This coming Wednesday, Nov. 29, I will be testifying at the DoJ/FTC joint hearings on loyalty discounts.  A draft of my prepared remarks is here.  I will be focusing primarily on bundled discounts, the LePage’s issue about which I have written a couple of articles.  Comments would be gratefully received.

So the Supreme Court denied cert in Schering.  Playing off the World Cup theme we’ve had going, several scorecards to tally here. 

Solicitor General: 2; FTC: 0.  The SG had recommended denial of cert in a case that the FTC desperately wanted to go upstairs after the spanking they got in the 11th Circuit.  Always interesting to see one “branch” of the federal government tell the Supreme Court to deny another “branch’s” appeal.  (I use “branch” advisedly since they really should be part of the same branch of government).

Pharma:  1; Plaintiffs’ bar: 1.  You might think denial of cert represents a victory for pharma, but it just extends the uncertainty over private antitrust actions based on patent settlements and leaves in tact bad law for the pharma companies, like the Sixth Circuit’s Cardizem decision.

Consumers: 0; Defense bar: 5.  As usual, consumers get hosed at the expense of . . . . yes, defense lawyers who will continue to rack up huge legal fees defending these cases and love every minute of the current morass in the legal standard.  (As a sometime defense lawyer, I should point out that this is not the fault of the defense lawyers, just a happy consequence of being one:  if your side wins, you look like a genius; if your side loses, you get to make even more money litigating).

The Supreme Court’s decision yesterday in eBay v. Mercexchange may be of interest to competition lawyers, even though it is nominally only about patent law.  For those who missed it, the Court unanimously held that in deciding whether to issue a permanent injunction after finding patent infringement, a district court must consider the traditional four-part injunction standard (irreparable harm, adequate remedy at law, balance of interests, public interest).  The Court rejected both the approach of the district court (which seemed skeptical that injunctive relief should often be appropriate) and the Federal Circuit (which viewed injunctive relief as a presumptive entitlement).

For what seemed to be a straight-forward formal legal issue on which everyone agreed, the case drew concurring opinions by Roberts, Scalia, and Ginsburg in one opinion and Kennedy, Stevens, Souter, and Breyer in another.  For once, Thomas stood as the centrist view on the Court, announcing the legal standard to be applied in future cases and not taking sides between the Roberts and Kennedy concurrences.  What separates the Roberts branch from the Kennedy branch is whether patent cases should draw on general equitable precedents or instead keep a careful eye on the peculiarities of patent cases.  The Kennedy branch is concerned about the deleterious influence of patent trolls that have no interest in ever marketing the patented technology themselves but are just using the injunction threat as leverage to increase licensing fees.  The Roberts branch seems to be more concerned about increasing the role of courts as royalty-rate-setting bodies for patents, and therefore seems to favor a more frequent use of injunctions to force negotiations out of the courtroom. 

Overall, the case seems to be more of a “duck” than a serious resolution of the difficult and important issues raised by patent infringement cases.

While reading a CNN.com article about the Parliamentary elections in Italy, I was struck by the report that Romano Prodi has made antitrust law a major campaign issue.  According to the report, Prodi “says one of his top priorities in office would be changing the anti-trust laws Berlusconi approved.”  (By contrast, Berlusconi’s major promise appears to be refraining from sex until the election.  Berlusconi, a media magnate, is under investigation by Italian and EU competition authorities for a possible conflict of interest in approving legislation that would subsidize Italians who purchase digital television decoders.)

When was the last time that a U.S. president made antitrust law a major issue?  It’s been a while.  Thanks to the miracle of presidential speech archives on the Internet, such questions can be answered (very casually, of course) in about 10 minutes.

A search of a University of California archive of presidential speeches from 1789-2005 produces 292 hits for the word “antitrust.”  Granted, if I was being scientific about this I would search “monopolies, trusts” etc., but this is just a back-of-the-envelope.

Most of these hits are fairly inconsequential (speeches on insignificant legislation, nominating AAGs, etc.).  The last President to invoke “antitrust” in an innaugural address was William Howard Taft (author of the Addyston Pipe decision while a judge on the Sixth Circuit and author of a book about antitrust).  Taft declared that he hoped ”to be able to submit at the first regular session of the incoming Congress, in December next, definite suggestions in respect to the needed amendments to the antitrust and the interstate commerce law and the changes required in the executive departments concerned in their enforcement.”

The last president to mention antitrust in a State of the Union address was Jimmy Carter in 1979.  He said:  “We must also fight inflation by improvements and better enforcement of our antitrust laws and by reducing government obstacles to competition in the private sector. “  I guess he didn’t see Bill Baxter coming.

