A Modest Proposal for Antitrust Enforcement
Stephen D. Houck, Special Counsel to Offit Kurman, P.A., previously served as the Chief of the Antitrust Bureau in the New York State Attorney General’s Office. He also served as lead trial counsel in the government’s Section 2 monopolization case against Microsoft. Houck has previously contributed posts to DisCo on antitrust enforcement action against Android here and here.
What antitrust enforcers should do about large tech companies, if anything, has been the subject of much recent commentary. The most widely publicized proposal is that of Senator Elizabeth Warren which calls for the breakup of all “platform utilities” with an annual global revenue of $25 billion or more. In this blog post and in my new article, I consider under what circumstances government enforcement agencies should seek remedial relief and what form that remedy should take.
The bottom line, for those who want to cut to the chase, is that the breaking up of companies is a logistically difficult matter with potential adverse harms to consumers. Given that such an extreme antitrust remedy could severely impair incentives to innovate and create economic inefficiencies, I present a modest procedural change that would have the effect of strengthening antitrust enforcement: allowing a trial court to request appellate review of its liability decision before a remedial hearing.
Punishing “No-Fault Monopolies”
U.S. antitrust law has two cornerstone requirements to establish monopolistic behavior. As reiterated by the D.C. Circuit in U.S. v. Microsoft, the government must show 1) that the defendant possesses monopoly power in a relevant market and 2) that the defendant willfully acquired or maintained its monopoly power by unlawful means. The underlying rationale is that a company could grow large by consequence of “a superior product, business acumen or historic accident.”
The proposal to break up companies solely based on their large size––coined “no-fault monopolization”––does away with the second prong of the inquiry. But the second prong serves a key purpose; the objective is to distinguish those companies that engaged in fair play and brought novel products to market from those that maintained a monopoly through questionable anticompetitive means. The dissolution of a large company absent proof of exclusionary conduct is likely to have significant adverse impact on incentives to innovate.
The “no-fault” approach places an arbitrary cap on potential awards for taking risks to develop welfare-enhancing products or technologies. Such an approach would create perverse incentives to cut back on innovation and other consumer-friendly practices as a company nears whatever dollar threshold or market share is established for breaking it up. For example, a company would be incentivized to withhold a new, improved model of its product or even raise prices to assure that it does not exceed the forbidden size. The more abstract, nonetheless important issue that also arises is one of fairness. The harsh punishment of a company that grows large through pro-competitive efforts strips the fruits of victory from a winner who has triumphed by following the rules and competing hard.
In addition, it is important to not lose sight of the fact that Internet companies that once had seemingly secure market positions faded rapidly when confronted by new, superior products. The Internet is a disruptive kingmaker that can just as quickly unmake, as make, a market leader.
Finally, another justification provided for the breaking up of large Internet companies is to address non-competition issues like privacy or income inequality. While these issues are complex and important, antitrust laws are not the right tools to tackle them. Privacy issues can arise irrespective of the size of a company. If persistent privacy failures exist in the market, they would be better addressed most efficaciously through legislation — not expensive, complex, and protracted antitrust litigation. To do otherwise would hurt competition, reduce the benefits of innovation, and harm consumers.
Modest Legislative Change Over Corporate Breakup
Unlike some of the more grandiose proposals for breaking up companies or changing substantive aspects of antitrust law, I propose a modest procedural change that could improve the appellate process and provide greater certainty for district courts when fashioning a remedy in Section 2 antitrust cases. The D.C. Circuit decision and procedural history of the Microsoft case offer insight on this front.
First, the D.C. Circuit in Microsoft stressed the “logistical difficulty” of dismembering Microsoft and recognized the effect that such an undertaking can have on price, innovation, and shareholder value. The D.C. Circuit further emphasized––consistent with the fairness principle discussed above––that the relief should be “tailored to fit the wrong creating the occasion for the remedy.” The court noted that the mere existence of an exclusionary act “does not justify full feasible relief against the monopolist to create maximum competition.”
The D.C. Circuit also expressed confidence in the district court’s ability to sort out the complex factual issues in fashioning relief, through the traditional means of an adversary hearing with both fact and expert witnesses. Despite the difficulty of doing so, the D.C. Circuit stressed that a “cardinal principle of our system of justice” is that factual disputes are “heard in open court and resolved through trial-like evidentiary proceedings.” Trial courts have long been accustomed to drafting antitrust decrees that necessarily involve “predictions and assumptions concerning future economic and business events.”
A noteworthy aspect of the Microsoft case was how quickly the litigation proceeded. The District Court put the Microsoft case on a “fast-track,” allowing the final judgment to be rendered in slightly more than two years after the filing of the complaint. (The appeal added one year to the timeline and further remedy proceedings were necessitated on remand.) However, the District Court judge Thomas Penfield Jackson granted the relief requested by the plaintiffs without holding an evidentiary hearing.
I believe that Judge Jackson’s decision not to hold a remedies hearing was the product of confusion sowed by the D.C. Circuit. One of three claims before Judge Jackson was whether Microsoft’s bundling of the Internet Explorer browser with the Windows operating system was a form of ‘tying.’ The D.C. Circuit had recently ruled in a related case, and its opinion contained extensive dicta on tying that did not square with the Supreme Court’s most recent tying decision (Jefferson Parish Hosp. Dist. v. Hyde). I think it highly likely that Judge Jackson, to avoid holding a potentially long and difficult remedies hearing that might be reversed on appeal because of how he handled the tying issue, simply granted the relief plaintiffs wanted to obtain immediate appellate feedback on his liability decision.
In light of this history, I make a modest proposal for legislative change to allow any party to a Section 2 action brought by a federal or state antitrust enforcement agency to request the district court to certify its decision for expedited appeal, prior to holding an evidentiary hearing on remedies. This would speed up the appellate process. In contrast to the extreme remedies proposed, like Senator Warren’s, this modest change should have a greater chance of passage. The expedited Section 2 litigation process would benefit everyone––the antitrust enforcement agencies, defendants, and trial judges––especially when high-tech products are at issue in a rapidly changing factual environment.
In sum, the extreme remedy of corporate dissolution is justified only when the corporation has engaged in predatory or exclusionary conduct. Breaking up is hard to do, whether under the “no-fault” system or under Section 2 as it traditionally has been understood by the courts. The nature and extent of injunctive relief is a proper subject for trial courts in the appropriate circumstances since those courts will have developed familiarity with the facts during the trial and can assess the pros and cons of various remedies. It would make sense, however, for the trial court to be able to request appellate review of its liability decision before embarking on a potentially difficult and time-consuming remedial hearing.