Newly installed Assistant Attorney General for Antitrust, Christine Varney, announced last month in her first public remarks as chief antitrust enforcer that the Antitrust Division is reversing the prior administration's policy with respect to Sherman Act Section 2 enforcement. In September 2008, after two years of public hearings conducted with the Federal Trade Commission, the Bush administration Department of Justice Antitrust Division issued a policy statement concerning single firm conduct under Section 2 of the Sherman Act that provided an analysis of the Division's views and enforcement intentions at that time. Section 2 prohibits, among other things, monopolization and attempts to monopolize, including exclusionary and predatory practices by companies in positions of market power. The report was not joined by the FTC, and was generally understood to signal a reduction in Section 2 enforcement activity by the Antitrust Division. FTC commissioners Harbour, Leibowitz and Rosch issued a statement on the issuance of the report that was highly critical and expressed the concern that views expressed in it, if adopted by the courts, would radically weaken Section 2 enforcement.
After assessing the state of the economy and competition enforcement, Varney observed that under the prior policy of "inadequate antitrust oversight" with respect to dominant firm conduct, markets have failed to self-police, and that as a result, we now see numerous markets distorted. Varney further said that "vigorous antitrust enforcement must play a significant role in the government's response to economic crises to ensure that markets remain competitive." Specifically with respect to Section 2 enforcement, Varney said that vigorous enforcement of Section 2 of the Sherman Act will be part of the Division's contribution to the government's multifaceted response to the current market conditions and stressed the importance of making the Division's position known by courts, practitioners and the business community.
This change in policy counsels all businesses, but especially those with significant market positions, to take a fresh look at any practices that could be construed to be exclusionary or predatory, such as below-cost pricing, bundling, exclusive licensing arrangements, exclusive distribution practices, or refusals to deal.
In announcing the Division's withdrawal of the September 2008 report, Varney said that she does not share the views espoused in the report that called for "skepticism regarding the ability of antitrust enforcers - as well as antitrust courts - to distinguish between anticompetitive acts and lawful conduct." Varney believes rather that "antitrust enforcers are able to separate the wheat from the chaff in identifying exclusionary and predatory acts." Varney also said that the report and prior policy went too far in considering efficiency justifications for exclusionary and predatory acts and that such practices result in harm to consumers through higher prices, reduced product variety, and slower innovation.
Unequivocally, the Assistant Attorney General for Antitrust said: "For these reasons, I hereby withdraw the Section 2 Report by the Department of Justice. Thus, effective today, May 11, 2009, the Section 2 Report no longer represents the policy of the Department of Justice with regard to antitrust enforcement under Section 2 of the Sherman Act. The Report and its conclusions should not be used as guidance by courts, antitrust practitioners, and the business community."
Varney went on to say that "the Division will go 'back to the basics' and evaluate single-firm conduct against the tried and true standards that set forth clear limitations on how monopoly firms are permitted to behave," and that the jurisprudence of leading Section 2 cases such as Lorain Journal v. United States , Aspen Skiing Co. v. Aspen Highlands Skiing Corp. , and United States v. Microsoft , will form the basis of Division policy towards Section 2 enforcement in the new administration. In response to an inquiry suggesting that the new policy may reach beyond current jurisprudence, specifically, Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP , and Pacific Bell Telephone Co. v. linkLine Communications, Inc., Varney added that the new policy is not inconsistent with those more recent Supreme Court cases.
The Supreme Court And Section 2
In Lorain Journal and Aspen Skiing , the Supreme Court held conduct to violate Section 2 of the Sherman Act where a firm with significant market share takes affirmative steps to exclude smaller competitors from the market for its products. In the Microsoft case the DC Circuit similarly held that affirmative steps to exclude rivals, when taken by a firm with a significant market position, can lead to a Sherman Act Section 2 violation.
In Lorain Journal, decided in 1951, the publisher of a local newspaper was for many years the only local business disseminating news and advertising in Lorain, Ohio. When a small radio station was established in a nearby community - and in an effort to stamp out the radio station as a competitor and regain its monopoly over the dissemination of advertising in Lorain - the newspaper refused to place ads for anyone that also patronized the radio station. The Supreme Court held that the newspaper's exclusionary conduct at issue gave rise to a monopolization claim and that the right to refuse to deal with other firms is not unqualified.
The Aspen Skiing case, decided in 1985, involved a claim that a ski resort operator had monopolized the market for downhill skiing services in Aspen, Colorado in violation of § 2 of the Sherman Act by, among other things, terminating a long-standing program whereby visitors to any of Aspen's separately owned ski resorts could purchase passes for all the area facilities - the "All-Aspen" ticket. In holding that the conduct at issue gave rise to a monopolization claim, the Supreme Court, relying on Lorain Journal , noted that despite the general rule espoused in U.S. v. Colgate in 1911 that there is no general duty to deal with competitors or to engage in a joint marketing program with a competitor, the right to refuse to deal with other firms, like most rights, is not unqualified.
