The Plenary Session of the Annual Meeting of The Society of Tribologists and Lubrication Engineers, Bally's Hotel
Las Vegas, Nevada
I. INTRODUCTORY COMMENTS
A. I appreciate the invitation to address your Society on how oil industry mergers and acquisitions will affect your profession in coming years. My remarks today are solely my own and do not necessarily reflect the views of the Commission or of any other Commissioner.
B. Because I am not an expert on tribology, before I venture into the oil business, I will beg your indulgence to focus on a somewhat broader topic -- recent FTC developments that are likely to affect the lives of all Americans, and how the Commission deals with these developments under its mandate to prevent "unfair methods of competition" and "unfair or deceptive acts or practices."
C. Before I delve into that topic, though, I’d like to explain a bit about my philosophy of government and the role of an agency like the FTC. The genius of the free market provides the wellspring for many of my views:
- I firmly believe in a limited -- indeed, minimal -- role for governmental involvement in the functioning of the market. Governmental intervention in the economic sphere should be reserved for those relatively rare instances where the government can do more good than harm.
- In all other cases -- and by this I mean the vast majority of cases -- the market should be allowed to function free of government involvement. We in the government will enrich the lives of all Americans if we faithfully apply a creed to our work -- something very much like the Hippocratic Oath: "First, do no harm."
- That is a major reason why I have occasionally dissented from actions taken by the Commission, on both the antitrust and the consumer protection fronts. In my 17 months at the FTC, I have generally found that the agency acts with restraint and respect for free markets. Sometimes, however, I have parted ways with my fellow Commissioners because in my judgment the market itself -- without FTC intervention -- will generate a solution to the competitive or consumer problem we have identified. (Indeed, on occasion I may not even agree with my colleagues’ condemnation of certain business conduct, which I may view as legitimate hard competition rather than anticompetitive or unfair.) When I see a close call, I am willing to resolve doubts in favor of market dynamics and against the frequently rigid -- and rather undynamic -- role of government institutions.
II. RECENT ANTITRUST HIGHLIGHTS AT THE FTC
Before I talk about recent FTC developments bearing directly on tribology and lubricants, I thought I’d touch briefly on the wide range of our antitrust enforcement activities, just to give you an idea of the sometimes-panoramic sweep of our work. In the less than one and one-half years since I joined it, the Commission has considered merger cases involving:
airport in-flight catering; arterial pumps; cable TV; cement; concrete roofing tiles; drug wholesaling; funeral homes and cemeteries; gasoline transportation, terminaling, wholesaling, and retailing; heart defibrillators; heart-lung machines; hospitals; household glass cleaners and soil and stain removers; hydrogen peroxide; individual disability insurance; industrial analytical instruments; local anesthetics; microprocessors; pharmacy benefit management services; pipeline transportation of natural gas and natural gas liquids; polymers used in floor-care products; premium Scotch and gin; propane; reagents for drugs of abuse testing; real estate title insurance services and title plants; refractories for glass furnaces; residential intercoms; retail pharmacies; supermarkets; systems engineering and technical assistance for ballistic missile defense; thinwall bearings for cars and trucks; vacation timeshare exchange services; viscosity index improvers for motor oil; and, believe it or not, even more.
Only a few industries -- including banks, interstate common carriers, and airlines -- are exempt from our jurisdiction under the Federal Trade Commission Act, and sometimes it feels as if we’ve dealt with all of the rest during my short time at the FTC. If you were to ask me for an apt metaphor for working there, I’d be tempted to invoke the image of a huge intellectual smorgasbord.
Meanwhile, in the nonmerger or conduct area -- involving alleged collusion, vertical restraints of trade, monopolization, and other types of antitrust violations -- the Commission has had some high-profile enforcement activities involving such well-known firms as Toys "R" Us, Intel, Mylan Laboratories, and others. Both Toys "R" Us and Intel have been occasions for me to express some differences with my FTC colleagues. In Toys "R" Us, I agreed with the majority’s finding that Toys "R" Us entered into a series of individual "vertical" agreements with important toy manufacturers to keep key product out of the hands of club stores, but I disagreed with their conclusion that Toys "R" Us orchestrated a "horizontal" conspiracy among the manufacturers to boycott the clubs. In Intel, I voiced reservations about both the complaint against Intel -- which alleged that Intel abused its monopoly power in microprocessors by cutting off several customers’ access to key technical information and microprocessor prototypes in order to coerce those customers to grant Intel licenses to certain of their intellectual property -- and the settlement that the firm and the Commission hammered out in March. (The U.S. Court of Appeals in Chicago heard oral argument just last Tuesday on the Toys "R" Us appeal from the Commission’s decision.)
