Single Firm Conduct: Same Conduct, Different Views

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Single Firm Conduct Same Conduct, Different Views

• John Briggs
• Trevor Soames
• Ronald Stern
• Prof. Bruce Kobayashi
• Scott Sher
• James Kress

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Single Firm Conduct Same Conduct, Different Views

• Emil Paulis
• Director, DG Competition
• European Commission
• Brussels, Belgium

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Single Firm Conduct Same Conduct, Different Views

• Trevor Soames
• Managing Partner (Brussels)
• Howrey LLP

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Multiple Enforcers
 
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Single Firm Conduct Same Conduct, Different Views

• Ronald A. Stern
• Vice President and Senior Antitrust Counsel
• General Electric Company
• Washington, DC

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Single Firm Conduct Same Conduct, Different Views

• Dr. Bruce A. Kobayashi
• Assoc. Dean of Academic Affairs
• George Mason University
• School of Law

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Single Firm Conduct Same Conduct, Different Views

• Scot Sher
• Partner
• Wilson Sonsini Goodrich Rosati
• Reston, Virginia

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Fundamental Differences Section 2 (US) Article
82 (EU)

• Policy Differences
• US More concerned about errors that will
  stifle competition (false negatives)
• EU More concerned about errors that will lead
  to under-enforcement (false positives)
• Proof of Harm
• US Plaintiff must demonstrate ACTUAL harm to
  competition
• EU Plaintiff needs to show only POTENTIAL harm
  to competition
• Evidentiary Standards
• US Ratchets up the analysis quantum of proof
  is high
• EU Lower evidentiary standards intent evidence
  is relevant

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Exclusive Dealing

• US
• Trending away from simple structural
  presumptions.
• Market share and duration less important
• Move to analysis of effect on market (Dentsply
  Gilbarco Microsoft)
• EU
• Ostensibly, per se illegal for dominant firms to
  engage in exclusive dealing arrangements
• British Airways It is not necessary to
  demonstrate that the abuse in question had a
  concrete effect on the markets. It is sufficient
  . . . To demonstrate that the abusive conduct . .
  . TENDS to restrict competition . . . Or . . . IS
  CAPABLE of doing so.
• Major differentiation Burdens and standards.

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Is the picture so clear in the US? NOT REALLY

• There is quite a bit of confusion in the U.S. as
  well as to what constitutes unlawful exclusive
  dealing
• Are one year exclusives presumptively lawful?
  (Gilbarco Dentsply)
• Is it necessary to demonstrate that the
  foreclosed competitors are efficient? (Dentsply
  LePages)
• Do you need to demonstrate complete foreclosure
  to END USERS, or simply foreclosure of
  DISTRIBUTION?
• Role of Business Justifications

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Is the picture so clear in the U.S., continued

• LePages
• In addition to exclusive dealing, you have the
  question of bundled rebating
• Finds above-cost bundled pricing illegal
• Questions
• efficiency of competitors?
• LePages had 67 market share POST scheme.
• Counter-Concerns If stores perceive they need
  scotch tape from 3M, why not buy both from 3M,
  lowering transaction costs and getting full
  bundle. Is this legit competition?

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TyingIs there convergence?

• Whats a Tie?
• Conditioning the sale of one product (tying
  product) on the purchase of a less favored
  product (tied product)
• US
• Traditional Rule If a party has market power,
  tying is per se illegal (Jefferson Parrish)
• EU
• Traditional Rule If a party has market power,
  tying is per se illegal (Tetra Pak).

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Tying, Continued

• And then there was Microsoft
• US Rule of Reason for Technology Ties
• EU Rule of Reason for Technology Ties
• BUT
• The language in the Commissions decision in
  Microsoft suggests a far higher burden for
  defendants
• E.g., Potential to foreclose competition
  serious risk of foreclosing competition.
• In the United States, the balancing test requires
  a plaintiff to demonstrate ACTUAL harm to
  competition

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Again, is the law so clear in the U.S.?NOT REALLY

• Even though a modified per se approach still
  governs, business justifications can save the
  day.
• Jerrold Electronics new product goodwill
• In re Data General pass through cost
  efficiencies
• Beware Independent Ink

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Does the Sherman Act, Section 2 Apply to the New
Economy?

