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A tale of two cities: Brussels, Washington, and the assessment of unilateral conduct.

Achieving convergence between American and European competition law approaches to the assessment of single firm conduct (SFC) would reduce costly business uncertainty and promote beneficial commercial activity. In 2009, the European Commission issued formal guidance on its analysis of SFC; a 2008 Justice Department Report on SFC was critiqued by the Federal Trade Commission and withdrawn in 2009. Although withdrawal of the Justice Department Report may have narrowed the perceived gap between American and European SFC policy (and reduced potential tensions between Justice Department and FFC approaches), it has not fully eliminated it. Steps that might be taken to bridge this gap include framing bilateral discussion in commonly accepted economic terms; working toward a common understanding of balancing tests; seeking to establish consensus approaches to particular practices; analyzing the centrality to the competitive process of conduct under scrutiny; taking into account the most recent findings from economic research; and cooperating in investigations. Although not a panacea, these and similar approaches should lead to greater consistency between U.S. and European enforcement policy and thereby promote welfare.

I. INTRODUCTION

The past decade has featured significant efforts to promote convergence of antitrust law standards ("competition law" in international parlance) worldwide. These efforts have borne substantial fruit in core fields including merger process, substantive merger analysis, and cartel prosecution. (1) In the areas of monopolization and (the European analogue) dominant single firm conduct (SFC), however, there remains a gap between the approaches taken by the two enforcement "market leaders," the United States and the European Union. Just as significantly, there is uncertainty about the approaches to SFC that will guide policy at the U.S. Department of Justice (DOJ) and the U.S. Federal Trade Commission (FTC). In a global economy increasingly characterized by international transactions, the existence of divergent enforcement approaches to SFC engenders costly business uncertainty and may deter consumer welfare-enhancing commercial activity. (2) Given the importance of clear SFC rules to both the business community and to enforcers (who need to reduce the costs of cooperation and multijurisdictional enforcement), policy convergence in this area (both at home and abroad) would be highly beneficial. The salient question, however, is how do we achieve such convergence?

Following background observations on the crafting of SFC rules, this article briefly assesses the approaches to SFC taken in a September 2008 DOJ report (the Section 2 Report or the Report) and in a rebuttal statement issued by a majority (three out of four) of the FTC's Commissioners (the Section 2 Statement or the Statement). (3) After discussing DOJ's May 2009 withdrawal of the Section 2 Report, the article sets forth considerations that the FTC and DOJ may wish to weigh if they seek to harmonize their positions on SFC. It next turns to an evaluation of the European Commission's (EC) December 2008 Guidance Paper (the Guidance Paper) on exclusionary SFC under European law. It then briefly summarizes differences between the Guidance Paper and U.S. policy, in light of the withdrawal of the Section 2 Report. The article concludes by suggesting guiding principles that may help European and American competition policy makers find common ground as they seek to bridge remaining transatlantic SFC policy differences.

II. BACKGROUND--WHAT ASSUMPTIONS SHOULD INFORM SFC RULES?

Crafting appropriate antitrust rules applicable to SFC is an inherently problematic exercise. It is often difficult to decide whether aggressive unilateral behavior seeks inappropriately to exclude rivals and harm the competitive process (and thus reduce consumer welfare) or, instead, to enhance overall efficiency and thereby strengthen the competitive process (despite the harm inflicted on less effective competitors). (4) Relatively "restrictive" antitrust rules designed to discourage "bad" SFC may also discourage "good" single firm behavior from being undertaken in the first place and lead to incorrect prosecution of some aggressive looking but procompetitive conduct (false positives or type I error). By contrast, relatively lax antitrust rules devised to allow more aggressive procompetitive SFC may also lead to incorrect failure to challenge some anticompetitive conduct (false negatives or type II error). In principle, applying decision theory, (5) theoretically ideal SFC antitrust rules would maximize welfare by minimizing the sum of the welfare losses due to the discouragement of desirable SFC, false positives, and false negatives plus administrative and litigation costs associated with SFC enforcement. Given the changing nature of business arrangements (which adjust over time in response to new information) and imperfect knowledge by enforcers, ideal rules cannot be identified. Policy makers can, however, strive to devise second best SFC rules that promote welfare maximization to the greatest extent possible, applying these principles, consistent with the best information they have at hand. (6)