Streamlining the FTC Process
Because your Society’s focus is more on the merger area -- and also because mergers devour such a large proportion of the FTC’s antitrust resources -- I want to spend a little more time highlighting merger developments of general interest before talking about cases directly affecting your industry. Because of the tidal wave of big mergers that we are now experiencing -- for example, close to 5000 transactions were reported under the Hart-Scott-Rodino program in fiscal 1998 -- we have found ways to save resources by streamlining our operations and reducing the burdens on merging parties. These developments should be of considerable interest to anyone in the business community involved in corporate mergers.
- We sometimes are able to take a "quick look" focusing on key issues raised by a merger, thereby reducing significantly the information that needs to be submitted.
- We’ve increased efforts to achieve divestiture of an ongoing, stand-alone business (rather than isolated assets that may not enjoy good prospects for viability).
- We’ve emphasized more "upfront buyer" requirements in divestiture orders, in order to avoid complications that have arisen when a buyer must be located and approved after consummation of the challenged acquisition.
- Appointment of interim trustees to oversee respondents’ compliance with provisions of divestiture orders (including, among other things, a prohibition on wasting of assets; a requirement to furnish technical assistance to new acquirer; a requirement, if appropriate, that the respondent enter into a limited-duration supply relationship with the new acquirer).
- Use of "crown jewel" requirements in some orders, which allow the Commission to order the divestiture of other, particularly valuable assets if the assets originally required to be divested are not sold. These requirements are designed to spur the respondent to achieve mandated divestiture quickly and to ensure that, in the event the mandated divestiture fails, the Commission will accomplish effective antitrust relief in its stead.
Recent FTC Antitrust Cases
I want to touch on a few key, recent antitrust cases at the FTC that don’t involve petroleum and its by-products before I discuss cases perhaps closer to your hearts.
- Intel: I’ve already mentioned the Commission’s settlement of a case charging Intel with anticompetitive practices vis-à-vis several of its microprocessor customers. The proposed settlement has been put out for public comment, and a statement that I issued last month asks the public for guidance on both the underlying theory of the complaint as well as the terms of the consent agreement. My statement voices concerns about the enforceability of the proposed order, which seems to me to rely too much on the Commission’s ability to divine Intel’s corporate "state of mind" when it withholds technical information or prototypes in the future. I’m looking forward to reviewing the comments that we receive.
- Digital Equipment: Another high-technology case during my tenure arose from Intel’s acquisition of certain semiconductor manufacturing assets from Digital Equipment. (Digital itself was later acquired by Compaq.) The Commission’s order against Digital requires the firm to license its Alpha microprocessor technology to Advanced Micro Devices and Samsung Electronics, and also to certify IBM or another FTC-approved firm as an alternative production source of Alpha chips. The Commission wanted to ensure that Intel did not become the sole source of Alpha chips, which represent perhaps the most significant alternative on the market to chips using Intel architecture.
- Mylan: The Mylan case, which I mentioned a few minutes ago, has been prominently featured in the news recently. The Commission’s complaint, filed several months ago in federal court in Washington, D.C., alleges that Mylan (one of the world’s largest manufacturers of generic drugs) and several other defendants committed a number of antitrust violations. These alleged offenses include entering into anticompetitive exclusive licensing agreements for the supply of active pharmaceutical ingredients for lorazepam and clorazepate -- two important drugs used for treating anxiety and other conditions -- as well as monopolization, attempts to monopolize, and conspiracies to monopolize the markets for generic lorazepam and clorazepate tablets. The FTC’s amended complaint alleges that, in the wake of its anticompetitive activities, Mylan raised the prices of clorazepate tablets by between 1900 and 3200 percent and raised the prices of lorazepam tablets by between 1900 and 2600 percent. (For example, a 500-count bottle of 7.5-milligram clorazepate tablets rose in price from $11.36 to $377, while a 500-count bottle of 1-milligram lorazepam tablets went from $7.30 to $191.) One aspect of the case that has drawn much attention is the Commission’s request that the court award more than $120 million in disgorgement and restitution for the benefit of consumers who suffered the eye-opening price increases imposed by Mylan in the wake of its allegedly illegal activities.
- Drug Wholesalers: The last non-oil antitrust item I want to mention involves the drug wholesaling mergers that the Commission dealt with last year. In early March 1998, the Commission authorized the staff to seek preliminary injunctions in federal court to block Cardinal’s proposed acquisition of Bergen Brunswig and McKesson’s proposed acquisition of AmeriSource – two transactions that would have combined the Nation’s four largest drug wholesalers into two. Despite the increase in industry concentration that would stem from these mergers, I considered anticompetitive effects unlikely and did not join my colleagues in authorizing the lawsuit. Although the FTC’s success in the injunction case did not turn me into a true believer, it’s obvious that the staff litigating the case for us did a superb job, and Judge Sporkin concluded that the Commission had established grounds for a preliminary injunction against each transaction. Both pairs of merging companies thereupon abandoned their deals.
