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Legal doctrine, economic screens and other distortions in antitrust agency decisions

Roy Hoffinger, Concurrences Journal, Art. N° 70582, N°4 2014

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1. At a recent dinner sponsored by Concurrences Journal [1], Dr. Howard Shelanski, formerly Director of the Bureau of Economics at the FTC and Chief Economist of the FCC, and currently Administrator of the Office of Information and Regulatory Affairs, gave a short but thoughtful talk about the potential for the application of “legal doctrine” and “economic screens” to produce outcomes inconsistent with sound antitrust policy [2].

2. Dr. Shelanski presented as an illustration the differing rules applied by different antitrust agencies to judge the propriety of unilateral “loyalty rebates”—that is, a seller’s offer to charge lower prices on the condition that the buyer purchase from the seller a specified percentage of a needed input (e.g., a CPU for a laptop computer). European regulators, Dr. Shelanski noted, apply a “legal doctrine” that deems an offer of “loyalty rebates” by a dominant firm essentially per se illegal, notwithstanding that many economists (and courts) have recognized that loyalty rebates may be pro-competitive (i.e., “output-enhancing”). Thus, mechanical adherence to this “legal doctrine” will predictably generate many “false positives” (i.e., over-enforcement), chilling efficient price competition. On the flip side, some U.S. courts have held that so long as the seller’s net (i.e., post-rebate) price exceeds its costs, then loyalty rebates are conclusively deemed lawful. But Dr. Shelanski noted that number of economists have argued that in some settings even “loyalty rebates” that do not result in below-cost pricing can be anticompetitive, and that mechanical use of a price/cost screen may therefore result in “false negatives” (i.e., under-enforcement).

3. Dr. Shelanski’s proposed solution to these problems of over- and under-enforcement was straightforward: reduced reliance by enforcers and courts on fixed legal doctrines and economic screens. Instead, the “rule” would simply be that loyalty rebates are violations if and when they are anticompetitive, and agencies and courts would—assisted by economists—conduct fact-specific analyses in each case.

4. Without for a moment doubting the reality of the under- and over-enforcement that Dr. Shelanski described, I believe that his prescription would be a mistake. The tension and trade-off he has identified —between clear but inflexible law on the one hand, and flexible but less predictable and perhaps more arbitrary law on the other—is a tension generic to law and legal systems, and well-developed legal systems invariably settle on some compromise between the two. I believe that, in the case of modern competition law, a substantial shift away from clear rules towards increased discretion and flexibility, in the hope of achieving greater economic accuracy on a case-by-case basis, would in fact be seriously inefficient and harmful to consumers in addition to businesses. This is so for one reason that is generic to commercial law, and two reasons that are particular to the contemporary antitrust enforcement environment.

5. First, though perhaps not readily apparent to those in the public sector relative to others who have spent their careers in the private sector, cases that come under investigation or litigation are just the small tip of a very large iceberg. Companies seek guidance about, and attempt to follow, the law on a daily basis, and the vast majority of such questions are resolved by legal advice, not by litigation or enforcement. The law creates efficiencies or inefficiencies and serves or disserves the public interest, as it impacts (or not) each one of these innumerable commercial decisions, not only as it impacts the investigations or litigations that are visible to the regulator. The “invisible resolutions” which never become cases or investigations numerically swamp the “visible resolutions”, increased inefficiency in the “invisible resolutions” setting resulting from abandonment of clear legal doctrines and economic screens could likewise swamp any incremental efficiency that one might hope for from a more fact-specific approach to adjudicating the “visible resolutions.”

6. In the advice context, simplicity and clarity deliver important value. Neither company nor counsel can retain economic consultants and do, for each pricing decision, the type of exhaustive economic analysis that Dr. Shelanski is calling for, and even if they could, the likelihood that they come to the same conclusion as other counsel and consultants is uncertain. Yet they must make a decision. If there are no clear guidelines, the legal advisor can say little more than “Who knows?” in response to each fact-specific question. In this environment of uncertainty, some companies will likely err on the side of aggression, creating more anticompetitive pricing requiring more expensive enforcement actions or litigations. Other companies will err on the side of caution, foregoing pro-competitive price competition which would have benefited consumers. And market leaders will from time to time be scorched by fines and penalties that they simply could not reasonably have anticipated—an unavoidable “cost of doing business” that will be passed through to the consumer. For this reason, the United States Supreme Court has “repeatedly emphasized the importance of clear rules in antitrust law.” Pac. Bell Tel. Co. v. Linkline Communs., Inc., 555 U.S. 438, 452 (2009); id. at 453 (“antitrust rules must be clear enough for lawyers to explain them to clients”). Even conclusive evidence that the current balance between rules and case-specific discretion leads to inefficient results in some cases (which I readily concede) tells us little or nothing as to whether that balance is inefficient for society on the whole.