• The basic principles are the same. The Sherman
  Act was, as many have said, you know, a charter
  of economic freedom, and that those basic
  principles do have to be applied regardless of
  changes in the economics of the underlying
  businesses or the structure of the markets.
• ....
• My basic instinct, and it's nothing more than
  that, is that the principles are there and the
  issue is simply application in a new context.

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EU and US Perspectives on Strategic Pricing By
Dominant Firms

• James G. Kress
• Partner
• Howrey LLP

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Significant Disclaimers

• No claim that U.S. antitrust law and policy
  regarding the treatment of dominant firms is
• Superior
• Transparent
• Applied Consistently
• Static

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A Question of Perspective

• The successful competitor having been urged to
  compete, must not be turned upon when he wins
• Dominant firm not required to pull its
  competitive punches or hold pricing umbrella
  over heads of its rivals
• Even the largest firms may engage in hard
  competition, knowing that this will enlarge their
  market shares

• Dominant firm bears special responsibility not
  to impair competition
• Although dominant firm entitled to take
  reasonable steps to protect its commercial
  interest, it does not countenance acts whose
  actual purpose is to strengthen that . .
  .position

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A Question of Perspective

• Firms intend to do all the business they can, to
  crush their rivals if they can to penalize this
  intent is to penalize competition itself.
• Depriving the leading firm in an industry of the
  incentive to exert its best efforts . . . may
  compel the very sloth antitrust laws intended
  to prevent.

• Competitive effects not required because
  establishing the anticompetitive object and
  anticompetitive effect are one and the same
  thing."
• Condemning fidelity-building rebate system
  that tends to prevent customers from obtaining
  supplies from competitors without showing any
  concrete effect on the markets concerned

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Michelin II

• 2003 Decision of European CFI
• Market Truck and Bus tires in France
• Michelin is dominant in that market
• Challenged Conduct
• Quantity rebates based on sliding scale
  applicable to all purchasers
• Not based on customers historical performance or
  reaching certain targets
• Not applied in discriminatory manner
• Rebates had significant variation in levels,
  applied to all sales in one year period

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Michelin II Rebates

• Loyalty rebates those that require customer to
  obtain stock exclusively or almost exclusively
  from dominant firm violate Art. 82.
• Market share rebates
• Quantity rebates based on individualized targets
• Quantity rebates based solely on volume
  generally not considered to foreclose
  competition, UNLESS . . .
• rules for granting the rebate reveal that the
  system is not . . . economically justified but .
  . . to prevent customers from obtaining supplies
  from competitors.

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Michelin II Holding

• Program was loyalty-inducing in that quantity
  rebate system tended to prevent dealers from
  being able to select competitors offerings
  freely at any time . . .without suffering any
  appreciable economic disadvantage.
• Is this per se illegality?
• For the purposes of applying Art. 82,
  establishing the anti-competitive object and
  anti-competitive effect are one and the same
  thing. If it is shown that dominant firms
  conduct was intended to limit competition, that
  conduct will also be liable to have such an
  effect.

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Concord Boat v. Brunswick

• Market Stern-drive engines for boats
• Brunswick at all times dominant
• gt 75 market share when conduct commenced
• Challenged conduct
• Vertical acquisitions of boat companies
• 3 rebate programs with boat builders
• Market share rebates (1-3)
• Rebates for longer term market share commitments
  (1-2)
• Volume discounts (up to 5)

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Concord Boat

• Plaintiffs argued that structured rebates
  amounted to golden handcuffs, and a tax in
  the form of foregone rebates imposed on
  purchasers for dealing with rivals
• Court applied classic Brooke Group predatory
  pricing law to structured rebate claims.
• Pricing below Average Variable Cost
• Likelihood of Recoupment

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Concord Boat

• Emphasized need for great caution when dealing
  with claims of lower prices in any form
• low prices benefit consumers regardless of how
  those prices are set (ARCO).
• No claim that prices were below Brunswick cost
• Dealers remained free to walk away took better
  deals when offered could buy up to 40 from
  others without losing all discounts

