The Bar Association of the City of New York
New York, N.Y.
It is an honor to appear before the City Bar Association and to have the opportunity of reviewing antitrust developments over the last year. And when you look back, there is a lot that is memorable. In the past year, both antitrust agencies reviewed a record number of proposed mergers and litigated a number of significant merger and non-merger cases. At the FTC, we continued to make progress in refining the merger review process, assuring to an even greater extent that we secure timely and effective relief. In terms of jurisprudence, there have been several important decisions, including agency enforcement cases, such as California Dental Association(1) and Nippon Paper.(2) Following the approach advocated by the FTC and the Justice Department, the Supreme Court reversed its decision in Albrecht, and eliminated the per se rule for maximum price fixing. Finally, in the largest and most hotly-contested merger case in over a decade, the FTC successfully challenged the merger of Staples and Office Depot.
This broad array of developments naturally leads to the question whether there is a unifying theme or themes linking them together. The best answer is: probably not. But, it is my job to behave as though there is. So, for the next few minutes, I hope you will indulge me while I share some thoughts on some of the more significant/salient happenings over the past year. As always, my remarks are my own, and do not necessarily reflect the views of the Commission or any individual Commissioner.
I begin with a brief overview of some trends in the Commission's merger enforcement program. But then I'd like to address some of the new myths that seem to have developed concerning present day government antitrust enforcement and confront them with our sense of what is really going on.
There is little disagreement that this country is in the midst of an unprecedented merger trend. Barely a day goes by without a report of some significant merger, strategic alliance, or joint venture that touches the lives of millions of American consumers. Our task is to identify those mergers which pose the threat of the exercise of market power and take enforcement action where appropriate to assure that consumers receive the full benefit of a competitive marketplace.
What is remarkable about this merger trend, in addition to its sheer volume, is also the nature of the acquisitions. In the 1980s, many mergers were prompted by financial market considerations. To a far greater extent, today's mergers appear to be motivated by strategic considerations. Some firms want to acquire market share, expand product lines, combine R&D capabilities, gain control of important inputs, or achieve efficiencies of integration. Other mergers are a response to a sharp increase in global competition, while still others are responses to new economic conditions such as deregulation, or to overcapacity. Some strategic alliances may represent an attempt for a dominant firm to "hedge its bets" by acquiring potential competitors in adjacent markets. Of course, these objectives are not necessarily anticompetitive, but these types of arrangements require close review because the firms are either competitors or in closely related markets, or both.
Let me begin with a review of some important statistics. Fiscal year 1997 produced the largest volume of merger filings in history, a total of 3,702 reportable transactions, an increase over 20% over the number in fiscal year 1996. That was the sixth consecutive yearly increase since 1991, when there were 1,451 filings, a time when our staffing was almost identical to what it is today. In other words, we are reviewing over 150% more filings with the same staffing we had six years ago -- a testament to the dedication and hard work of the Bureau's staff.
In fiscal year 1997, the Commission initiated 20 merger law enforcement actions, including two preliminary injunctions, one administrative complaint, and 17 consent agreements. An additional five transactions were abandoned in the face of probable enforcement action. Moreover, we are using our scarce resources well by targeting second requests to those acquisitions in which we ultimately find enforcement action is necessary; in the last two fiscal years we took enforcement action in about 60% of the investigations in which we issued second requests.
In addition, we filed four civil penalty enforcement actions under Section 7A of the Clayton Act for HSR violations, and two civil penalty actions for order violations. We have assessed record-high civil penalties over the past three years: $3.4 million in FY 1995, $7.9 million in FY 1996, and $9.35 million in FY 1997. To give you some perspective, the Commission has collected more in civil penalties in the last three years, than in the entire 1980s.
With that as background, let me review some of the prevailing wisdom that seems to have developed recently about aspects of antitrust enforcement and examine those new myths in light of some old realities.
Myth #1 -- Relevant market analysis has strayed from the Merger Guidelines.
A recurrent criticism is that the agencies are using the unilateral effects doctrine to bring antitrust challenges without subjecting themselves to the rigor of market definition as called for by the Merger Guidelines. Another formulation of the criticism is that unilateral effects analysis is Brown Shoe dressed up in economic jargon. The Staples-Office Depot case is cited as Plaintiff's Exhibit #1.
Staples was the largest merger litigated by the government in recent years. Staples and Office Depot are two of the three leading office supply superstores chains in the U.S.(3) The two firms together operated about 1,000 superstores and compete head-to-head in numerous metropolitan areas across the country. In 15 major metropolitan areas, including Washington, D.C., Baltimore, San Diego and Tampa-St. Petersburg, Staples and Office Depot are the only superstores, and the merger would have resulted in a monopoly in those markets. In 27 other metropolitan areas, the two firms have only one other superstore competitor, Office Max. The merger was very likely to produce higher prices, and also to prevent increased competition in areas where one of the firms was planning to enter the other's territory. The Commission argued and the district court agreed that the merger would lead to increased prices for consumers in each of these markets.
