Time to Reform U.S. Antitrust Laws?

By Ryan Niksa

Even the harshest critics of antitrust laws view them as well-intentioned laws that aim to protect the consumer and natural economy from the market-share controlling methods of big business. Antitrust laws are designed to ensure competition in the free market and provide that commerce is not restrained, promoting fairer prices and better-quality products for the consumer as a result. While the first word one associates with antitrust law might be monopolies, it is important to recognize that the possession of monopoly power is not illegal under U.S. antitrust law. 

While monopolies have been viewed as inefficient in economic theory by raising prices above marginal cost and restricting supply, leading to market failures since the days of Adam Smith, they inevitably emerge from technology for producing certain services, superior corporate efficiency, innovation or unique skills. They also can result from high barriers to entry, high set up and sunk costs, and economies of scale. Important segments of the electric power, natural gas distribution, water, and telecommunications industries are generally thought to continue to have natural monopoly characteristics, even if they are now categorized as public utilities subsidized by the state and federal government. Antitrust laws enforce against anticompetitive practices, ensuring that companies do not take control of the market and abuse their market power by thwarting competition, and that natural monopolies are regulated.

Very few modern observers wish to do away with antitrust laws. To see the effects of a shortage in antitrust laws, we can just look south of the border, where Mexico suffers from almost a complete lack of competition law, dominated by cartels.  Key industries are controlled by two or three inter-connected firms and companies, resembling more of a corporatist society than a free market. A majority of critics would rather see reform in antitrust laws. The biggest negatives that detractors have pointed out are that these laws are 1) too antiquated and ill-prepared to interpret in the 21st century; and 2) lacking in oversight, harming competitors to protect the economic welfare of the consumer, slowing innovation and economic efficiency. There is some foundation to these criticisms: anyone would wonder with skepticism how the three laws that serve as the foundation for our nation’s antitrust laws in the United States, the Sherman Antitrust Act of 1890, Clayton Antitrust Act of 1914 and Federal Trade Commission Act of 1914, all passed over a century ago, could still be used effectively against today’s burgeoning pharmaceutical giants, telecommunication companies, and technological empires. Indeed, they were created to break up Rockefeller’s Standard Oil Company and Carnegie’s U.S. Steel Company.

Reforming antitrust laws is a challenging issue. Our first antitrust law, the Sherman Act, was passed by Congress through the “Commerce Clause,” granting the Sherman Act constitutional authority through Article 1, Section 8, Clause 3 of the U.S. Constitution, which gives Congress the power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” [1] Penalties for violating the Sherman and Clayton Act have historically been very severe, as criminal and civil charges can result. While the criminal charges generally brought on by the Department of Justice are nothing to sneeze at, in a business context, the civil charges are widely viewed as the most detrimental and most effective deterrent to anti-competitive activity. If proven guilty, criminal penalties of up to $100 million can be incurred for a corporation and $1 million for the individual. A provision in the Clayton Act also permits private parties injured by an antitrust violation to sue in Federal court for three times their actual damages in addition to court costs and attorneys’ fees. [2] 

Most antitrust cases involving large corporations are investigated by the Federal Trade Commission (FTC) and the Department of Justice (DOJ) Antitrust Division. Corporations have, through enforcement of antitrust law, been broken up into smaller companies, and at times have needed to file for bankruptcy to pay the massive fines and sanctions. Businesses have also appealed their court rulings, and those appeals have occasionally been won and subsequently heard by the U.S. Court of Appeals and U.S. Supreme Court. Researching the debate about reforming antitrust laws, I instinctively assumed that antitrust laws and their outdated language would just not be able to adjust to the 21st century, and specifically, the mercurial technology industry. Evidence to support that theory, however, did not materialize, and it seems, as of now, that antitrust laws have more conclusively done a commendable job of enforcing against anticompetitive methods and monitoring mergers and acquisitions.

