Has Interbrand Has Interbrand Competition Become the Competition Become the Sole, Not Merely the Sole, Not Merely the “Primary” Concern of “Primary” Concern of Antitrust Law in the Antitrust Law in the United States? United States? Presentation by Presentation by Professor Andrew I. Gavil Professor Andrew I. Gavil Howard University School of Law, Washington, D.C. and Howard University School of Law, Washington, D.C. and Visiting Professor, Centre for Competition Policy Visiting Professor, Centre for Competition Policy University of East Anglia, Norwich, UK (May-June, 2010) University of East Anglia, Norwich, UK (May-June, 2010) CCP 6 CCP 6 th th Annual Conference Annual Conference 18 June 2010 18 June 2010 Copyright Andrew I. Gavil, 2010
Transcript
Has Interbrand Competition Become Has Interbrand Competition Become the Sole, Not Merely the “Primary” the Sole, Not Merely the “Primary”
Concern of Antitrust Law in the Concern of Antitrust Law in the United States?United States?
Presentation byPresentation byProfessor Andrew I. GavilProfessor Andrew I. Gavil
Howard University School of Law, Washington, D.C. andHoward University School of Law, Washington, D.C. andVisiting Professor, Centre for Competition Policy Visiting Professor, Centre for Competition Policy
University of East Anglia, Norwich, UK (May-June, 2010)University of East Anglia, Norwich, UK (May-June, 2010)CCP 6CCP 6thth Annual Conference Annual Conference
18 June 201018 June 2010
Copyright Andrew I. Gavil, 2010
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Outline of the PresentationOutline of the Presentation
Challenging the Conventional View of Challenging the Conventional View of LeeginLeegin Leegin Leegin implicitlyimplicitly overruled key theory of anticompetitive overruled key theory of anticompetitive
effect fromeffect from Sylvania Sylvania Perceived value of intraband competition as a stimulant to Perceived value of intraband competition as a stimulant to
RPM three years after RPM three years after LeeginLeegin Less uniformity than one might imagineLess uniformity than one might imagine
1.1. Overrule Overrule Leegin --Leegin -- bring back per se rule bring back per se rule2.2. Work within Work within LeeginLeegin -- develop a structured rule of reason -- develop a structured rule of reason3.3. Fully embrace Fully embrace LeeginLeegin -- stop worrying about vertical restraints -- stop worrying about vertical restraints
Some Questions and Speculations about Future Some Questions and Speculations about Future DirectionsDirections
Part I:Part I:
Challenging the Conventional View Challenging the Conventional View of Leeginof Leegin
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The Conventional ViewThe Conventional View
““LeeginLeegin reaffirmed and extended reaffirmed and extended SylvaniaSylvania to to vertical intrabrand price restraints”vertical intrabrand price restraints” It:It:
ended the disparate treatment of price and non-price ended the disparate treatment of price and non-price restraints…restraints…
restored consistency and harmony to the law….restored consistency and harmony to the law…. and all thanks to well-settled economics!and all thanks to well-settled economics!
The Brighton Line
The Sylvania Colour TVc. 1966
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Largely Accurate for EfficiencyLargely Accurate for Efficiency
But do theories of anticompetitive effect similarly align?
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Sylvania’sSylvania’s Theory of Theory ofAnticompetitive Effects – Non-Price RestraintsAnticompetitive Effects – Non-Price Restraints
SylvaniaSylvania, 433 U.S. at 52 n.19:, 433 U.S. at 52 n.19: ““Interbrand competitionInterbrand competition is the … is the … primary concern primary concern of antitrust law.”of antitrust law.”
ImplicationImplication: We permit restraints on intrabrand when they enhance : We permit restraints on intrabrand when they enhance interbrand – Why?interbrand – Why?
““[W]hen interbrand competition exists … it provides a [W]hen interbrand competition exists … it provides a significant checksignificant check on the on the exploitation of intrabrand market powerexploitation of intrabrand market power because of the because of the ability of consumers to ability of consumers to substitute a different brand of the same productsubstitute a different brand of the same product.”.”
ConverseConverse: Restraints on intrabrand competition are : Restraints on intrabrand competition are unreasonableunreasonable if… if… Interband competition is lacking, i.e., when the supplier has market power Interband competition is lacking, i.e., when the supplier has market power Why? Why? They eliminate the primary source of downward pressure on price They eliminate the primary source of downward pressure on price
(intrabrand competition), without any benefit to interbrand competition.(intrabrand competition), without any benefit to interbrand competition. Additional Assumption?Additional Assumption?