I have read and heard the view that the FTC eschewed the rigorous analytical framework of the Merger Guidelines and instead based its relevant market argument on the multi-factored approach embodied in the Supreme Court decision in Brown Shoe.(4)
Brown Shoe provides a list of factors for relevant market analysis, but has been criticized for providing little guidance as to how those factors should be weighed.
The second criticism suggests that the Commission used unilateral effects analysis and attempted to prove the merger was anticompetitive without really defining a relevant market. Both myths provide interesting dinner conversation, but ignore the more mundane realities of the case.
In Staples, the Commission followed the analytical framework of the Merger Guidelines and defined a relevant market in a traditional fashion. Our analysis focused on one compelling set of facts -- the pricing history of the office superstore firms. This evidence provided a powerful beacon that illuminated the market definition analysis. The simple but compelling story was that the number of superstore firms had the most significant effect on prices in the market. Prices were lowest in three chain markets, higher in two chain markets and highest in markets with a superstore monopoly. The difference in price between one chain cities and three chain cities was approximately 13% -- an impressive difference in retailing where profits and profit margins are usually only a small percentage of sales volume.
Why was this important? The critical question in relevant market analysis is whether -- if prices increase by 5 percent -- enough consumers will switch to other sellers of the product to make the price increase unprofitable. The answer -- based on the current pricing practices of Office Depot and Staples -- was that consumers in many parts of the country had not switched to alternative sellers despite sustained price differentials exceeding 5 percent. This strongly suggested that alternative sellers, such as mail order, and small office supply stores, were not in the relevant market.
Of course, the court found other evidence that supported the Commission's delineation of the relevant product market, and this evidence fit within some of the factors listed by Brown Shoe: the parties identified a superstore market in their documents, they focused primarily on other superstore competitors in establishing price zones and considering where to enter, and office superstores offered a broader range of products in a unique retail setting. Ultimately, I believe that while the case was not litigated as a Brown Shoe case, the court's decision relied on the better aspects of the Supreme Court's teaching.
The second concern: that we are using unilateral effects analysis to avoid market definition does not hold up either. While most of the recent cases brought by the Commission involve unilateral effects analysis, in none of these cases have we sought to avoid the requirement of proving a relevant market.(5)
There is a sense though in which the critics are right. The Brown Shoe criteria address intuitively and somewhat less vigorously some of the same issues dealt with more systematically in the Guidelines under the rubric of unilateral effects. That is, they are both concerned with situations in which the competitive interaction among some products in the relevant market is much stronger than the interaction with other products. And in such cases that interaction may be a more important issue than the precise boundaries of the broader market. But the fact that we take a hard look at the actual competitive interactions within a market, rather than considering our job done as soon as the market is defined, should not be a basis for criticism but a reflection of the fact that we are doing our job. When we find unique relationships among products made by the merging firms, as evidenced by how the firms behave in the marketplace and by quantitative analysis of past pricing behavior, we have a merger that poses problems. And the issue of the precise market definition becomes and should become secondary.
Let me close with an observation of the importance of the Staples law enforcement action. The litigation produced a number of important results, not the least of which was a very careful, thoughtful court opinion on Section 7 law. But ultimately, as public servants we must ask: how did the public benefit from our action? The careful econometric work done in Staples provides one of the more reliable estimates of consumer benefits I have seen. By blocking the merger, we estimate that consumers may save around $1 billion over a five-year period, or $200 million per year-- approximately double the FTC's annual budget.
Myth #2 -- The agencies intervene too aggressively in high technology markets.
Last Monday's Wall Street Journal had a provocative front-page article titled "Antitrust Isn't Obsolete In an Era of High-Tech."(6) The article explained that "one of the great myths of our time is that technology is eradicating the imperfections of market economies." This myth was not news at the antitrust enforcement agencies. An increasing number of our cases involve issues on the cutting edge of some new technologies: innovation markets, standard setting, network effects, market access, and new forms of competition.
Our challenge here is multifaceted. High tech markets pose some new and novel issues for antitrust enforcers. Unlike traditional markets, these are often markets with "winner take all" characteristics. Thus, the key competition occurs at the stage of product development and innovation. Protecting competition at this stage involves some difficult trade offs, especially since we do not want to suppress incentives to innovate. Our goal as antitrust enforcers is not to favor one competitor or group of competitors over another. Rather, our objective is to ensure that the race is run fairly, that the course is level, and that the rules are fair.