It is difficult to believe that antitrust laws have kept up in the 21st century, and as someone who grew up in Silicon Valley, I find the able interpretation of antitrust laws in the technology industry to be especially dubious. However, beginning with what attorneys call the “antitrust case of the 20th century,” the DOJ Antitrust Division has come to regularly deal with tech giants and to carefully interpret antitrust laws. This “antitrust case of the 20th century” must be discussed pertaining to antitrust law and the technology industry: United States v. Microsoft Corp. The case began in 1994, when Microsoft and the DOJ Antitrust division agreed to sign on to a consent decree that forbade the company from using the market power of its operating system to squelch competition – the consent decree was approved by the District Courts in 1995. However, on October 27, 1997, the Justice Department filed a complaint demanding a $1-million-a-day fine against Microsoft for its alleged violation of the 1995 consent decree and Sherman Act Sections 1 and 2, claiming that Microsoft overstepped its bounds by demanding that personal computer (PC) manufacturers bundle the Internet Explorer Web browser with their hardware products before being able to obtain a Windows 95 license, requiring computer makers to install its Internet Explorer browser if they wanted to license Windows 95. Less than a year later, the DOJ Antitrust Division and twenty state attorneys general filed an antitrust suit against Microsoft, charging the company with abusing its market power to thwart competition, including Netscape Navigator, through making business agreements with Internet service providers and using exclusionary practices to restrict their ability to promote non-Microsoft Internet browsers. By April 2000, the District Courts ruled that Microsoft violated Sections 1 and 2 of the Sherman Act, and had “paid huge sums of money, and sacrificed many millions more in lost revenue every year, in order to induce firms to take actions that would help increase Internet Explorer’s share of browser usage at Navigator’s expense.” [3]

Reviewing the facts of the case, in mid to late-1990s, there was little debate that Microsoft’s market share for Intel-compatible PC operating systems was extremely large and stable, protected by a high entry barrier, with a lack of commercially viable alternative to Windows. The judge’s application of the Sherman Act has been widely validated by legal experts, who agreed with the District Court’s ruling that “Microsoft maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market, both in violation of section 2. Microsoft also violated section 1 of the Sherman Act by unlawfully tying its Web browser to its operating system” [4] – in laymen, Microsoft committed anticompetitive, exclusionary practices, took advantage of its monopolistic powers, and violated the law and harmed consumers and innovation. There is no doubt that the U.S. government’s victory against Microsoft was an accomplishment that certainly won over doubters that antitrust law could keep up with the technology industry and industries in the 21st century.

A multitude of significant antitrust cases against technology giants have occurred since then, including U.S. Government v. Apple, Inc. in 2013, when the appeals court upheld the District Court’s ruling that tech giant Apple violated the Sherman Antitrust Act by orchestrating a price-fixing deal with five major book publishers as a way to draw customers to e-books via Apple’s iPad tablet technology and to allow the publishers to make more money on e-book sales. [5] One of the most ambitious cases that the Department of Justice Antitrust Division participated in was United States v. Adobe Systems, Inc. et al., when the DOJ filed a lawsuit against some of the largest technology companies in North America in respect of their agreement not to solicit or “cold call” each other’s employees – “cold calling” refers to any solicitation for employment targeted at an employee who has not previously applied for the position in question. [6] 

Interpreting the Sherman Act, Section 2, the agreements were anti-competitive as they reduced the ability of the companies to compete for workers and limited their employee’s exposure to superior job opportunities, better compensation and improved benefits; by 2012, all six defendants settled with the DOJ and heeded their requests to stop poaching for highly-skilled and specialized employees. Even when the federal government decided not to file an antitrust lawsuit against a technological giant, as with the Federal Trade Commission and Google in 2013, legal experts commended the FTC for resisting the tantalizing impulse to aggressively go after Google and attempt to regulate the rapidly evolving and highly dynamic Internet market, epitomized when FTC chairman Joseph Leibowitz remarked, “That’s something you want to try to do. But more important than that is to faithfully execute the law. And we found unanimously that they hadn’t engaged in illegal monopolization and hadn’t violated the FTC Act.” [7]

Important cases that need the interpretation of antitrust law seem to arise once or twice a week, so I can easily locate numerous other examples that have confirmed effective utilization of antitrust laws in the 21st century. So the question is how have these antitrust laws remained powerful in the 21st century? As Fiona Scott Morton, Professor of Economics at the Yale School of Management explains, “Even though the laws themselves were written during the industrial age, they've proven flexible enough to allow the government to influence the direction of a wide variety of current industries, from sports to the movies to healthcare” [8] – the language found in the Sherman Act and Clayton Act are intentionally vague, to foster interpretation for a wide variety of industries, and as we have seen, for different time periods as well. The relative success in antitrust laws in battling big business in the 21st century has relied as much on those who interpret the laws as the laws themselves, and since the 1970s and the emergence of the Chicago School of Economics, antitrust laws like the Sherman Act have increasingly been jointly interpreted by attorneys and economists, which has effectively addressed the letter of the law and allowed for understanding the case through an economic purview, combining both aspects, one no less crucial than the other. [9] Technology companies from time to time incite debate about the legitimacy of antitrust laws more than other industries, as the technology industry is much faster and more dynamic than other industries today, with lower barriers to entry by the month and marginal costs on the decline. The dynamic nature of the tech market, however, does not necessarily translate to ineffectiveness for antitrust laws for multiple reasons. While critics claim that antitrust laws are trying to slow innovation and put consumers over the competitors, it is worth pointing out that antitrust laws and their enforcers are not regulating the industry, but enforcing against anticompetitive practices– it sounds obvious, but with the rise of intellectual property and patent law entangled with antitrust law, that distinction has become increasingly muddled – pertaining to enforcing against thwarting competition, the DOJ and FTC have become adept at discerning if corporations are committing anticompetitive practices like bid-rigging, exclusionary deals, et. al. even in the 21st century: technology giants are no exception.

