• ANTITRUST PUBLICATIONS AND OTHER MATERIALS BY RONALD W. dAVIS

EXCLUSIONARY PRACTICES

Among the most controversial aspects of the European Union's antitrust policy is its expansive view of "abuse of dominant position" (roughly equivalent to "monopolization" in U.S. terms). A December, 2005, "Discussion Paper" issued by the EU authorities endeavored, with qualified success, to describe how the EU law of dominance might be restated and updated. In the Spring 2006 issue of Antitrust magazine Jennifer Driscoll and I described these developments. Our article is entitled The Urge to Converge—the New EU Discussion Paper on Abuse of a Dominant Position. In addition, we both participated in an "Antitrust Conversation" on the meaning and significance of the Discussion Paper.

In the fall of 2006, I put finger to computer to address an issue that is arguably the most vexed question in contemporary antitrust law. The article is entitled Reverse Payment Patent Settlements: A View into the Abyss and a Modest Proposal. (It is quoted in a pending petition for certiorari, albeit with the wrong name and wrong publication title!)

Previous topics relating to unilateral business practices about which I have written include

pricing with strings attached - low prices, rebates, or discounts contingent on conditions such as purchase of a minimum proportion of requirements (within a given time period) or the like, and

slotting allowances - payments to grocery and other retailers in exchange for shelf space,

maximum vertical price fixing,

unilateral refusal to license intellectual property, and

exclusive dealing, enforced by threats of refusal to deal, in order to block competitors from effective distribution channels.

Pricing with Strings Attached

Materials

Discussion

Assume a monopoly - or maybe a single firm with monopoly in multiple relevant markets for products sold the the same types of customers. Assume the monopolist always prices above any conceivable measure of cost. But assume the monopolist offers bundled pricing, in which the customer receives a better unit price if it buys - to pick one of many, many permutations - at least 80 percent of its requirements of X and 70 percent of its requirements of Y from the seller.

Similar issues can arise without bundling, that is, in respect of single product pricing, where the seller offers better unit prices in exchange for higher and higher purchase volumes or percentages of requirements.

Pricing programs such as these may be accompanied by formal exclusive dealing arrangements. If so, they are subject to Clayton Act Section 3 as well as Sherman Act Section 2. Even without a formal contractual promise of exclusivity, there may be a tacit understanding that the buyer receiving the good price will buy all or most of its needs from the seller. Often the facts in that regard are murky.

My 2000 Antitrust magazine article discussed the current state of play at that time. In a major subsequent development, an en banc decision of the Third Circuit in 2003, the subject of my client memo, took an extreme pro-plaintiff position on these matters. I discussed the en banc decision in a November, 2004, article in The Antitrust Source.

The decision is objectionable in many respects, including

its contempt for, and Pickwickian interpretation of, the Supreme Court's decision in Brooke Group,

its failure to observe, or attribute any significance to, the absence of past or foreseeable consumer injury - the plaintiff lost profits as a result of the challenged conduct, but it was still in business and did not claim to fear exit from the market, and

the fact that one is unable to derive the actual holding of the case.

The closest I can come to a holding is that if a monopolist does anything at all interesting with price and thereby wins any amount of sales away from a smaller competitor, every dollar of profit lost as a result of the complex pricing is the basis for treble damages.

3M petitioned for cert. In October 2003 the Court asked for the views of the Solicitor General. In a speech delivered shortly thereafter, Deborah Majoras, then a senior Antitrust Division official who has since returned to private practice, observed of the Third Circuit decision that the "court did not . . . articulate a clear and administrable principle for distinguishing lawful from unlawful rebates." That means no one knows what the heck the holding is.

Ultimately, the Antitrust Division, joined by the FTC, urged the Supreme Court not to take certiorari, on the ground that issue of conditional rebates needed more time to percolate. (Just below the surface was the concern that the positions advocated by each side in LePage's were seriously flawed.) The Supreme Court denied cert., as requested, and there the matter sits.

The FTC and Antitrust Division have announced joint hearings on standards for single firm conduct, to be held in spring, 2006. The announcement states, in part,

Participants will critically examine and discuss the standards used in recent cases, including DOJ’s enforcement actions against Microsoft, American Airlines, and Dentsply, and FTC cases against Intel, Unocal, and Rambus. Private actions, such as Trinko and LePage’s, also will be examined. Hearing participants also will examine what economic learning contributes to the analysis with respect to exclusionary or predatory conduct.