We are relatively modest about what we know and understand. We recognize the need to learn more about the novel issues posed by the new world of high-tech competition. Because of the importance of developments in the high-tech arena, last July the FTC and Stanford Law School co-sponsored a three day technology and business strategy summit with business leaders, scholars, and attorneys. This provided the opportunity for FTC Commissioners and staff to learn from and exchange views with the private sector, and created a dialogue about the role of antitrust in the high-tech marketplace.
Perhaps the most controversial area of government enforcement in this area involves merger cases based on innovation markets. The Commission has brought several innovation market cases in the past 3 years, primarily involving pharmaceuticals. The number of cases should not be surprising for two reasons. First, as the Wall Street Journal article observed, R&D competition is an increasing focus of the U.S. economy in many areas. Research and development, and innovation, are critically important to the competitiveness of our markets, both domestically and internationally. Second, a substantial amount of recent merger activity has occurred in markets where antitrust is particularly important in preserving R&D competition, such as pharmaceuticals and defense.
Our goal is to carefully identify those situations where a merger will reduce innovation competition. We intervene in innovation market transactions under carefully limited circumstances -- namely, where few firms possess the specialized assets or characteristics needed to compete successfully in the market. Where intervention is necessary, we seek to craft relief carefully to remedy the competitive problem without interfering with the incentives and ability to engage in other R&D.
The Commission's action in Ciba-Geigy/Sandoz(7) illustrates the point. That was a $63 billion merger of two pharmaceutical giants that threatened to produce a monopoly in key technologies used to develop gene therapy products, which show substantial promise for the treatment of various cancers and AIDS. There were relatively few potential competitors for this technology, because the merging firms controlled critical patents. The merger therefore would have diminished both the incentives and the ability of other firms to develop competing products.
Although the market has yet to be developed, it is expected to be a $45 billion market by the year 2010. We secured a consent order that will preserve competition in this important innovation market, in part by requiring the licensing of certain technology and patent rights to Rhone-Poulenc Rorer so that it will be in a position to compete with the merged firm. According to Business Week, the FTC's enforcement action "shows a new savvy among trustbusters about high-tech competition."(8)
One issue that generated some controversy was the scope of relief. In innovation market cases, the Commission uses various approaches to relief: in some cases certain assets must be divested, in others the licensing of technology is required. In Ciba, the Commission believed that licensing, rather than divestiture of assets, was sufficient. Competitors already had (to varying degrees) the hard assets, e.g., production facilities, researchers and scientists, needed to compete. Rivals and other scientists confirmed that licensing would enable them to develop gene therapy products and replace the competition lost due to the merger. Further, an asset divestiture might have created substantial disruption in the parties' research and development efforts. In this case, therefore, a licensing remedy represented the preferred approach to restoring the competition lost by the merger.
Our approach is to carefully identify the assets necessary for the divestiture to restore competition. Because of the increasing importance of relief issues in innovation market cases, the Bureau staff is currently investigating the results of divestiture in these cases. Once that study is complete we hope to be able to give further guidance on the most effective means of remedying competitive problems.
Ciba-Sandoz illustrates the importance of enforcing the antitrust laws carefully but assertively in high-technology industries. Antitrust enforcement is critical because a firm's competitive strength in these markets is often derived from its intellectual property and these rights can be a formidable barrier to new entry. On the one hand, we always weigh the impact of enforcement on the incentives to innovate. But it is as important to protect against anticompetitive consolidations or other abuses of intellectual property as it is to prevent the acquisition or abuse of market power with respect to other assets. This is a difficult, but critical balance to draw.
Myth #3 -- Penalties for violations of the HSR Act are nothing more than a cost of doing business.
Enforcement of the Hart-Scott-Rodino Act is an increasing priority at the Commission. The number of recent enforcement actions and higher penalties reflect our commitment to ensure that firms properly abide by the Act. Accordingly, the Commission closely monitors compliance with the Act and takes strong, appropriate action against serious violations. The penalty for failing to comply will not be minimal.
The best illustration of our vigilance is the enforcement action taken against Mahle GmbH, a German automotive and diesel engine parts manufacturer with businesses in the U.S., and Metal Leve, S.A., a competing Brazilian manufacturer. The complaint charged that Mahle acquired 50.1 percent of the voting securities of Metal Leve for approximately $40 million around June 26, 1996, without Mahle and Metal Leve filing the requisite premerger notifications. The complaint alleged that both firms knew that their deal posed serious antitrust problems and completed the transaction knowing that they were violating the HSR Act. According to the complaint, each of the two firms "consulted with U.S. counsel or U.S. investment bankers and were apprised of the requirement under the HSR Act that they each file Notification and Report Forms with U.S. antitrust authorities." In fact, the complaint alleges that each firm had "considered ignoring the HSR reporting requirements" and treating the HSR reporting obligation "as a trade off between the costs of compliance with the Act and the potential risks of noncompliance with the Act."
