Sunday, September 14, 2008

DOJ Monopolization Report Issued, Criticized.

DOJ Section 2 Report Issued: The Department of Justice issued a 215-page report (.pdf) on September 8 entitled: Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act.

Perhaps the best known Section 2 monopolization case in the modern era is U.S. v. Microsoft, in which my former boss, David Boies, is often credited with winning the case for the United States government. The Department of Justice retained Mr. Boies to lead the case on behalf of the government, and Mr. Boies’s videotaped deposition of Bill Gates during the litigation helped discredit Microsoft as a corporation and Mr. Gates as a witness. Possibly because of his behavior during the deposition (Mr. Gates appeared recalcitrant and evasive during the deposition), Mr. Gates did not testify at trial. Mr. Boies nonetheless used numerous video clips of Mr. Gates’s deposition to attack the credibility of Microsoft, which proved to be an extraordinarily effective tactic. In preparing witnesses for deposition, many lawyers now use the Bill Gates deposition videotape as an exemplar of how not to act during a deposition.

Monopolization is also an issue in the consumer goods and retail industry, as with category captains and other dominant players in the industry, and industry stakeholders that are impacted by dominant firms should become familiar with monopolization issues.

DOJ Report Seeks to Clarify Standards: The DOJ Report emphasized the desirability of “clear, objective” rules for Section 2 enforcement. The Report addresses single-firm conduct issues, such as exclusive dealing, predatory pricing, tying, bundling, loyalty discounts, and refusals to deal. The DOJ based its Report partly on input it received at a number of hearings about Section 2 that DOJ held beginning in June 2006, including a “broad array of views” presented by “[a]cademics, business people, and antitrust practitioners.” (Report at vii).

Not Binding, But May Be Persuasive: While the DOJ Report is not binding, it may influence at least some courts assessment of single-firm practices subject to a Sherman Act Section 2 challenge. For instance, a colleague of mine who is serving as an economic expert witness in an ongoing antitrust case is currently rewriting his expert report to incorporate aspects of the DOJ’s Report. But the extent to which the DOJ’s Report will be adopted by courts is unclear. Many of the enforcement policies the DOJ enunciates in the Report have been criticized as being too favorable to monopolists, and unsupported by economic or legal justification, including criticism levied against the DOJ by its sister antitrust agency: the Federal Trade Commission.

FTC Criticism: The same day that the DOJ issued its Report, three of the four Commissioners of the Federal Trade Commission issued an 11-page statement that sharply criticized the Report. They questioned the Report in two main respects: (1) the Report is chiefly concerned with lax enforcement of dominant firms rather than protection of consumers; and (2) the Report “overstates the level of legal, economic, and academic consensus regarding Section 2.” Although the fourth Commissioner at the FTC, Chairman Kovacic, did not join the statement of his colleagues, he wrote a separate statement that did not endorse either position, but raised additional concerns about the Report’s shortcomings.

Some commentators have suggested that the Report represents an effort by the administration to perpetuate lackluster antitrust enforcement beyond the upcoming elections. But in the critical statement by three FTC Commissioners – who include a Republican, an Independent, and a Democrat – the Commissioners stated that the FTC “stands ready to fill any Sherman Act enforcement void that might be created if the D[OJ] actually implements the policy decisions expressed in its Report.” Private parties may also help fill any void. My firm, for example, is currently involved in Section 2 cases and will likely help shape the extent to which the DOJ Report is adopted by courts.

Consumer Goods and Retail Industry Monopolization Issues: Section 2 monopolization issues sometimes arise in different areas of the consumer goods and retail industry. For example:

  • Consumer Goods Manufacturers. Consumer packaged goods manufacturers with large maket shares are sometimes designated by retailers as category captains to help retailers manage in-store displays and shelf space for that product category. Manufacturers who abuse their influence with retailers to fraudulently exclude competitors may be liable under Section 2, as in Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768 (6th Cir. 2002), in which the Sixth Circuit affirmed a finding of a Section 2 violation where Conwood alleged that competitor U.S. Tobacco “used its role as category captain and/or manager to exclude competition.” With a recent trend among retailers to limit the skus stocked on shelf (sometimes referred to as “sku rationalization”), there may be greater opportunity for category captains to unfairly exclude competitors, and they should beware of the potential for violating Section 2 when encouraging retailers to exclude competing products.

  • In-Store Advertising. As this blog has frequently discussed, News America Marketing has been accused of acquiring and exercising monopoly power to the detriment of competitors and retailers, and is soon facing trial over its allegedly anti-competitive conduct.

  • Retailers. Retailers are often the victims of monopolization practices (in the context, for instance, of vendor or manufacturer practices) and are not typically subject to monopolization challenges. A retailer’s dominance in a market arises more often in the merger context than in a monopolization context, such as a recent court finding that the Whole Foods – Wild Oats merger gave Whole Foods a dominant share of certain markets.

Conclusion: Stakeholders in the consumer goods and retail industry that themselves are dominant firms or that are impacted by dominant firms should review the DOJ’s Report and become familiar with monopolization and other Sherman Act Section 2 issues for which a stakeholder may be held accountable or for which a stakeholder may rely on to ensure that it’s competing on a level playing field. While aspects of the DOJ’s Report may ultimately not be adopted by courts, the Report nonetheless is a helpful reference to understand the range of antitrust issues that concern single firm conduct under the Sherman Act.

Related Posts: Valassis' $1.5 Billion Antitrust Suit Against News America Marketing Over FSIs; DC Circuit Reverses Ruling That Allowed Whole Foods Merger with Wild Oats.


The Law Firm of Kotchen & Low LLP - Civil Litigation, Counseling, and Representation Before Government Agencies

This work is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License.