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Private Rights of Action, an Underappreciated Dilemma

· August 14, 2019

Does the availability of harsh punishment for competition law violations lead to reduced enforcement? Conversely, can we increase enforcement by reducing the maximum punishment available for certain claims? This is a question that many scholars have answered with a qualified “yes.”

As my explainer on private rights of action shows, there are many who question whether the U.S. current system of overlapping public and private rights of action is creating the optimal outcomes. Creating the optimal policy for private and public rights of action is difficult because antitrust cases are often wildly different and fact-dependent. What may be best for clear cases of bad behavior may be counterproductive for behavior at the margins, or instances where attitudes towards certain behaviors are changing. There can also be challenges created from uneven enforcement within an industry. Companies punished less than their rivals can be given an unintended advantage.

The American antitrust enforcement system was built with the intention that private enforcement would drive much of the policing of markets. The mandatory treble damages remedy (three times actual damages) is given to private plaintiffs to encourage this. A previous study found that there are ten private antitrust cases for every one government enforcement case. But this creates a set of overlapping rights, one that the Supreme Court has acted to limit. This reactive limitation of rights necessarily reduces enforcement, and therein lies the tension. There is evidence that judges are uncomfortable aggressively enforcing the antitrust law when they perceive the total cost of potential antitrust claims to be excessive.

There are no easy answers to this tension between the size of potential remedies and willingness to enforce. However, the debate is healthy because the better the balance the more effective and fair the total enforcement. As the debate continues, here are some questions that might be helpful:

Are private actors the best custodians of the public interest? 

There are many instances when a company’s interest aligns with the public interest, like when the company wants to bring less expensive, higher quality, or more innovative products to market but is thwarted by an anticompetitive actor. There are also instances when those interests do not fully align. For example, if the private plaintiff accepts a remedy that splits the monopoly rent rather than improve competition.

There are also instances where private plaintiffs may pursue antitrust cases in ways that benefit them but harm consumers. An example of this is found in Warrior Sports v. NCAA. The case concerns lacrosse sticks, and the danger presented by a trend by manufacturers to narrow the base of the stick head. This narrower head made it harder to knock the ball loose, which encouraged players to use greater force and resulted in greater risk of injury. The NCAA proposed a rule change to fix this and Warrior Sports filed suit to stop the change because it would make 14 out of its 15 models illegal for NCAA play. The NCAA withdrew the proposal and solicited more feedback. Warrior Sports suggested a flared head design, which the NCAA adopted in its next proposal. However, Warrior Sports did not disclose that it had a patent on this head design and would have exclusive rights to produce NCAA-legal lacrosse sticks. The NCAA tried to engage Warrior Sports in licensing discussions, but Warrior Sports balked. In response, the NCAA issued a new proposal that would allow the flared head in addition to other non-infringing designs. Warrior Sports sued the NCAA claiming that it had colluded with Warrior Sports competitors to deprive it of the windfall it would receive from exclusive rights over NCAA legal lacrosse sticks. Both the district court and Sixth Circuit rightly decided this was a bogus antitrust claim, and that the NCAA’s conduct actually benefited consumers and increased competition.

Are private rights of action working to incentivize enforcement? 

There is some concern that private plaintiffs piggy-back on public enforcement actions, and are therefore not fulfilling the role of bringing actions where the government does not. There is evidence that these fears are overblown. However, there seems to be some industries where private parties are complaining to enforcers about anticompetitive behavior but not bringing their own private actions. If treble damages are not enough to incentivize private plaintiffs to act first, then is this a sign that something is not working in the structure of U.S. antitrust policy? For example, are we incentivizing those with potential claims at the margins to lobby others to act first and then free-ride off the results?

One could look at other examples of policies created to incentivize cases brought in the public good. For example, the Hatch-Waxman Act incentivizes generic drug companies to challenge patents and bring generic competition to markets earlier by providing the first to file a 180-day exclusivity. Could we better incentivize private enforcement by providing only the first to file an antitrust case the mandatory treble damages? Or would this lead to too many cases as every potential plaintiff rushes to the courthouse?

Are public and private enforcers working at cross-purposes? 

An irony of the public-private dynamic is that in some instances the government might have the greatest leverage to negotiate settlements if they offer a resolution that does not make it easier for private plaintiffs to later win damages on the same conduct. These resolutions may allow the defendant to not admit guilt, or may avoid the release of evidence useful at subsequent trials. These settlements can provide quick and expansive relief for the public, but may make it harder for follow-on private suits. 

However, this type of resolution may still serve the interest of public policy if we assume that the purpose of treble damages is to encourage private enforcement regardless of whether public enforcers have taken action, as the burdens of private enforcers would not be worse than if they had taken action first. In these instances, the private plaintiffs do not have the benefit of a prior guilty verdict or admission of guilt that would allow them to avoid the upfront costs in proving their case. But this also means that potential plaintiffs might balk at pursuing their claims due to the risk of a loss. A company may settle on marginal, but legal, behavior regardless of a chance to prevail in court because of the risk of a catastrophic loss. Therefore, these settlements don’t necessarily signal an easy win for potential private plaintiffs.

Are private rights substitutes or complements? 

The legislative history suggests that those that drafted U.S. antitrust laws believed private enforcement is essential to police conduct that the government, for whatever reason, does not. This makes sense from a resource perspective, because the government only has to fund its enforcement divisions to the extent necessary to safeguard the public interest from failures of private enforcement to fully protect the public. However, the drafters did not include any language to prevent all potential enforcers from pursuing their claims. This means that some conduct may be enforced by all parties with a right, some conduct will only see a single enforcement action, and some conduct will still escape without enforcement.

So is the intended policy that public and private enforcement are complements, meaning everyone should act? If so, are remedies, including mandatory treble damages, properly acknowledging this? If we increase the available remedies of public enforcers do we need to decrease the damages available to private enforcers? Conversely, if the intended policy is to reward treble damages only to incentivize private plaintiffs to act as a substitute for public enforcement, does that mean we should not allow treble damages when private plaintiffs act after the government?

Should marginal conduct be treated differently?

We want companies to be aggressive competitors, but sometimes this aggressive competition produces anticompetitive results. Two grocery stores fiercely competing to win customers is great, unless that competition puts one of the stores permanently out of business and the remaining store raises prices or reduces quality. The line between procompetitive and anticompetitive behavior is sometimes unclear, and our thinking on where the lines are drawn can change as information develops. What makes sense as a remedy for some anticompetitive behavior, like cartels, may not make sense for other more marginal behavior.

This matters if there is an unwillingness from courts to adapt the law to respond to new theories of harm when the result is that a sympathetic plaintiff is overly punished by later treble damages suits. Examples may include where the defendant was acting with competitive intentions but produced an anticompetitive result, or where previously legal behavior should be barred based on modern economic thinking. In these instances, optimal enforcement may require that only public enforcers have the right to pursue action as a way of setting new policy without necessarily punishing the defendant. This would give notice to industry that this behavior is now unlawful. Such a recalibration may be necessary if Congress wishes to adopt a policy that produces more aggressive enforcement at the margins. Additionally, policy that pushes more aggressive punishments may have the unintended effect of producing less aggressive enforcement at the margins.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.