The penalties for the firms' actions was appropriate and substantial. First, within days of discovering the acquisition we required the parties to implement a hold separate order. Second, we promptly investigated the acquisition and required swift and substantial divestitures of assets to restore competition lost as a result of the merger. Third, the companies agreed to pay civil penalties in excess of $5.6 million dollars -- the highest civil penalty amount ever obtained under the HSR Act for a single transaction -- for their failure to file a premerger notification. We insisted upon the maximum penalty from both the buyer and the seller because of the serious and knowing nature of the violation.
It should be clear. The HSR Act is not a toll booth. Intentionally detouring around the toll gates can be costly.
Myth #4 -- Offer to divest some package of assets and the FTC will accept it.
As many of you know, most of our merger cases end up being resolved with consent orders, rather than litigation. One of our important initiatives over the past two years has been to carefully review whether an adequate package of assets is being divested.(9) Our objective, as always, is to ensure that the divestiture package will fully restore the level of competition that existed before the merger.
There seemed to be a strong impression in the private bar around the time I joined the agency that the Bureau was more interested in accumulating consent decrees, adding notches to its belt, than in securing complete relief. I firmly believe that in most cases where competitive problems are identified, adequate relief can be secured without litigation. In some cases, however, the merger itself may pose such significant risks to competition that settlement cannot be had, and litigation is the only proper course. For the sake of consumers in those markets, we are obligated to seek full and effective relief. Settling cheap has another cost. It encourages firms to test our mettle in future cases and use the threat of litigation to achieve yet another less-than-complete resolution of the problem. So we have drawn the line in places where respondents argued they were entitled to a settlement, but which we thought the relief was not adequate.
For example, in Staples the parties offered to divest 63 stores, primarily in metropolitan areas where this was a merger to monopoly. The Commission rejected the proposed settlement. In my view that decision was correct. First, the proposed relief would not have solved the diminution of competition in those markets where the number of superstore competitors was reduced from 3 to 2. Moreover, significant potential competition would have been lost if the settlement had been approved. All three superstore firms were entering each other's territories at an increasing rate, which would have led to significant price reductions in new markets.
Our recent challenge of MEDIQ Inc.'s proposed acquisition of Universal Hospital Services ("UHS") provides another example of a proffered settlement that was inadequate to restore competition. MEDIQ and UHS are the two largest firms in the country that rent durable, movable medical equipment -- such as respiratory devices, infusion devices and monitoring devices -- to hospitals on an "as-needed," short-term basis. Much of the contracting for durable medical equipment is done on a national basis, and hospital chains and group purchasing arrangements require a national network for this equipment. This acquisition would have given MEDIQ a near monopoly in the national market, and a near monopoly in numerous local geographic markets as well. Competitive concerns were heightened because earlier acquisitions by MEDIQ had led to higher prices.
In an attempt to forestall litigation, the parties presented a purported "fix-it-first" involving Medical Specialties, a firm that currently rents infusion pumps to home healthcare customers. The parties proposed to sell Medical Specialties rental equipment and provide it with an option to lease several facilities. But the proposed relief was inadequate for a number of reasons. First, the new firm would have had a substantially smaller inventory than UHS, which itself was considerably smaller than MEDIQ. Second, customers -- particularly national ones, like hospital buying groups -- testified that Medical Specialties would not have the amount and breadth of equipment necessary to replace UHS. Finally, much of the business that Medical Specialties claimed it needed in order to successfully compete in the hospital rental market was under long-term exclusive contracts with UHS and MEDIQ.
The Commission found the proposed relief inadequate and authorized the staff to seek a preliminary injunction on August 22, 1997.(10)The defendants attempted to short-circuit the litigation by having Judge Sporkin approve the proposed settlement, but the Judge was unwilling to second-guess the FTC. On the eve of the preliminary injunction hearing, the parties dropped the proposed acquisition.
Myth #5 -- Once you have entered into a consent, your obligations to the FTC are over.
We have also tried to deal with the perception that securing agreement on a remedy was all that the Commission cared about, that implementation was secondary. Over the past two years we have implemented a number of reforms to improve the divestiture process. These changes include imposing shorter divestiture periods, identifying up-front buyers, broader asset divestiture packages, appointing interim trustees, and imposing crown jewel provisions. The Bureau now insists that divestitures be accomplished in a shorter time so that competition is restored more quickly and it is less likely that assets will deteriorate in the interim. These reforms have begun to show progress in the divestiture process: the average time to divestiture has fallen by more than a third: from about 15 months in 1995 to less than nine months in 1997.
Currently, many consent agreements have up front buyers. In other cases, the Commission imposes a relatively short divestiture period, typically no more than 4 to 6 months. In these cases we often require the parties to enter into an asset maintenance agreement, to ensure that the divested assets retain their competitive viability. The asset maintenance agreement is an essential part of the divestiture package and if parties fail to fully comply with their obligations they can expect enforcement action.
