DOJ advocates considering whether the price
of competitive goods is above cost after allocating the entire discount to the competitive
goods.167
7.
Exclusionary Conduct in Standard Setting
The law of Section 2 as applied to conduct within the standard setting context lacks
clearly defined guidance. Recent enforcement actions by the FTC have challenged deceptive
conduct and the enforcement of royalty rights relating to standards.
Unfortunately, these
enforcement actions have provided little guidance for antitrust practitioners.
The FTC has brought two enforcement actions challenging deception in the standard
setting context. In both Rambus and Unocal, the FTC alleged that participants in a standard
setting organization misled the organization regarding their ownership and control of patents
164
Id. at 891-92.
165
Id. at 906.
166
See DOJ SECTION 2 REPORT, supra note 12, at 101.
167
See id. at 101-02.
30
which ultimately were incorporated into a standard.168 The Commission’s concerns in Unocal
were resolved by consent decree.169 After proceedings, the Federal Trade Commission found
Rambus liable under Section 2 for its failure to disclose a patent and several pending patent
applications that involved specific technologies ultimately adopted in a standard.170 On appeal,
the D.C. Circuit reversed the Commission’s decision, finding the Commission failed to prove
that the standard setting organization would have adopted alternative technology if Rambus had
disclosed the patent ownership.171 The Supreme Court denied certiorari in February 2009.172
Although reversing the FTC’s finding of liability in this case, the D.C. Circuit left open the
possibility that deceptive conduct in standard setting organizations could constitute a violation of
Section 2 of the Sherman Act.
The FTC also considered whether enforcement of patent royalty rights could violate the
antitrust laws in its investigation of Negotiated Data Solutions LLC (N-Data). In this case,
National Semiconductor (National) participated in setting a standard for a technology known as
“NWay.”173 National fully disclosed its patent interests and agreed to accept a token royalty if
its patents were included in the standard, which they ultimately were.174 Years later, National
sold the relevant patents to Vertical Networks, Inc. (Vertical), who for a period of time continued
See Press Release, Fed. Trade Comm’n, FTC Finds Rambus Unlawfully Obtained
Monopoly Power (Aug. 2, 2006), at http://www.ftc.gov/opa/2006/08/rambus.shtm [hereinafter
Rambus Statement]; Statement of the Federal Trade Commission In the Matter of Union Oil
Company of California, Docket No. 9305 and In the Matter of Chevron Corporation and Unocal
Corporation, File No. 051-0125, Docket No. C-4144, Aug. 2, 2005, at
http://www.ftc.gov/os/caselist/0510125/0510125.shtm [hereinafter Unocal Statement].
168
169
See Unocal Statement, supra note 169.
170
See Rambus Statement, supra note 169.
171
See Rambus Inc. v. Fed. Trade Comm’n, 522 F.3d 456 (D.C. Cir. 2008).
172
See Certiorari - Summary Dispositions, at
http://www.supremecourtus.gov/orders/courtorders/022309zor.pdf.
173
Complaint, In the Matter of Negotiated Data Solutions, LLC, FTC No. 051 0094 (Jan.
23, 2008), at http://www.ftc.gov/os/caselist/0510094/index.shtm.
174
Id.
31
to not enforce the patent rights or seek royalties.175 After several years, however, Vertical began
enforcing the patents, seeking exorbitant licensing fees.176 Vertical then sold the patent rights to
N-Data, which continued to seek the exorbitant licensing fees. 177 The FTC entered into a
consent decree with N-Data to settle its concerns that N-Data’s conduct violated Section 5 of the
FTC Act.178 Notably, the FTC did not allege a violation of Section 2 of the Sherman Act.
8.
Exclusionary Conduct in Category Captain Arrangements
There has been much commentary, but little case law, on the widespread practice known
as “category management” and “category captaincy.” Category management is a retail technique
in which the management of the retail establishment is broken down into categories. Category
captains are suppliers, usually the largest supplier, to which the retailer looks for advice in
managing the category.179 There are generally three antitrust concerns expressed regarding
category captaincy: (1) it can be used to facilitate a price-fixing conspiracy among retailers in
violation of Section 1; (2) it can be used by a dominant supplier to drive a competitor out of the
market in violation of Section 2; and (3) it can be a form of discrimination in violation of the
Robinson-Patman Act.