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British Airways

• 2003 Decision of European CFI (Virgin Atlantic)
• Market UK market for air travel agency services
• BA more than 50 share
• Conduct Incentive Compensation
• Performance award based on increasing BA ticket
  sales one year to next
• Market share growth incentives with 3 agencies
• Monthly performance awards based on agent
  exceeding benchmark of monthly sales for prior
  year

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BA Theories of Abuse

• Article 82 challenge based, in part, on
  exclusionary impact on competing airlines given
  the loyalty-inducing structure of incentive plans
• Rebates linked to volumes of purchases from
  dominant firms are generally lawful, except
• where 1 the criteria and rules for granting
  that rebate show that system is not based upon an
  economically justified consideration but 2
  tends, like a fidelity rebate, to prevent
  customers from obtaining supplies from rival
  producers.

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BA Exclusionary Effects

• Effects not necessary to demonstrate that the
  abuse in question had a concrete effect on the
  markets concerned.
• Likelihood of Success the fact that the
  hoped-for result exclusion is not achieved is
  not sufficient to prevent a finding of abuse of a
  dominant position.
• Rebuttable Presumption The fact that BAs
  rivals grew and prospered during the period in
  question
• In the absence of those practices, it may
  legitimately be considered that the market shares
  of those competitors would have been able to grow
  more significantly.

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JBDL v. Wyeth-Ayerst Labs

• Market Oral Estrogen Replacement Therapy (ERT)
• Wyeth (Premarin) market share 68-75
• Significant price increases after entry by
  competitor
• Evidence of actual exclusion from some
  formularies
• Monopoly not disputed on SJ
• Conduct alleged foreclosure of rival ERT drug
  by Duramed based on (a) exclusive placement
  contracts with some PBMs (b) structured rebates
  on multiple Wyeth drugs dependent on Premarin

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Wyeth - Intent

• (1) Treated as undisputed Wyeths intent and
  desire to thwart Cenestins market share growth
  through PBM contracting practices
• (2) Undisputed evidence that a manufacturer
  desires or intends to maintain or increase its
  market share at the expense of a new competitor,
  does not by itself create a triable issue of
  whether Wyeths chosen means to achieve that
  desire violated the Sherman Act.

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Wyeth

• Initially, the Court rejects Wyeths somewhat
  simplistic argument that its lack of predatory
  pricing mandates dismissal of the Section2
  claims. Plaintiffs essential complaint is that
  Wyeths contracts rebates plus limited
  exclusivity prevented Cenestin from becoming a
  competitive threat, and thus allowed Wyeth to
  unlawfully raise its Premarin prices after
  Cenestins introduction.
• Court seeks guidance in Lepages, Concord Board,
  Dentsply, Conwood . . .

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Wyeth

• LePages Multi-tiered bundled rebates plus
  exclusivity with large retailers
• The Third Circuit decision also leaves unclear
  (at least to this Court) the precise nature of
  3Ms violation of Section 2. The verdict imposed
  a heavy penalty on 3M without producing
  consistent guidance for what is permissible price
  competition . . .
• Concord Board Strong support for application of
  Brooke Group test, without endorsing above cost
  pricing via rebates as per se lawful.
• Dentsply Distinguishable because thwarted all
  competition from dealer network where
  overwhelming majority of teeth sold.
• Conwood No such tortious conduct involved
  here.

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Wyeth Horns of a dilemma

• Thus, this Court finds itself faced with
  somewhat imprecise and certainly conflicting
  standards by which to judge Plaintiffs
  allegations of Wyeths monopolistic behavior.
  LePages obviously favors letting a jury sort it
  out, using the same imprecise, conflicting
  Section 2 standards transformed into jury
  instructions. Concord Boat, on the other hand,
  illustrates the dangerous possibility of a
  tremendous waste of time and resources of all
  involved here in permitting a jury to sort it
  out when the appellate court may well find that
  there is no jury issue here.

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Wyeth

• Holding
• Given near impossible task for jury to divine
  metaphysical differences between exclusionary
  conduct and competition on the merits when
  dealing with strategic pricing practices, and
  risks of chilling beneficial price competition,
  Court determines that Concord Boat is correct.
• Grants summary judgment

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• Conclusions