In July, the Commission settled a case with Schnuck Markets which provides several instructive lessons about our insistence that firms fully honor their divestiture obligations.(11) Schnuck had acquired several grocery stores in the St. Louis metropolitan area and was required in July 1995 to divest 24 stores to a Commission approved buyer. The stores were divested in March 1996, but they did not resemble the stores originally acquired by Schnuck in several important respects. The Commission alleged that during the divestiture period Schnucks failed to maintain the stores properly: it operated the supermarkets to be divested differently from the other supermarkets it operated; it reduced staffing, provided inadequate signage and inadequate customer service, failed to maintain routine cleaning, repair, and maintenance; maintained non-published telephone numbers; failed to make available certain promotional features and other ancillary services for customers. Not surprisingly because of these actions, sales at the divested stores fell significantly.(12) Moreover, one week before the stores were to be divested, Schnuck issued customers at the divested stores check-out coupons informing them that the issuing supermarket would soon close and directing them to shop at a designated, alternative Schnuck location.
The relief secured by the Commission was notable in a number of respects. First, Schnuck paid a $3 million civil penalty, the second highest penalty in a competition case. Second, in order to remedy the competitive harm created by Schnuck actions the Commission required the divestiture of two additional stores. These stores heretofore had been closed by Schnuck. Third, the investigation and settlement represented a collective effort of the FTC and the Missouri and Illinois Attorneys General.
Our consent orders require divestiture to fully restore the competition lost from a merger. Where parties fail to maintain divested assets in a fashion that permits the full restoration of competition, they can expect enforcement action.(13)
Myth #6 -- The new efficiency guidelines have raised the bar for demonstrating efficiency claims.
Last April the FTC and Department of Justice revised the efficiency section of the Merger Guidelines. This effort stemmed from the Commission's 1995 hearings on competition in a global, high-tech marketplace. One of the subjects, in which there was a general consensus, was the need to clarify analysis of merger efficiencies. The report of the Commission's policy planning staff described the law on the treatment of merger efficiencies and how the enforcement agencies analyzed efficiency claims. The revised Guidelines drew upon both the hearings testimony and the analysis in the staff report.
The revised Guidelines sought to achieve four objectives:
(1) Explain how efficiencies may affect the analysis of whether a proposed merger may likely lessen competition substantially in a relevant market;
(2) Define more precisely which efficiencies are attributable to a proposed merger and which likely could be achieved in other ways without posing as great a cost to competition;
(3) Clarify what parties have to do to demonstrate claimed efficiencies are valid; and
(4) Set forth how efficiencies are factored into the analysis of the competitive effects of a merger.
The Guidelines instruct, as the courts have for several years, that only efficiencies that are merger-specific and cognizable will be considered in the analysis. Cognizable efficiencies are those that can be verified and do not arise from anticompetitive reductions in output or service. A merger will not be challenged if the efficiencies "are of a character and magnitude such that the merger is not likely to be anticompetitive in any relevant market." This is not simply a matter of comparing the magnitudes of the anticompetitive effects and the estimated efficiencies. Rather, it is essential to determine how the claimed efficiencies will affect market behavior. Where the potential anticompetitive consequences of a merger are substantial, the merger likely will be anticompetitive unless the efficiencies are extraordinarily great.
Some critics suggest that the Agencies have actually made demonstrating efficiency claims more difficult. That criticism misses the mark. Our goal was to provide clarification and guidance so that firms could better understand how efficiencies are analyzed. We did not come into the process with any preconceived notions. Of course, the agencies neither sought to raise or lower the burden for efficiency claims. Ultimately, we found that the enforcement decisions on efficiencies were appropriate; but the mode of analysis was not well presented in the brief discussion in the 1992 Guidelines.
What we did come away with was the sense that efficiencies needed to be analyzed with some rigor and should be based on an adequate factual foundation. We hope that the new efficiency Guidelines set forward a framework for that analysis and provide greater clarity about the role of the efficiency defense.
Myth #7 -- The pace of merger enforcement means the Commission is unable to bring any significant non-merger matters.
While we have been facing unprecedented challenges on the merger front, this does not mean, nor should it mean that we have become less vigilant about our non-merger responsibilities. We continue to have a number of non-merger investigations, involving a broad spectrum of activities including distribution practices, efforts to defeat new forms of health care delivery and cost containment, and restrictions by horizontal competitors.