Two federal cases have addressed the concept of category captaincy from the antitrust
perspective; both cases focused on Section 2. In Conwood Co., L.P. v. U.S. Tobacco Co., the
plaintiff (Conwood) alleged that the defendant (USTC) used its category captain position to
facilitate monopolization and attempted monopolization of the market in violation of Section 2
of the Sherman Act.180 Specifically, USTC “pursued strategies . . . to exclude competition in the
175
Id.
176
Id.
177
Id.
Statement of the Fed. Trade Comm’n In the Matter of Negotiated Data Solutions LLC,
File No. 0510094, Jan. 23, 2008, at http://www.ftc.gov/os/caselist/0510094/index.shtm.
178
179
Federal Trade Commission Staff, Report on the Federal Trade Commission Workshop
on Slotting Allowances and Other Marketing Practices in the Grocery Industry, at 47 (Feb.
2001), available at http://www.ftc.gov/bc/slotting/index.htm.
180
290 F.3d 768 (6th Cir. 2002), cert. denied, 537 U.S. 1148 (2003).
32
moist snuff market” including convincing retailers to have “exclusive” racks in their stores and
“routinely discard[ed] hundreds of thousands of Conwood racks.181
The jury held for the
plaintiff, returning a $350 million verdict that was trebled to over $1 billion. The Sixth Circuit
affirmed. The case did not adjudge the category management relationship at issue to be illegal,
but held that abuse of the category captain position could be a way of unfairly excluding
competitors. As the Sixth Circuit explained:
[T]here was . . . evidence . . . that [the defendant] used its position
as category manager to exclude competition by suggesting that
retailers carry fewer products, particularly competitor’s products;
by attempting to control the number of price value brands
introduced in stores; and by suggesting that stores carry its slower
moving products instead of better selling competitor products. …
[T]hat evidence was … probative of [the defendant’s] intent to
exclude competition.182
The court found USTC’s actions harmed both Conwood specifically and competition in the
moist snuff market generally in violation of Section 2.
In El Aguila Food Products Inc. v. Gruma Corp., a plaintiff (El Aguila) challenged the
defendant’s (Gruma’s) payment of money to become a category captain and its actions as a
category captain as violations of Section 1, Section 2, and the Robinson-Patman Act.183 The
court rejected all of these claims, and the Fifth Circuit affirmed.184 Although these courts did not
validate (or reject) the concept of category captaincy, the district court especially noted evidence
of the efficiencies associated with such a system.185
Neither Conwood nor El Aguila are very clear legal markers by which to judge category
captain conduct with respect to Section 2 or any other legal theory. This issue will continue to
be worked out in future cases.
181
Id. at 775, 778.
182
Id. at 785-86.
183
301 F. Supp. 2d 612 (S.D. Tex. 2003).
184
131 Fed. App’x. 450 (5th Cir. 2005).
185
301 F. Supp. 2d at 623-24.
33
V.
Conclusion: More Guidance Is Needed
Despite laudable efforts by enforcement agencies in the United States, the application of
Section 2 of the Sherman Act to single-firm conduct in the United States remains confused. In
light of the agencies’ recognition that “[c] ompetition and consumers are best served if section 2
standards are sound, clear, objective, effective, and administrable,”186 the agencies should
continue their efforts to provide transparency and guidance to antitrust practitioners and their
clients in this area of the law.
186
DOJ SECTION 2 REPORT, supra note 12, at vii; see Deborah Platt Majoras, Chairman,
Federal Trade Commission, Remarks, The Consumer Reigns: Using Section 2 to Ensure a
“Competitive Kingdom”, June 20, 2006, available at
http://www.ftc.gov/os/sectiontwohearings/index.shtm.
34