In both cases, the Supreme Court held that conduct for which there is no valid business reason and that is intended to reduce competition in the market over the long run by harming a smaller competitor can fairly be characterized as exclusionary and represents an exception to the general rule that there is no duty to deal with or aid competitors.
The 2001 Microsoft case reached a similar result. The Court of Appeals for the DC Circuit affirmed the District Court's finding that Microsoft illegally maintained its operating system monopoly in violation of Section 2. The Court upheld the conclusion that, in response to competitive threats to its operating system monopoly, Microsoft engaged in a variety of restrictive practices, including integrating its Internet Explorer web browser into the Windows operating system in a non-removable way while excluding rival web browsers from the Windows desktop, engaging in restrictive and exclusionary dealings with Internet Service Providers and certain software vendors, and attempting to mislead and threaten certain software developers to subvert technologies that threatened the company's operating system monopoly.
The more recent Trinko and linkLine decisions, however, arguably lessen the scope of conduct actionable under Section 2. In the Trinko decision, the Supreme Court held in 2004 that the breach of a local exchange carrier's duty to share its network with competitors under the Telecommunications Act of 1996 does not give rise to an exception from the general rule that there is no duty to aid competitors, and thus could not be the basis for a claim under Section 2 of the Sherman Act. Though in the intervening years, some observers noted that the Trinko decision had muddied the waters for monopolization and attempted monopolization cases and that some lower court opinions applying Trinko appeared to be expanding Section 2 liability in this area. If Trinko did not give lower courts a sufficiently straightforward rule, perhaps a clearer path forward is found in the decision issued by the Supreme Court in the link-Line case earlier this year, which more resolutely restricts the reach of Section 2 of the Sherman Act. Broadband provider of internet service to consumers, linkLine Communications, alleged that its vertically integrated competitor and supplier, Pacific Bell, unlawfully monopolized the market for link-Line's services by imposing a "price-squeeze" on the company: raising the wholesale price while lowering the retail price. The Supreme Court dispensed with the claim and refused to recognize price-squeeze as a viable antitrust theory, at least in a case where there is no predatory pricing at the retail level and no duty to deal at the wholesale level. Essentially, the Supreme Court held that a firm is not required to price on terms and conditions favorable to competitors.
Does The New Policy Have Legs To Stand On?
Although Varney attempts to distinguish Trinko and linkLine based upon the fact that those cases arose in regulated industries, how the Division will square its new policy with linkLine has become a matter of great interest. It remains to be seen how the courts will respond to the Division's call for increasing the scope of actionable conduct under Section 2. For more than a decade, the Supreme Court's pro-business atmosphere has led to a steady chipping away at the type of conduct that is actionable under antitrust law. Longstanding edifices of antitrust law have been eroded in favor of defendants in areas such as maximum resale pricing, minimum resale pricing, price-squeeze and antitrust pleading standards, to name a few.
There is little doubt that the Division will be opening a host of new investigations in the coming months and years. Still, while it is too early to tell how willing the agency will be to test its theories in court, and how well the new policy will withstand Supreme Court review, it should be noted that lower courts have traditionally given a high degree of deference to antitrust enforcers. At the very least, we should expect the Division to be very aggressive in trying to make new case law of outlier conduct. Moreover, we should expect what constitutes outlier conduct to be a moving target as the new policy takes shape.
To be sure, even getting to litigation would require a strong commitment and a great deal of expense and perseverance. Going head-to-head with the government is not for the faint of heart. Consider the long, costly and often unsuccessful battles of IBM, AT&T and Microsoft, and more recently Rambus, Intel and Whole Foods. However, the government does not always win, and the government is not always right. Last month the FTC announced that it had formally dismissed its complaint in the seven-year-old Rambus matter following last year's upset at the DC Circuit and the Supreme Court's denial of certiorari in February. Many will be watching to see what the next great antitrust battle will be.
Antitrust lawyers and the business community will be paying close attention to the Division's implementation of these new policy initiatives and their impact on business practices. Lawyers will also be looking for the best ways for their clients to garner or avoid the attention of antitrust enforcers during this impending uptick in enforcement, depending on which side of the monopoly fence they sit on, and, ultimately, to what extent successful enforcement results in changes to the law.
Alicia J. Batts is a Partner in the antitrust practice group of Proskauer Rose LLP resident in the firm's Washington, DC office. John R. Ingrassia is an Associate in the firm's antitrust practice group resident in the Washington, DC office. The authors regularly represent companies before the Department of Justice and the Federal Trade Commission and in active investigations before the federal antitrust authorities.