Let me provide just a couple of examples. In September, an administrative law judge found that Toys R Us had violated Section 5 by orchestrating a boycott of the warehouse clubs, like Costco and Sam's Club.(14) In the early 1990s, the warehouse clubs began selling toys at prices that were lower than Toys R Us prices, which tarnished the Toys R Us low-price image and threatened the Toys R Us market position. To protect itself, Toys R Us orchestrated a boycott by major toy manufacturers of the warehouse clubs. As part of the scheme, toy manufacturers agreed with Toys R Us and each other not to sell the same toys to the clubs as were being sold to Toys R Us, or to package two or more toys into more expensive, less desirable "club specials." These club specials raised the clubs' costs and inhibited consumers from readily comparing the Toys R Us prices to those of the warehouse clubs. As a consequence, the conspiracy eliminated pricing pressure that the clubs were exerting on Toys R Us.
Let me attempt to clarify one issue that has been raised by some commentators: does the Toys R Us case suggest that all nonprice restraints by a firm with a similar market share face antitrust challenge? It is important not to mistake the Toys R Us policy for a typically benign non-price vertical restraint. For instance, in an exclusive dealing situation, one company agrees to deal with another company exclusively for the purpose of promoting interbrand competition. These agreements generally raise profit margins to induce sellers to provide pre-sales or other valuable services to consumers that otherwise would go uncompensated. The Toys R Us case has two important distinguishing features from an exclusive dealing agreement. First, this case involved a horizontal agreement among toy manufacturers. Second, there were no procompetitive efficiencies associated with the Toys R Us scheme. Toys R Us claimed that it bore substantial risk of buying in bulk early in the season, acted as a showroom for the toys, conveyed substantial information to manufacturers about sales levels for each toy, and provided other valuable services. The evidence showed, however, that Toy R Us was already compensated for the services it actually provided. Thus, there was no risk of free-riding. Moreover, the program was wholly unrelated to promoting interbrand competition and was in fact designed to and did reduce competition among toy manufacturers.
Our health care enforcement program continues to be active in identifying, and taking enforcement action where necessary, to enable new forms of health care delivery to arise. In seeking to fulfill this goal we do not favor one form of health care delivery, or one group of market participants, over another. Our objective is to permit the market to decide.
Most of our past enforcement actions have involved efforts to forestall the development of privately funded managed care. Yet for many citizens, private insurance is unavailable and government must step in. Many states are currently developing forms of publicly-sponsored insurance to provide medical coverage for the otherwise uninsured. Our most recent health care enforcement action involved such a program.
The Commonwealth of Puerto Rico developed a program for providing health care coverage for the uninsured, known as the Reform, which currently covers about 30% of the population. Around November 1996, the College of Physicians and Surgeons decided to take collective action to attempt to raise their reimbursement level under the Reform, which would have raised the costs to the taxpayers of Puerto Rico. The College ultimately called an eight-day strike, closing their offices and, in some cases, canceling elective surgery without notice.
This case was a fine example of state-federal cooperation. The staff of the Bureau and the Attorneys General office of the Commonwealth promptly investigated the matter. Last month, the FTC and the Commonwealth jointly filed a complaint and a consent, under which the College and three large medical groups that contracted with the government agreed not to engage in future boycotts or unintegrated collective price fixing.(15)
One somewhat novel aspect of the relief is that the College is required to provide $300,000 in restitution to the catastrophic fund of the Puerto Rico Department of Health. Although restitution is not common in Commission competition orders, such relief is appropriate here, where the Commonwealth paid higher prices for health services during the strike.(16) Requiring restitution was wholly appropriate and should be considered in other cases where we can identify an appropriate recipient of restitution and the amount of harm.
This is also the only case in which an enforcement agency has charged several IPAs or medical groups with conspiring together to boycott insurers. Our earlier cases have generally involved single medical groups that engaged in price fixing, group boycotts, or other illegal activity.
We have several other ongoing investigations, which I cannot speak about directly. Some involve sophisticated legal and policy issues such as the interaction of antitrust and intellectual property law, what forms of joint venture price setting are legal, exclusive dealing, and the obligations of a monopolist to deal with its competitors. I can not predict the outcome of the investigations, but I have a sense that the areas we are probing will be of critical importance in an increasingly high-tech driven economy.
Myth #8 -- The Supreme Court's Khan decision suggests that forms of minimum resale price maintenance may be legal.
Earlier this month, in State Oil Co. v. Khan,(17) the Supreme Court unanimously reversed its 1968 opinion in Albrecht,(18) and held that maximum resale price maintenance was no longer per se illegal. In some respects the result was unsurprising, since the New York City Bar Association and the FTC and Justice Department filed amicus briefs suggesting reversal.(19) The agencies' brief, quoting the Supreme Court's decision in ARCO,(20) observed that "the manufacturer's decision to fix a maximum resale price may actually protect consumers against exploitation by the dealer acting as a local monopolist." Thus, it was our view that in the vertical maximum price fixing context, the per se rule could be anti-consumer and ought to be changed. Moreover, the per se rule had little effect on government enforcement, since the antitrust agencies had not committed any enforcement resources to challenge a vertical maximum resale price maintenance arrangement in recent memory. Finally, as to Albrecht's premise that maximum price fixing could be used to disguise arrangements to fix minimum prices, the Court noted its "belie[f] that such conduct, as with the other concerns articulated in Albrecht can be appropriately recognized by and punished under the rule of reason."(21)
Some may suggest that the Supreme Court's opinion may open the door for the repeal of the per se rule against vertical minimum price fixing. Such an assessment is premature and overly generous.