Slotting Allowances

Materials

Discussion

Slotting allowances - payments to retailers in exchange for shelf space - are an old issue which has assumed increased salience in recent years, with the general trend in our economy toward the rise of powerful retailers and the concommittant growth of their power on the buying side of the market. A spate of complaints, mainly by smaller food product manufacturers and sellers aggrieved by the cost or difficulty involved in finding shelf space, led to an FTC workshop and report and to my article. The latter aimed to sort out the surprisingly complex issues raised by application of the Sherman and Robinson-Patman Acts to slotting allowances.

No enforcement action has resulted from the FTC's look into the question. A November 2003 FTC staff study provides detailed information on slotting allowances in the food industry.

 

Maximum Vertical Price Fixing

Materials

Discussion

The Supreme Court's 1997 decision in Khan overruled prior case law holding that it was per se illegal for a supplier to agree with a purchaser on the maximum resale price that the purchaser could charge - i.e., to agree to an upward limit on prices or margins. Henceforth, such agreements are to be subject to the rule of reason. Minimum resale price maintenance agreements remain per se unlawful.

My article pondered the imponderable question when, if ever, maximum RPM might be unlawful under the rule of reason. It also considered the practical application, in several business scenarios, of the newfound pricing flexibility afforded by the Khan decision.

Several articles on Khan, more comprehensive than mine, appeared in the Symposium on Vertical Resale Pricing in Antitrust Law Journal, vol. 66, no. 3 (1998). See also the following (among many other sources):

Robert T. Joseph, Vertical Maximum Price Fixing After State Oil Company v. Khan, Franchise Law Journal (Winter 1998),

Roger D. Blair & John E. Lapotka, The Albrecht Rule After Khan: Death Becomes Her, 74 Notre Dame L. Rev. 123 (1998), and

Norman W. Hawker, Maximum Resale Price Maintenance Under the Rule of Reason, 51 Baylor L. Rev. 441 (1999)

 

Unilateral Refusal to License Intellectual Property

Materials

Discussion

The article analyzed the many issues raised by the FTC's proceeding against Intel - and its 1999 consent agreement in that matter. To oversimplify, the question raised was the legality of a policy of unilateral refusal to license intellectual property in order to achieve some business objective not directly related to recovering one's investment in the IP in question. For a fuller explanation, read the article.

In a controversial ruling in a private case arising out of the same facts that brought an FTC challenge, the Federal Circuit held that Intel's conduct was pure as the driven snow. Intergraph v. Intel, 195 F.3d 1346 (Fed. Cir. 1999)

Other discussions of interest include Mark R. Patterson, When is Property Intellectual? The Leveraging Problem, S. Cal. L. Rev. 1137 (2000).

Unilateral refusal to license as a Sherman Act Section 2 violation remains an unsettled, controversial, and much discussed topic. It involves a subset of issues relating to unilateral refusal to deal generally, and the continued validity, if any, of the essential facilities doctrine. The Supreme Court's 2004 Trinko decision, while significant, has probably not advanced the ball very far on these issues.

 

Exclusive Dealing and Refusal to Deal

Materials

Discussion

In my view, and that of my coauthor, Richard Wolfram, even though the Third Circuit ruled against the defendant in Dentsply, the tone and substance of its discussion of the law of monopolization marked a return to sanity after the excesses of LePage's.

In our opinion, the key to the case was how one viewed the facts. As the appellate court saw the facts, Dentsply had intentionally locked its competitors out of key dealers - necessary for effective competition - by threats to cut off supply if they dealt with competitors. Both the district court (which found for the defendant) and the Third Circuit panel (which found for the Justice Department) agreed there was no efficiency justification. They disagreed about whether the competitors' difficulties were largely their own fault, because they might have found other good ways to get their products to market, working around Dentsply's exclusionary efforts. The appellate court that such a workaround was not practical. On that view of the facts, the Antitrust Division's claim of violation of Sherman Act Section 2 was a slam dunk.

Our article considers some of the more subtle issues lurking in the case, such as the interplay between Sherman 2 and the law of exclusive dealing under Section 3 of the Clayton Act and Section 1 of the Sherman Act. We also reflect on what would have happened if Dentsply could have shown a reasonable efficiency justification for its conduct.