Another prevailing myth is that antitrust laws are hurting innovation by preventing mergers between tech companies that would potentially result in improved efficiency and greater investment, but a report by the Department of Justice in 2011 in preparation for the Conference on Competition and Intellectual Property Policy in High-Technology expressed that “the interests of truly innovative technology companies are closely aligned with the Antitrust Division, which seeks to ensure that commercial outcomes are decided in free and open markets, on the basis of superior innovation, quality, and price.” [10] Explicitly discussing mergers, Renata Hesse, author of the report, explained that “[antitrust enforcers] are rarely forced to choose between preventing higher prices and protecting innovation. Competition drives firms to compete on price and become more efficient, but it also can motivate them to invest more and work harder to improve their product design, function, and production processes. In high-tech markets, a transaction that threatens to lead to higher prices or reduced output, therefore, will often have a corresponding negative effect on a firm’s incentives to innovate.” [11]

Overall, I firmly believe that the Department of Justice and Federal Trade Commission have done a commendable job in enforcing and interpreting our three main antitrust laws, the Sherman and Clayton Antitrust Acts and Federal Trade Commission Act, which has resulted in these century-old antitrust laws standing the test of time. In some ways, the longevity of these laws might not be very surprising, as they are fundamentally governed by law and economics, two subjects that have been present for centuries, and will continue to remain as influential entities in the future. There probably will come a time when antitrust laws will need to change, but if antitrust laws are currently keeping up with the ever-changing technology industry, it might be another century before that time comes around.

References:

1. “Commerce Clause,” Legal Information Institute, https://www.law.cornell.edu/wex/commerce_clause, (December 15, 2015)

2. “Antitrust Laws,” Federal Trade Commission, https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws, (December 14, 2015)

3. “The Microsoft Monopoly: The Facts, the Law and the Remedy,” The Progress and Freedom Foundation, http://www.pff.org/issues-pubs/pops/pop7.4microsoftmonopolyfacts.html (December 17, 2015)

4. “The Microsoft Monopoly: The Facts, the Law and the Remedy,” The Progress and Freedom Foundation, http://www.pff.org/issues-pubs/pops/pop7.4microsoftmonopolyfacts.html (December 17, 2015)

5. Lyle Denniston. "Apple to appeal its e-book antitrust defeat." SCOTUSblog. SCOTUSblog.com, 19 Sept. 2015. Web. 18 Dec. 2015.

6. Bill Singer. “After Apple, Google, Adobe, Intel, Pixar, And Intuit, Antitrust Employment Charges Hit eBay.” Forbes Advisor Network. Forbes Magazine. 19 Nov. 2012. Web. 18 Dec. 2015.

7. Sam Gustin. “Google’s Federal Antitrust Deal Cheered by Some, Jeered by Others.” Tech Policy - TIME Business. TIME Magazine, 4 Jan. 2013. Web. 17 Dec. 2015

8. Fiona Scott Morton. “Is antitrust law keeping up?” Yale Insights. Yale School of Management, 12 July 2013. Web. 18 Dec. 2015.

9. William E. Kovacic and Carl Shapiro. “Antitrust Policy: A Century of Economic and Legal Thinking.” Journal of Economic Perspectives, Volume 14, No. 1. University of California Berkeley Haas School of Business, Nov. 2000. Web. 18 Dec. 2015

10. Renata B. Hesse. “At the Intersection of Antitrust & High-Tech: Opportunities for Constructive Engagement.” Antitrust Division. Department of Justice, 2011. Web. 18 Dec. 2015.

11. Renata B. Hesse. “At the Intersection of Antitrust & High-Tech: Opportunities for Constructive Engagement.” Antitrust Division. Department of Justice, 2011. Web. 18 Dec. 2015.