The per se rule against vertical minimum resale price maintenance has existed for over eight decades. The Supreme Court has declined the opportunity to reverse the per se rule, as recently as its opinion in Monsanto Co. v. Spray-Rite Service Corp..(22) The Supreme Court's reasoning in State Oil is heavily based on the economic effects of maximum resale price maintenance and there is general consensus that the economic effects of minimum resale price maintenance are profoundly different.(23) Most important in this regard was the Court's observation that the "interpretation of the Sherman Act . . . incorporates the notion that condemnation of practices leading to lower prices to consumers is 'especially costly' because 'cutting prices in order to increase business is the essence of competition.'"(24) Thus, a rule that prohibited maximum resale price maintenance would be contrary to the purpose of bringing lower prices to consumers. A rule prohibiting minimum resale price maintenance is not similarly infirm. Finally, the prohibition of minimum resale price maintenance rests in part on a concern over facilitating or concealing horizontal collusion, concerns that are not present in the maximum resale price maintenance context.
It is also notable that although there were several amicus briefs filed by various interest groups, none of them suggested that the application of the per se rule to minimum resale price maintenance should be reversed.
So you can expect the Commission to enforce the per se rule against minimum resale price maintenance. The Commission certainly has brought traditional resale price maintenance cases, but some of our more important enforcement initiatives involve more novel arrangements. For example, sometimes a manufacturer may attempt to effectively establish resale prices through incentives rather than through an old fashioned resale price maintenance agreement.
In these cases the question is not whether there is an agreement, but whether the agreement fixed the resale price or price levels. This issue shows up in the contrast between the treatment of traditional cooperative advertising programs -- which are analyzed under the rule of reason -- and schemes in which dealers are explicitly paid to adhere to a particular price or price level -- which are not.
Earlier this year, the Commission challenged such a rebate scheme in American Cyanamid Corp.(25) Reflecting our cooperative relationships with the states, all 50 states and the District of Columbia announced their own settlements with American Cyanamid at the same time.(26) In that case, American Cyanamid had established a rebate program in a $1 billion agricultural chemical market, reflected in written agreements with its dealers, that paid a substantial rebate for each resale of crop protection chemicals at or above floor prices. American Cyanamid had set wholesale prices equal to the stated minimum prices, so the dealers lost money on every sale below the specified price.
In the Commission's view, as the complaint alleged, the program amounted to a quid pro quo between American Cyanamid and its dealers, under which American Cyanamid explicitly promised to pay dealers in exchange for adhering to the suggested price. That was an agreement on price or price level.
It is important to note that American Cyanamid does not take issue with other cases addressing dealer assistance programs, including cooperative advertising and discount pass-through programs. In traditional cooperative advertising programs, manufacturers help dealers pay for advertising or promotion, but add the condition that in the advertisements supported by the manufacturer, the dealer cannot include any price advertising unless the prices are at or above suggested levels. These programs are unlikely to raise antitrust concerns as long as dealers are free to price at whatever level they choose when they buy their own advertisements.
Myth #9 -- Don't worry about administrative litigation with the FTC; it will take years for them to litigate and even longer for them to issue a decision.
The pace of administrative litigation at the FTC has often been criticized and by the time I returned to the FTC in 1995 that criticism had become a national pastime. Because of that criticism Chairman Pitofsky formed a task force, under the leadership of then-General Counsel Stephen Calkins, to suggest reforms of the administrative litigation process. The task force suggested several reforms which were adopted by the Commission in September 1996. The reforms established shorter deadlines, streamlined pre-trial discovery, and speeded up the trial itself. In most cases, the amendments require the administrative law judge to issue an initial decision within one year after the Commission issues an administrative complaint. Let me provide you some preliminary results that suggest that these reforms show promise.
The Toys R Us case is a good example. The time from the issuance of the complaint in May 1996 to the decision of the ALJ in September 1997 was 16 months.(27) This included a very tough discovery schedule, which produced more than 9500 pages of transcript and 2600 exhibits, 43 days of hearings, and numerous motions. The result was a very thoughtful 126 page opinion.
Although no case has yet been litigated under the 12-month rule, we believe the procedural reforms have speeded pretrial proceedings and led to more timely resolution of cases. For example, in the first merger case litigated under the 12-month rule, ADP-Autoinfo, the ALJ scheduled the trial to start about six months after the complaint was issued. After about four months of pretrial proceedings, and with trial imminent, the parties sought a settlement and the case was removed from administrative litigation. The Commission approved the consent order last month.(28) The message is simple: parties can no longer expect to use delays in the administrative litigation to postpone their day of reckoning.