Following Carter, the word “antitrust” appears to be relegated to more specialized speeches and announcements.  For example, President Clinton used the word in speeches or remarks on 46 occasions, but an illustrative instance is his 1996 remarks welcoming the World Series champion Atlanta Braves, where he remarks:  “Well, the Braves proved that last year. You had great hitting, great fielding, and great pitching. Tom Glavine and Greg Maddux have won every Cy Young Award for the past 5 years. You may have an antitrust suit on your hands, even with baseball’s exemption.  [Laughter].”

And how about George W. Bush?  How interested has he been in antitrust law?  The word has appeared in his speeches a total of 3 times, most recently in 2002 when he gave a speech on corporate responsibility in New York and said:  “From the antitrust laws of the 19th century to the S&L reforms of recent times, America has tackled financial problems when they appeared.”  Very enlightening.

So I’m glad to hear that Prodi is making something of antitrust law during a national election.  If nothing more, it gives econerds like us something to discuss at cocktail parties.

During Steve Calkins’s very funny (as usual) lunchtime talk at the Spring Meeting on Wednesday, he noted derisively that the Supreme Court issued the following order on the FTC v. Schering-Plough cert petition: “The Solicitor General is invited to file a brief in this case expressing the views of the United States.” This is the case in which the Eleventh Circuit unceremoniously dumped the FTC’s deeply held views on patent settlements. That had everyone (except me) fuming at last year’s Spring Meeting. The Supreme Court’s request for the “views of the United States” seems funny to all of us, of course, because the FTC was the loser in the Eleventh Circuit and it was the FTC’s cert petition on which the Supreme Court wanted “the views of the United States.” Hadn’t “the United States” already expressed its views???

No. The FTC is not “the United States,” and let everyone annoyed by this recall that it can’t be so long as Humphrey’s Executor remains good law. Humphrey’s Executor is the 1935 case in which the Supreme Court held that the President’s power to remove commissioners of the FTC is limited to the statutorily prescribed criteria (inefficiency, neglect of duty, or malfeasance in office). The broad implication of the case is that Congress can create federal agencies that have executive power but are immune from direct Presidential control, what Justice Scalia refers to as the “headless fourth branch” of government.

If you like Humphrey’s Executor, then you can’t be upset when the Supreme Court asks for the “views of the United States” on a cert petition by the FTC. There can only be one “United States.” (I’m not sure if that’s true grammatically, but it’s true politically). If the FTC wants to speak for “the United States,” it has to be wholly accountable to the President.

I hold no illusions that my unitary executive preferences are likely to be realized any time soon. (However, this did not stop me from exploiting the fact that Bill Kovacic and I were the first two to show up at the Milton Handler Lecture dinner last fall to harangue poor Bill about the unconstitutionality of his office). Still, it’s gratifying to get the occasional moral victory, like the Supreme Court’s order in Schering.

I recently read two books that may be of interest to others in the antitrust field.

Spencer Waller’s Thurman Arnold:  A Biography (NYU 2005) traces Arnold’s assent from small town Wyoming to the pinnacles of New Deal power and an (unhappy) seat on the D.C. Circuit, followed by an anti-establishment stint as defender of civil rights during the McCarthy era (and founder of Arnold & Porter).  Antitrust practitioners may be most interested in Chapter 6, which details Arnold’s tenure as head of the Antitrust Division during the second half of the New Deal, when the Roosevelt administration turned from mandated industrial cartelization under the NIRA to rigorous criminal antitrust enforcement.  Although the trend began under the brief tenure of Arnold’s prececessor, Robert Jackson, Arnold is often credited with turning around the Antitrust Division and transforming it into a modern, effective, and aggressive enforcement agency. 

Although much of the story that Waller recounts is familiar, the tale is nicely told and brings out the complications of being an aggressive antitrust enforcer in a political administration deeply ambivalent about competition policy.  Arnold’s indictment of the carpenter’s union and its president, William Hutcheson, was a serious political miscalculation because labor was such an important component of the New Deal coalition.  Arnold was finally forced out of the DOJ after he attemped to indict the railroads (which were essential to the war effort) and political luminary Averell Harriman for price fixing.  We owe much to Arnold for taking antitrust seriously–including the lesson that competition policy always takes a back seat to direct economic management by powerful political institutions.

My second recommendation is Christopher Mason’s The Art of the Steal (Berkley 2004), which provides juicy detail on the Christie’s/Sotheby’s price-fixing scandal.  Mason, a contributor to the New York Times, received cooperation from a number of the indicted executives, particularly Al Taubman and Deede Brooks of Sotheby’s, and the story therefore emerges somewhat sympathetically to Sotheby’s.  Then again, regardless of how the story is told, it’s hard not to feel that Taubman in particular got the short end of the stick in light of the fact his counterparts at Christie’s got off without any criminal sanction, thanks to the Justice Department’s leniency program and the geographical accident that the Christie’s principals lived in England and the Sotheby’s principals in the U.S.