Business Electronics (1988)Business Electronics (1988)
““What is most troubling about the majority's opinion What is most troubling about the majority's opinion [in Business Electronics] is its [in Business Electronics] is its failure to attach any failure to attach any weight to the value of intrabrand competitionweight to the value of intrabrand competition ... Not a ... Not a word in the word in the SylvaniaSylvania opinion implied that the opinion implied that the elimination of intrabrand competition could be elimination of intrabrand competition could be justified as reasonable without any evidence of a justified as reasonable without any evidence of a purpose to improve interbrand competitionpurpose to improve interbrand competition.”.”
Stevens, J., dissentingStevens, J., dissenting
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Sylvania’sSylvania’s Theory of Theory ofAnticompetitive Effects – RPMAnticompetitive Effects – RPM
SylvaniaSylvania, 433 U.S. at 51 n.18:, 433 U.S. at 51 n.18: RPM “is not only designed to, but almost invariably” RPM “is not only designed to, but almost invariably”
reduces interbrand price competitionreduces interbrand price competition Dampening/softening of competition theoryDampening/softening of competition theory
Facilitates Facilitates cartelizingcartelizing
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Leegin’sLeegin’s Theory of Theory of Anticompetitive Effects for RPMAnticompetitive Effects for RPM
Explicit and Extensive TreatmentExplicit and Extensive Treatment Facilitate CollusionFacilitate Collusion
Three Relevant “Filters”:Three Relevant “Filters”: Widely utilized? (necessary for cartel theory)Widely utilized? (necessary for cartel theory) Dealer initiated? (necessary for either dealer-related theory)Dealer initiated? (necessary for either dealer-related theory) Market Power? (necessary for all theories)Market Power? (necessary for all theories)
Note: Sylvania’s core theory is not mentioned.
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The Issue Going ForwardThe Issue Going Forward
Has interbrand competition become the Has interbrand competition become the solesole, , not merely the “not merely the “primaryprimary” concern of U.S. ” concern of U.S. antitrust law?antitrust law? If If LeeginLeegin silently overruled core theory of silently overruled core theory of
Sylvania, Sylvania, then “yes.” then “yes.” If so, was If so, was LeeginLeegin correct? Is correct? Is Sylvania’sSylvania’s theory theory
economically sound?economically sound?
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Intrabrand Competition After Intrabrand Competition After LeeginLeegin: : Two ApproachesTwo Approaches
Single monopoly profit Single monopoly profit theory as critique of theory as critique of SylvaniaSylvania If a mfr has market power, it If a mfr has market power, it
cannot gain any additional cannot gain any additional power power by limiting intrabrand by limiting intrabrand competition.competition.
Did SCT implicitly endorse?Did SCT implicitly endorse? Flaws?Flaws?
Ignores exclusionIgnores exclusion Denigrates value of intrabrand Denigrates value of intrabrand
competition competition asas competition competition
Dampening Competition Dampening Competition TheoryTheory Core concept from Core concept from SylvaniaSylvania Intrabrand competition is real Intrabrand competition is real
competitioncompetition Responsive to consumersResponsive to consumers Pressure on suppliersPressure on suppliers Promotes interbrandPromotes interbrand
Mostly ignored by economic Mostly ignored by economic writing on vertical restraintswriting on vertical restraints
Does it fit well with observed Does it fit well with observed behaviour?behaviour?
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Does Intrabrand Competition Have Independent Does Intrabrand Competition Have Independent Competitive Value?Competitive Value?
An IllustrationAn Illustration
Manufacturer/Supplier
Rival Dealers Rival DealersRival Dealers
Some Mfr Assumptions:
1. Market power is “imperfect” (can’t simply raise price as predicted by SMP).
2. Cost of vertical integration is prohibitive (so must work with independent dealers).
Some Dealer Assumptions:
1. No free-riders. 2. A discounter emerges.3. Price war erupts. 4. Dealers ALL reduce services/promotion.5. Sales begin to fall overall.
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Manufacturer’s OptionsManufacturer’s Options
The Mfr’s DilemmaThe Mfr’s Dilemma: : “My dealers have “My dealers have reduced promotion and reduced promotion and my sales are dropping, my sales are dropping, what can I do?”what can I do?”