Second, the Commission has been far more diligent in issuing opinions on a timely basis, as a consequence of some other reforms. In each of the two litigated cases decided most recently -- California Dental Association and AIIC -- the Commission issued its opinion within four months after the case was argued. This is a significant improvement from the time where these decisions could take up to 1-2 years.
Does this mean we have made sufficient progress: I don't think so. We continue to evaluate how to improve the process of administrative litigation. No one is using the term "rocket docket" just yet, but long-time Commission critics may yet find that we have made real progress.
This has been a very interesting and challenging year at the FTC. Although we have not prevailed in all of our enforcement endeavors, we believe we have shown that antitrust plays a critical role in assuring that consumers receive the benefits of a competitive marketplace.
* The views expressed are those of the Bureau Director and do not necessarily reflect the views of the Federal Trade Commission or any Commissioner.
1. California Dental Association v. FTC, 1997-2 Trade Cas. (CCH) ¶ 71,954 (9th Cir. 1997).
2. United States v. Nippon Paper Indus. Co., 109 F.3d 1 (1st Cir. 1997), pet. for cert. filed (June 13, 1997).
3. FTC v. Staples, Inc., 977 F. Supp. 1066 (D.D.C. 1997).
4. Brown Shoe Co. v. United States, 370 U.S. 294 (1962).
5. Of course, some antitrust decisions find violations without defining relevant markets. See, e.g., FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986).
6. Wall Street Journal, Nov. 10, 1997 at 1.
7. Ciba-Geigy Ltd., C-3725 (consent order, Mar. 24, 1997).
8. Business Week, Jan. 20, 1997.
9. For further description of these initiatives, see Prepared Remarks of George Cary, Senior deputy Director, Bureau of Competition, before the ABA Antitrust Section, April 10, 1997.
10. FTC v. MEDIQ, Inc., Civ. No. 97-1916 (SS) (D.D.C. Aug. 22, 1997).
11. FTC v. Schnucks Markets, Inc., Civ. No. 01830 (E.D. Mo., filed Sept. 5, 1997).
12. The press reports that sales dropped approximately 37%. See "A Grocer Drove Off Customers on Purpose, Competitor Contends," Wall Street Journal, July 10, 1997, at 1.
13. Where parties fail to divest timely they may also face enforcement action. For example, in January, 1997, Red Apple Companies, Inc. and affiliated persons agreed to a $600,000 civil penalty judgment for failure to divest five Manhattan supermarkets in a timely manner.
14. Toys "R" Us., Inc., Dkt No. 9278 (Decision and Order of the administrative law judge Sept. 25, 1996).
15. FTC and Commonwealth of Puerto Rico v. College of Physicians and Surgeons, et al, Civ. No. 972466 (HL) (D.P.R. Oct. 2, 1997).
16. The Commission has obtained restitution in two other competition consent agreements. See FTC v. American Home Products Corp., No. 92-1365 (D.D.C. June 11, 1992) (consent agreement) and FTC v. Mead Johnson & Co., No. 92-1366 (D.D.C. June 11, 1992) (consent agreement) (cited approvingly in FTC v. Abbott Laboratories, 853 F. Supp. 526, 537 (D.D.C. 1994)).
17. 66 U.S.L.W. 4001, 1997-2 Trade Cas. (CCH) ¶ 71,961 (S. Ct., Nov. 4, 1997).
18. Albrecht v. Herald Co., 390 U.S. 145 (1968).
19. Brief for the United States and the Federal Trade Commission as Amici Curiae Supporting Reversal, State Oil Co. v. Kahn, No. 96-871.
20. Atlantic Richfield Co. v. USA Petroleum, 495 U.S. 329, 343 n.13 (1990).
21. Slip Op. at 11-12, citing, among others, Robert Pitofsky, "In Defense of Discounters: The No-Frills Case for a Per Se Rule Against Vertical Price Fixing," 71 Geo. L. J. 1487, 1490, n.17 (1983).
22. 465 U.S. 752 (1984).
23. See DOJ/FTC amicus brief at fn 8.
24. Slip op. at 19.
25. C-3739 (consent order, May 12, 1997) (Comm'r Starek dissenting). In part, the consent order prohibits American Cyanamid from conditioning the payment of rebates or other incentives on the resale prices its dealers charge for American Cyanamid products.
26. The multi-state task force obtained a settlement valued at $7.3 million.
27. The case was litigated before the new procedural reforms were implemented, so the 12-month rule did not apply.
28. Automated Data Processing, Dkt. No. 9282 (Oct. 20, 1997).