7. Some might argue that we simply have too little experience and knowledge at this point to select even roughly efficient legal doctrines or economic screens, and that our best hope is that knowledge and experience gained by antitrust agencies and courts from a period of flexible and fact-specific pursuit of pricing efficiency will in due course evolve useful guidance and structure for future decisions, whether by businesses or enforcers. But it is precisely from an evolutionary process across the 130 year history of antitrust law that existing legal doctrines and economic screens have developed. The next decade or two decades may deliver incremental increases in our “data set” and our understanding, but there is no reason to hope that they will provide radically improved insight. We cannot wait, but instead must work with what we have.

8. Quite apart from the general efficiency problems created by uncertainty, a shift from “rules” to “discretion” will not be outcome-neutral, but instead is certain to substantially increase false positives, for two separate reasons.

9. First, antitrust agencies in all important jurisdictions face systematic biases towards finding violations. Most fundamentally, when any enforcement agency rules against a respondent, the agency receives great acclaim and monetary rewards in the form of fines that can be used to justify maintaining or increasing the agency’s budget and/or authority. By contrast, if the agency does not initiate or drops an investigation without a finding of wrongdoing, the agency receives nothing other than criticism and questions from other branches of its government and its constituency about how it has chosen to utilize its resources. To point to these incentives is not at all to question the good faith of enforcement officials; those who concern themselves professionally with economics and incentives will not deny that incentives have their effect on public servants as well. And indeed, the quick and strongly worded press releases by agencies touting the fines they collect, and their common use of fine data as a metric of their success and worth, evinces the important and pervasive influence of these incentives within enforcement organizations.

10. Second, and even more troublingly, it is beyond question that new entrants into the game of competition law enforcement, such as China and India, are using competition law today as an instrument of local industrial policy, wielded to advantage local favorites at the expense of more efficient foreign competitors, even though this is to the disadvantage of their own consumers. Indeed, many antitrust lawyers with experience in multiple jurisdictions understand that industrial policy in general and protectionism in particular are often the key drivers of antitrust decisions by political agencies worldwide. Indeed, some practitioners find that the facts most relevant to assessing risk in antitrust proceedings in certain countries are the jurisdiction of the agency, the respondent, and the respondent’s competitors and customers. Against this background, clear legal and economic doctrines are the last line of defense against the infection of antitrust decisions by industrial policy considerations, while increased discretion and a supposedly more “fact based” inquiry will almost invariably undermine this last defense and work to their disadvantage. As a result, a change to a more “flexible” approach in the U.S. or the EU, even if it results in more precisely efficient results in a few identifiable proceedings, will open the door even further to the influence of industrial policy in antitrust proceedings elsewhere.

11. Needless to say, if society truly desired outcomes in antitrust proceedings to reflect the application of sound antitrust principle to a complete and accurate record, it would adopt measures to prevent the distortions of such outcomes by industrial policy and anti-respondent bias. A large first step would be to shift to courts the adjudication function from agencies that function simultaneously as investigator, prosecutor, judge and jury, thereby eliminating the bias created by the fine system. Judicial review of agency action under the current system is not an adequate safeguard, because appeals courts in some jurisdictions are not sufficiently independent from the agency or those directing the agency’s actions, and because appeals courts in other jurisdictions are required to apply a highly deferential standard of review.

12. Absent such measures, none of which are on the horizon, abandoning economic screens in favor of case-by-case decisions, even if informed by the theorizing of economists, is far more likely to increase the potential for outcomes that ultimately harm competition and consumers, in addition to denying to businesses what little useful guidance exists today about how to stay on the right side of the law without refraining from legitimate competition, contrary to the good intentions of Dr. Shelanski and others. Instead, we should continue the “common law” process of refinement and improvement that has served us well. Antitrust understanding and doctrine have come a very long way over the last 50 years, through an incremental process. If further theoretical debates lead to a consensus that an “above cost” economic screen will often result in “false negatives” permitting anti-competitive pricing, then courts and regulators should—and there is no reason to doubt that they can—develop more precise, but still clear, rules of thumb. I believe that both experienced practitioners and experienced enforcement officials will agree that the developed body of antitrust law and doctrine is remarkably sophisticated and effective. They will also agree that it is not perfect. This should lead us to call for continual improvement, but not for throwing out the hard-won benefits of the clarity that has developed over recent decades.

(This article reflects the author’s personal views, which may differ from those of his current or former clients.)

Footnotes

[1New York, September 11, 2014. See : http://www.concurrences.com/Photos/Dinner-in-honor-of-Howard/

[2On screens, see W. E. Kovacic, L. Idot, C. Fonteijn, Detection of anticompetitive practices: Should existing tools be revised or new tools introduced? Leniency, market surveys, financial reward... (New Frontiers of Antitrust, 21 février 2014, Paris), Concurrences Journal N° 2-2014, www.concurrences.com

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