£$€
2. Increase efficiency and lower prices.(Sylvania’s solution)
1. Use RPM to Restore Incentive to Promote(Leegin’s solution)
(Benjamin Klein, Competitive Resale Price Maintenancein the Absence of Free Riding,76 Antitrust L.J. 431 (2010))
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Two Options/Two Sets of PriorsTwo Options/Two Sets of Priors
Option 1: RestraintOption 1: Restraint Restrict intrabrand to enhance Restrict intrabrand to enhance
interbrandinterbrand Use RPM to Protect Dealer Use RPM to Protect Dealer
Margin Margin Dealer will use margin to Dealer will use margin to
promote productpromote product Interbrand competition will Interbrand competition will
discipline pricediscipline price Mfr and consumer interests Mfr and consumer interests
are alignedare aligned Protects supplier autonomyProtects supplier autonomy
Competitive Dealer MarginCompetitive Dealer Margin ““Noise” from dealers Noise” from dealers
provides provides incentive for dealer incentive for dealer and supplier to become more and supplier to become more efficient and lower priceefficient and lower price
Dealer is responding to Dealer is responding to consumerconsumer choice and choice and communicating it to suppliercommunicating it to supplier
Suppliers competeSuppliers compete to provide to provide best margin/volume best margin/volume combinationcombination
Supplier can use Supplier can use non-price non-price restraintsrestraints and and performance-performance-based discountsbased discounts to secure to secure promotionpromotion
S. 148/H.R. 3190 – “The Discount Pricing Consumer S. 148/H.R. 3190 – “The Discount Pricing Consumer Protection Act”Protection Act” ““Findings” recount history of Findings” recount history of Dr. MilesDr. Miles and abandonment and abandonment
in in LeeginLeegin Amends Sherman Act, Amends Sherman Act, §1:§1:
““Any contract, combination, conspiracy, or agreement setting a Any contract, combination, conspiracy, or agreement setting a minimum price below which a product or service cannot be sold by minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate this Acta retailer, wholesaler, or distributor shall violate this Act.”.”
Second attempt since 2007; depth of support not clearSecond attempt since 2007; depth of support not clear Would abandon generality and flexibility of Section 1 Would abandon generality and flexibility of Section 1
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DOJ/Antitrust Division:DOJ/Antitrust Division: “Working Within “Working Within LeeginLeegin””
Speech by Christine Varney (Oct. 7, 2009)Speech by Christine Varney (Oct. 7, 2009) LeeginLeegin as an “invitation”: as an “invitation”:
““As As courts gain experiencecourts gain experience considering the effects of these considering the effects of these restraints by applying the restraints by applying the rule of reasonrule of reason over the course of over the course of decisions, they can establish the decisions, they can establish the litigation structurelitigation structure to ensure the to ensure the rule operates to eliminate anticompetitive restraints from the rule operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses. Courts can, for market and to provide more guidance to businesses. Courts can, for example, example, devise rules over time for offering proof, or even devise rules over time for offering proof, or even presumptions where justifiedpresumptions where justified, to make the rule of reason a , to make the rule of reason a fair and fair and efficient wayefficient way to prohibit anticompetitive restraints and to promote to prohibit anticompetitive restraints and to promote procompetitive ones.” procompetitive ones.” LeeginLeegin, 551 U.S. at 898-99., 551 U.S. at 898-99.
Reflect some distrust of comprehensive rule of reason?Reflect some distrust of comprehensive rule of reason?
General PrinciplesGeneral Principles ““Structured rule of Structured rule of
reason”reason” Euphemism for something Euphemism for something
less than comprehensive less than comprehensive rule of reasonrule of reason
Presumptions and burden Presumptions and burden shiftingshifting
““Sliding scale” as in Sliding scale” as in mergersmergers
Preserves possibility of Preserves possibility of per se ruleper se rule
Specific Tests for Each Specific Tests for Each LeeginLeegin Scenario Scenario Collusion ScenariosCollusion Scenarios Exclusion ScenariosExclusion Scenarios
Role of three Role of three LeeginLeegin factorsfactors
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FTC -- A More Complex PictureFTC -- A More Complex Picture“Overrule or Work Within “Overrule or Work Within LeeginLeegin?”?”