Art of the Steal is fun to read partly because of the prurient pleasure of peeking into the lives of really rich, arrogant people who get to deal in art.  From an antitrust perspective, what struck me the most was that (with the benefit of hindsight, of course) the public discovery of the price-fixing scheme appeared inevitable.  Inexplicably, Christie’s CEO Chris Davidge actually kept notes of his price-fixing activities and there were enough tell-tale signs to make any interested observer (and there were many) begin to wonder.  There is some empirical work suggesting that the probability that a cartel will be detected is only about 13 to 17 percent.  See Peter G. Bryant and E. Woodrow Eckhard, Price Fixing: The Probability of Getting Caught, 73 Rev Econ & Stat 531 (1991).  In light of the Christie’s/Sotheby’s debacle, it’s hard to imagine how anyone would ever get away with it.

Beyond the obvious hilarity of a case featuring a party with “Ink, Inc.” in its name, this decision turned out to be interesting on a number of levels, both for what it said and what it didn’t say. Having read the oral argument transcript and some of the amicus briefs, I was surprised both at the unanimity of the decision and its doctrinalist tone — economics seemed to take a back seat to an explanation of the orgin of the presumption of market power in early Supreme Court decisions. I would have taken it as an article of faith that no one cares any more about why pre-Chicago antitrust decisions arrived at the conclusions they did, the question being whether there is any warrant in Chicago or post-Chicago economic theory for a particular rule or standard. Illinois Tool serves up a reminder that the Supreme Court is still first and foremost a legal institution that operates juridically and not as an open-ended purveyor of economic policy.

Having said this, I thought that the decision was correct, even if not as obvious as might appear from the unanimity of the court and the relative brevity of Justice Stevens’s opinion. The assumptions that seemed to ungird much of Independent Ink’s argument was faulty, circular, and proved too much. I took Kathleen Sullivan’s oral argument to attempt to hoist Chicago on its own petard in the following manner: Chicago has taught us that tying exists in order to facilitate price discrimination; price discrimination requires market power; therefore where tying exists there must be market power. Of course, this would prove that all instances of tying prove the existence of market power, whether or not a patent was involved. Justice Stevens aptly noted another fault with the argument: the assumption that price discrimination requires market power, which is not generally true.

I was disappointed that the opinion did not rigorously engage what I thought were the strongest arguments for Independent Ink. The obvious problem for Independent Ink (which probably doomed them from the start) is that no sane person believes that patents generally confer market power. So the challenge was to articulate the basis for a rule that patents used to tie presumptively confer market power. The line taken by Independent Ink and the Nalebuff, Ayres, Sullivan amicus brief was that patents used in requirements contract tie-ins (as opposed to all patents as a class) should be assumed to confer market power. Justice Stevens’s response on that point was weak — a doctrinalist rejoinder that this argument construes the International Salt decision. I still think the argument is wrong, but I would have liked to have seen in rebutted on its economics, not on its law.

F.M. Scherer’s amicus brief presents what I thought was the most interesting argument, and it received not a word in the opinion. Scherer argues not for a general rule that patents confer market power (his own prior work saying that most patents have no economic value was cited in the Solicitor General’s brief–which apparently is why he jumped in to correct the alleged misuse of his scholarship) but that patents that have been the subject of litigation presumptively confer market power. There is something intuitive about this argument. If Illinois Tool sued Independent Ink for infringing its patent, Illinois Tool obviously doesn’t think its patent lacks any value. Still, I’m not sure the point is correct. If a firm sues a competitor for physical trespass to its plant, that doesn’t mean that the real estate confers market power. Scherer does better than this, relying on statistics (from Germany — where IP rights are different from the U.S., and query whether this makes a difference) showing that patents that have been involved in litigation have signficantly higher market value than other patents. In any event, I would like to have seen a bit of a discussion of whether there should be a rebuttable presumption of market power with respect to a patent when the patentee has previously sued for patent infringement as to that patent, as was true in Illinois Tool.

So where do we go from here? One immediate question is what happens to the per se rule in tying cases. Is it gone? On one level, the answer may not matter much because it was effectively gone with Jefferson Parish, whether or not the majority was willing to recognize this. At a doctrinal level, however, the per se rule persisted — foolishly, in my opinion since it did not resemble the per se rule anywhere else in antitrust and only caused confusion. Illinois Tool does not explicitly say that the per se rule is dead, but it does explicitly repudiate the “tying arrangements serve hardly any purpose beyond the suppression of competition” language of Standard Oil, which provides the only meaningful justification for a per se rule. My guess is that this is the end of the road for the per se rule for tying (if Jefferson Parish and Kodak weren’t functionally that end already).

If you’re keeping score on “Chicago vs. post-Chicago,” this was arguably another win for Chicago after losing in Kodak. The Nalebuff, et al, brief (and, to some extent, the Scherer brief) was a full frontal attack on the Chicago view of tying and the welfare effects of price discrimination. This opinion nominally says nothing on the welfare effects of price discrimination, but that issue is lurking in the background for future tying and bundling decisions.