III. OIL INDUSTRY DEVELOPMENTS
The Commission has recently had both antitrust and consumer protection cases that should be of interest to tribologists and lubrication engineers. I’ll begin with a few antitrust matters. (Other than to acknowledge that we’re looking at the proposed Exxon/Mobil and BP Amoco/ARCO mergers, I won’t answer any questions about the ongoing investigations of those deals.)
Probably the antitrust case most directly pertinent to your interests -- and one with which you’re no doubt familiar -- culminated in an FTC consent order against Exxon and Shell last fall. Those two firms proposed a joint venture for their viscosity index improver businesses, and the Commission was concerned that this transaction could increase the likelihood of collusion in the viscosity index improvers industry, leading to higher prices and reduced quality and innovation. As a remedy, the Commission ordered Exxon to divest its viscosity index improver business to Chevron Chemical Company or to another FTC-approved buyer.
- We’ve had a number of other important antitrust cases in the petroleum industry, although probably none as close to home for you as Exxon/Shell. For instance, we’ve looked at (or are still examining):
- The big joint venture between Shell’s and Texaco’s U.S. refining, transportation, and marketing businesses. This transaction involved a number of affected markets, including gas stations in San Diego, gas stations and terminals in Hawaii (Oahu), a refinery in Washington State, asphalt in Northern California, and petroleum product pipelines running from the Gulf Coast to the northeastern U.S.
- British Petroleum’s acquisition of Amoco, which resulted in an FTC consent order involving gas stations and light petroleum product terminals. Some of you may know that I dissented from the part of the order requiring divestiture of gas stations in the southeastern United States. I thought the evidence showed pretty convincingly that switching by gasoline jobbers among oil companies was likely to defeat efforts by the oil companies to levy anticompetitive price increases.
- BP Amoco’s proposed acquisition of ARCO, which is undergoing review at the FTC.
- The marketing of gasoline in California. (Our examination of the Exxon/Mobil and BP Amoco/ARCO transactions is also looking more generally at effects on the supply of gasoline in the western United States.) As it often does, the Commission has productive cooperative relationships in these investigations with a number of state attorneys general and with the European Commission’s Directorate-General for Competition.
Consumer Protection Cases
The oil industry has also generated a number of consumer protection cases germane to your Society. I cannot discuss the merits of a couple of these cases, which are in administrative litigation at the FTC, but I can tell you what our complaints allege. As for the three cases that have been settled in recent years, I can give you some idea of what relief the Commission prescribed.
- The three settled cases involved Ashland, Inc. (the manufacturer of Valvoline TM8 Engine Treatment), the Blue Coral subsidiaries of Quaker State that manufacture the Slick 50 Engine Treatment, and STP. The complaints against these respondents alleged that their advertising made deceptive claims that their engine treatments would, among other things, reduce engine and bearing wear, extend engine life, and improve fuel economy.
- These cases, as well as the two matters now in litigation, involve engine treatments -- substances that are supposed to alter the performance of the engine directly, irrespective of whether the oil is being replaced -- rather than oil additives, which I understand to be substances that are added with each new oil change and are intended to act directly on the oil’s performance.
- The order in each of the settled cases bars the respondent from making misrepresentations about its engine treatment and requires competent and reliable evidence that substantiates representations about engine life, mileage, horsepower, temperature reduction, emissions, and certain other attributes.
- As I said, two other engine treatment cases are now pending before an FTC administrative law judge. The Commission issued its complaint against Motor Up Corporation last month, and the complaint against Dura Lube was announced a few weeks ago. The complaints charge these companies with making deceptive claims about their engine treatments, including certain claims not backed up with adequate substantiation. Because these two matters are in litigation at the FTC, I’ll have to leave it at that.
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Thank you very much. I appreciate having had this opportunity to address your Society on some antitrust and consumer protection developments pertinent to your members. I’ll leave you with a few questions that I hope will provoke thought and dialogue, and I’d be glad to hear your responses to them:
- As I said at the beginning of my remarks, I think that the first obligation of government officials is to do no harm. Do you think that the FTC is causing any harm? If so, how? Is there a way that we can still do our job and yet cause less harm?
- I am always interested in finding better ways of helping businesses comply with the laws that we enforce. Would more guidance about laws enforced by the FTC be beneficial? If so, what is the best method of getting information to you -- policy statements, brochures, professional articles, speeches, etc.?
- Without going into details about the Exxon/Mobil merger or the BP Amoco/ARCO merger, can you tell me what changes you have seen recently in the oil industry and what you anticipate in the near future? Are these changes good or bad for competition? Are they good or bad for consumer?