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Antitrust in 60 Seconds: What Is the “Essential Facilities Doctrine” in the U.S.?

· April 4, 2018

The 60-Second Read:

The essential facilities doctrine is a “mandatory access remedy” that imposes a duty on a monopolist firm to deal with competitors by requiring “a monopolist to provide access to a ‘facility’ that the monopolist controls and that is deemed necessary for effective competition.”

The existence of the essential facilities doctrine in the U.S. competition legal framework remains debatable. The essential facilities doctrine has never been explicitly recognized by the U.S. Supreme Court. However, some lower courts have ruled that in some instances, a monopolist may deny access to a facility deemed necessary to compete in a defined market to harm competitors. So for example, if a railroad company controlled the only bridge across the Mississippi, and therefore had complete control of whether other railroad companies could serve customers who needed to cross the Mississippi river. An essential facilities remedy would require the Mississippi monopolist to allow others to use the bridge at a fair rate, if the Mississippi monopolist were to deny access to the bridge to competing railroad companies.

Some scholars have criticized this doctrine as being overly regulatory and having constitutional concerns, while others have argued that it is a useful, but limited, tool that will create benefits to society as a whole through a regime of open access.  One of the most important aspect of the essential facilities doctrine was raised by Areeda, who argued that court-imposed duties to deal undermine incentives to innovate.

What is the essential facilities doctrine?

The essential facilities doctrine or the ‘bottleneck’ doctrine is part of an old, if controversial, theory of antitrust liability, whereby a monopolist leverages its monopoly power to obtain a competitive advantage by denying access to an essential facility. The essential facilities doctrine remedy for this anticompetitive practice is the imposition of an obligation on the monopolist to deal with competitors by granting access to the so-called essential facility. This is an exception to the ordinary rule that a company has no duty to deal with their competitors.

In the U.S., the Supreme Court has explicitly remained agnostic on whether the essential facilities doctrine exists. In fact, in the 2004 case Verizon Communications v. Trinko, the Supreme Court stated: “We have never recognized such a doctrine, . . . and we find no need either to recognize it or to repudiate it here.”

Where does the U.S. Supreme Court stand?

The essential facilities doctrine was first named in 1977, by the D.C. Circuit case Hecht v. Pro-Football. Prior to the Hecht decision, there had been a line of cases decided by the Supreme Court that seemed to intentionally start what became the essential facilities doctrine (Terminal Railroad, Associated Press, Otter Tail). In fact, prior to the Supreme Court decision in Trinko, as Pitofsky notes, it was believed that the Supreme Court had endorsed the essential facilities doctrine that was developed in lower courts. This doctrine was perhaps expressed most clearly in the Seventh Circuit’s 1983 opinion in MCI Communications v. AT&T, which stated that there are “four elements necessary to establish liability under the essential facilities doctrine: (1) control of the essential facility by a monopolist; (2) a competitor’s inability practically or reasonably to duplicate the essential facility; (3) the denial of the use of the facility to a competitor; and (4) the feasibility of providing the facility.”

In the Post-Hecht decision Aspen Skiing, the Supreme Court seemed to further condone the doctrine, but not by name. However, the Supreme Court noted that the antitrust laws did not impose duties to deal on monopolists, and therefore, the decision should be construed as a narrow exception to the general principle. This principle was further clarified in the Trinko decision: declaring that the Aspen Skiing decision was “at or near the outer boundary of § 2 liability” and stating that the Supreme Court has not and will not (yet) recognize or repudiate the essential facilities doctrine.

Trinko also specifically names the essential facilities doctrine, and states “[w]e have never recognized such a doctrine, see Aspen Skiing Co., and we find no need either to recognize it or to repudiate it here.” And while the Court refuses to say whether the doctrine exists, it does state that if it did exist it would not apply to situations in which other laws or regulations already have provisions to provide access to facilities.

Trinko certainly narrowed the exceptions to the rule that a company has no duty to deal with its competitors. However, it is likely the essential facilities doctrine remains in some form until the Supreme Court definitively says otherwise. In the meantime, there will be some confusion as to the doctrine’s scope and other practical considerations such as whether the essential facilities doctrine is a cause of action separate from its prescribed remedy, or in other words, whether monopolizing an essential facility is an antitrust violation that could be punished through other remedies – like damage awards.

The impact of the essential facilities doctrine on innovation

The mandatory access remedy found in the essential facilities doctrine was attractive. Four years before Trinko cut back the doctrine, antitrust scholars Abbott Lipsky and Gregory Sidak catalogued all the facilities a plaintiff has attempted to apply essential facilities to (with varying success):

the New York Stock Exchange, the Providence, Rhode Island wholesale produce market, the multiple listing services for residential real estate, the computerized airline reservation system, modern rail networks, regional electricity distribution networks, natural gas pipelines, oil pipelines and storage facilities, a municipal pier, an airport terminal, football and basketball stadiums, and the nationwide transmission and switching facilities that once comprised the local telephone network of the former Bell System. . . . [Additionally] hospitals, ski mountains, soft drinks, credit cards, the milk industry, cable television, the apartment rental referral industry, direct all-freight flights between New York City and San Juan, Puerto Rico, the ownership of National Football League franchises, publications and periodical distributors, the list of vendors willing to provide teletype terminals compatible with the Western Union teletype service network, electronic transmission of advertisements to newspapers, a list of the business classification in which each advertiser in the Miami, Florida Yellow Pages spends the greatest amount of money each year, a membership in an appraiser’s association, payphone long distance carriers in Puerto Rico, cellular long distance service, microwave facilities for international communications, the home health care market, resistive bands and tubing for exercise equipment, the lignite market, and high performance Intel microprocessors.

The wide application of what was presumably intended as a narrow exception led to antitrust scholar Phillip Areeda’s scathing critique of the doctrine in his article “Essential Facilities: An Epithet in Need of Limiting Principles,” which was eventually cited in Trinko. The Trinko court found Areeda’s arguments on the administrability problem of a mandatory access remedy particularly convincing, stating “[w]e think that Professor Areeda got it exactly right: ‘No court should impose a duty to deal that it cannot explain or adequately and reasonably supervise. The problem should be deemed irremedia[ble] by antitrust law when compulsory access requires the court to assume the day-to-day controls characteristic of a regulatory agency.’”

However, Areeda’s concerns about the drag on innovation from an unconstrained essential facilities doctrine are the most relevant to modern marketplaces. Areeda points out that an aggressive essential facilities doctrine might discourage companies from investing in vital assets in the first place. These assets are high value to consumers and high cost to the companies that build them, otherwise they wouldn’t be labeled as essential facilities. Imagine a company building a state of the art research facility knowing that they would have to offer the use of it to their competitors. The same can be said of platforms or operating systems.

One case highlights this problem. In Berkey Photo, the plaintiff won a jury trial on the argument that releasing an innovative new product without pre-disclosing the invention was a violation of the antitrust laws. Berkey was a competitor to Kodak for cameras and film processing, but was not a competitor for film. Kodak introduced a brand new film system without warning Berkey, and because of that it took Berkey months to be able to offer compatible cameras and processing services. A jury awarded Berkey damages for lost sales, but the Second Circuit reversed. The court stated that “[t]he first firm, even a monopolist, to design a new camera format has a right to the lead time that follows from its success.” While Berkey may have laid out a sympathetic case for the jury, the end result was ridiculous. Forcing companies to question their plans to innovate would not be a good result.

These concerns highlight why even many of the proponents of the essential facilities doctrine believe it to be a limited or narrow doctrine. It is a doctrine whose overapplication could produce unusual and unhelpful results.

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.