So stay tuned for more fun ahead.

Technorati Tags: Independent Ink, Chicago School, market power, patents, Supreme Court, antitrust, intellectual property

I’ve got to disagree with Manfred’s analysis of mixed bundling, for reasons I explain in my U. Chi. L. Rev. essay on LePage’s and my forthcoming article in the Emory L. J. on mixed bundling. Cross-subsidization adds nothing to the plausibility of the strategy. When A offers the bundle at a $1.50 discount, it is sacrificing a profit of $1.50 per sale in order to “exclude” B from the market. Money is fungible. That sacrifice is identical to the sacrifice A would make if it took $1.50 out of a bank account to pay for single-product predation. It is no more plausible to think that A would sacrifice the $1.50 of monopoly profits to effectuate an above-variable-cost price that B must meet than to think that A would withdraw that money from its bank account to engage in single-market predation. The recoupment doesn’t happen any sooner. A can only charge a monopoly price for Wc if it first drives out B.

It’s my view that the cross-subsidization story never makes sense unless there is rate regulation in one market and the monopolist is using the cross-subsidization to cheat the rate regulators in one market and predate in another market. Not so in LePage’s or any of the other pending mixed bundling cases I’m aware of.

The really interesting distinctions between single-product predation and bundling concern a model where A doesn’t have to sacrifice profits at all because it is raising its price on the competitive product at the same time that it’s discounting its monoply product. The customer buys the package, even though the net price of the two products is the same or higher, because it prefers to buy more of the monopoly product and less of the competitive product. Barry Nalebuff has developed an interesting model where there is “instant recoupment” even as the competitor is being driven from the market. In my forthcoming Emory article, I explain why that model is conceptually interesting but: (1) not relevant to almost any of the recent bundling cases; and (2) not a good case for being restrictive with mixed bundling, because it shows a strategy that generally increases consumer (and social) welfare.

What’s up with the Sixth Circuit? In its December 15, 2005 Spirit Airlines v. Northwest Airlines decision, the court reversed the district court’s grant of summary judgment for Northwest in Spirit’s monopolization lawsuit alleging predatory pricing on the Detroit-Boston and Detroit-Philadelphia routes. So much for those who thought that the Tenth Circuit’s 2003 decision in AMR killed the possibility of predation claims in the airline industry.

There are some interesting and (apparently, to me, the outsider) close questions in Spirit about the right way of thinking about costs and revenues in airline predation cases, but those interesting and (apparently) close questions are overshadowed by a bizarre concluding section in which the Sixth Circuit purports to consider Spirit’s “Non-Price Predation Claims.” The “non-price predation” at issue is the expansion of output–i.e., the addition of flights. Of course, the expansion of output only occurred, and would only make sense, as a corollary of the Northwest’s price reductions. (If Northwest added flights without lowering its price, it would end up with empty planes, assuming demand remained constant). In most cases where the defendant has drastically lowered its price, the defendant will also have expanded its output, so it would be possible to describe virtually any predatory pricing case (including Brooke Group) as a “non-price predation” case not subject to the “below cost” test.

The “Non-Price Predation” section gets more bizarre when the Sixth Circuit announces that Brooke Group’s “below cost” test does not even apply “to a monopolist with its unconstrained market power.” The Sixth Circuit relies for this proposition on LePage’s (which I have roundly criticized elsewhere), but LePage’s at least had the fig leaf of making this claim in the context of bundled rebates and not traditional single-product price discounting. To suggest that the Supreme Court’s “below cost” rule does not apply to monopolists is ludicrous, both doctrinally and theoretically. None of the Supreme Court’s predation decisions articulating the below cost test have limited it to non-monopolists. In Trinko, the Court repeated (albeit in dicta) that “above-cost predatory pricing schemes [are] beyond the practical ability of a judicial tribunal to control.” The Supreme Court has now said four or five times, in categorical terms, that a price cannot be unlawful unless it is below cost.

Further, predation only makes sense, if ever, when the predator is a monopolist. Predation by a single oligopolist is inherently stupid behavior because the single oligopolist will be internalizing huge costs with the hope of producing a market-wide price increase that it will have to share with all of the other firms in the markets as it tries to recoup. So the idea that the “below cost” price test only applies to oligopolists is silly. We really don’t need any predatory pricing test for oligopolists.

Having thus slammed the Sixth Circuit’s decision, it’s a hard to feel too sorry for Northwest. Recall that Northwest (and Continental) sued American for predatory pricing in the summer of 1992 and lost. I have written elsewhere that the predatory pricing lawsuit itself may have been partly responsible for price increases in the airline industry in late 1992 and early 1993. Those who play with fire sometimes get burned.