Chairman LeibowitzChairman Leibowitz January 2007January 2007
Then Commissioner, he Then Commissioner, he dissents from dissents from LeeginLeegin AmicusAmicus
May 2008May 2008 Votes in favor of Votes in favor of Nine Nine
WestWest petition petition Spring 2009Spring 2009
As Chairman, supports As Chairman, supports bill to overrule bill to overrule LeeginLeegin at at ABA Spring MeetingABA Spring Meeting
still support still support LeeginLeegin outcomeoutcome
Post-Post-LeeginLeegin Nine WestNine West Consent Consent
Decree ModificationDecree Modification New Commissioners New Commissioners
Could Determine FTC Could Determine FTC PositionPosition
Ramirez & BrillRamirez & Brill
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FTC -- A Closer Look at FTC -- A Closer Look at Nine WestNine West
Petition Granted (4-0)Petition Granted (4-0) General PrinciplesGeneral Principles
RPM NOT per se RPM NOT per se lawfullawful Leegin’sLeegin’s “invitation” could mean agencies should “invitation” could mean agencies should
explore truncated approaches using explore truncated approaches using three factorsthree factors RPM could be “RPM could be “inherently suspectinherently suspect” (” (PolygramPolygram))
““presumptions and phased inquiries”presumptions and phased inquiries”
Nine West demonstratedNine West demonstrated:: No market power + RPM initiated by Nine West,No market power + RPM initiated by Nine West,
……so no likely anticompetitive so no likely anticompetitive effecteffect
But…NW failed to demonstrate how RPM would But…NW failed to demonstrate how RPM would increase demand for its products, so monitoring increase demand for its products, so monitoring requiredrequired
What was What was involvedinvolved??
A petition by a shoe A petition by a shoe mfr to modify a pre-mfr to modify a pre-LeeginLeegin consent consent decree that prohibited decree that prohibited its use of RPM.its use of RPM.
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A Closer Look at A Closer Look at Nine WestNine West cont’d cont’d
“Through the Commission’s own enforcement work, research, and external consultations such as workshops, we anticipate further refinements to this analysis, including the further specification of scenarios in which RPM poses potential hazards and those in which it does not.”
Workshop held in May 2009; no Report yet
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Basis for Federal Consensus?Basis for Federal Consensus?If Leegin is not overruled by Congress…
DOJ/Antitrust Division FTC
Common Ground:Look for structured/truncated ways to identify “bad” RPM.
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The StatesThe States
Courts & LegislationCourts & Legislation Most state antitrust laws Most state antitrust laws
expressly or by court decision expressly or by court decision follow federal law follow federal law
So far, at least two state So far, at least two state courts have decided to follow courts have decided to follow LeeginLeegin
Some states have specific Some states have specific prohibitions of RPM (NY)prohibitions of RPM (NY)
Maryland amended law to Maryland amended law to reject reject LeeginLeegin
So far the only “So far the only “LeeginLeegin repealer”repealer”
OAG EnforcementOAG Enforcement Amicus in Amicus in LeeginLeegin supporting supporting
Dr. MilesDr. Miles (37 states) (37 states) Opposed Opposed Nine WestNine West Petition Petition
(27 states)(27 states) Cases Filed Since Cases Filed Since LeeginLeegin
Herman MillerHerman Miller (NY, IL, MI) (NY, IL, MI) Tempur PedicTempur Pedic (NY) (NY) Derma-QuestDerma-Quest (CA) (CA)
Some Critical QuestionsSome Critical Questions Does SMP theory convincingly Does SMP theory convincingly dispose of all concerns about dispose of all concerns about loss of intrabrand competition?loss of intrabrand competition?
Can intrabrand stimulate Can intrabrand stimulate interbrand competition in some interbrand competition in some circumstances?circumstances?
How can antitrust rules best How can antitrust rules best calibrate relationship among calibrate relationship among suppliers, dealers. and suppliers, dealers. and consumers?consumers?
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Manufacturer/Manufacturer/
Supplier Supplier
DealersDealers
ConsumersConsumers
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Concluding Thoughts on U.S.Concluding Thoughts on U.S.
If If LeeginLeegin is not overruled… is not overruled… DOJ/FTC will focus on refining test for effectsDOJ/FTC will focus on refining test for effects Few cases are likely (never been a high priority)Few cases are likely (never been a high priority)
FTC more likely to pursue?FTC more likely to pursue? Will courts be receptive to abbreviated analysis?Will courts be receptive to abbreviated analysis?
Regardless of Regardless of LeeginLeegin…… Some states will continue to prosecuteSome states will continue to prosecute Will these cases trigger private damages actions?Will these cases trigger private damages actions? Intrabrand competition will remain marginalizedIntrabrand competition will remain marginalized