III. THE SECTION 2 REPORT

The DOJ Section 2 Report set forth a detailed analytical framework for section 2 jurisprudence--widely recognized as the most vexing and uncertain area of American antitrust enforcement. (7) In developing this framework, the Section 2 Report: (1) took note of key testimony from joint FTC-DOJ Hearings on section 2 (Section 2 Hearings) (8) held during 2006 and 2007; and (2) used the Section 2 Hearings record, interpreted in light of case law and current economic and legal literature, to shape a series of recommendations for the appropriate application of section 2 to different types of conduct. These recommendations did not amount to formal enforcement guidelines. The Section 2 Report argued, however, that, if adopted as evaluation methodologies by enforcers and the courts, the recommendations would substantially clarify the appropriate boundaries for the finding of section 2 violations. The Report opined that such clarification would enhance consumer welfare and tend to promote innovation, by improving the quality of section 2 enforcement (in particular, weeding out bad cases, identifying sound ones, and reducing the systemic costs of judicial administration in this area) and reducing costly business uncertainty that deters aggressive welfare-enhancing SFC. In short, the Section 2 Report went well beyond a positive analysis of the state of the law by providing normative guidance for possible future doctrinal reform.

The Section 2 Report placed great emphasis on the benefit of giving firms substantial leeway to engage in aggressive profit-seeking behavior, without undermining the importance of vigorous enforcement where appropriate. (9) It reflected an implicit understanding that the occasional failure to prosecute valid SFC cases will be corrected by market forces over time, if not immediately. The gist of the Report's philosophy may be summarized as follows. The marketplace itself limits the extent of the harm that flows from monopoly maintenance. Monopoly profits spur entry and innovation by competitors that seek to displace the monopolist. As a result, consumers benefit from new products and services and the monopoly is eventually eroded. By contrast, the incorrect prosecution of a firm wrongly accused of engaging in monopolizing behavior deprives consumers of the benefits produced by that firm's conduct. But far more importantly, the mistaken prosecution dissuades other firms from engaging in aggressive, consumer welfare-enhancing behavior. This welfare-inimical constraint on business activity cannot be whittled away by market forces over time, because the faulty legal standards that generate it are immune to market correction. In sum, the Section 2 Report implicitly accepted the proposition that harm due to false negatives is limited and will be corrected in due order, but harm due to false positives is substantial and has a malign economic "ripple effect" that can only be corrected by future legal reform." (10) For that reason, the Report was more concerned about avoiding false positives than avoiding false negatives.

The Section 2 Report proposed the following SFC enforcement principles:

(1) The plaintiff should have the initial burden of establishing that challenged conduct harms the competitive process and therefore has a potentially anticompetitive effect. If plaintiff carries that burden, defendant should have the opportunity to proffer and substantiate a procompetitive justification for the challenged conduct. If defendant does so, plaintiff then should have the burden of establishing that the challenged conduct is anticompetitive under the applicable enforcement standard.

(2) There is no "one size fits all" test for assessing SFC. In the absence of a conduct-specific test, SFC should be deemed to violate section 2 of the Sherman Act if its anticompetitive effects are shown to be substantially disproportionate to any associated procompetitive effects. (11)

(3) In the case of single-product predatory pricing, DOJ endorses the principle that a plaintiff alleging predatory pricing must show that the defendant cut prices below an appropriate measure of its costs and had a dangerous probability of recouping its investment in below-cost prices. In most cases the appropriate cost measure will be average avoidable cost (average costs, variable plus fixed, that could have been avoided absent incremental predatory output), but average variable cost will be used when the defendant's incremental output due to predation cannot be identified. DOJ endorses the test for predatory bidding enunciated in the Supreme Court's Weyerhaeuser decision.

(4) The antitrust rule of reason should be applied to tying. Tying arrangements should be condemned only if their anticompetitive effects are "significantly disproportionate" to any benefits. Technological tying arrangements (products technologically linked to work together, in contrast to contractual tying) yield major consumer benefits that could be undermined through the second guessing of design decisions, and thus should be condemned only in exceptional cases (such as when linking two separate products serves no purpose other than to harm competitors and thereby harm the competitive process).

(5) When bundle-to-bundle competition is effective, the predatory pricing rule should apply to bundling (the sale of multiple products in a bundle). When bundle-to-bundle competition cannot occur, a cost-based safe harbor should apply, in which an imputed price for the item (or items) in the bundle potentially subject to competition is computed by allocating to that item (or items) the entire discount or rebate received by a customer. If bundled discounting fails a safe harbor, a plaintiff should be required to demonstrate that the practice has harmed the competitive process or likely would do so if allowed to continue. If the defendant demonstrates that the practice has a procompetitive explanation, it should be condemned only if plaintiff demonstrates a substantially disproportionate anticompetitive harm.

(6) Single product loyalty discounting (discounts on all units of a single product conditioned upon the level of purchases) should be treated like predatory pricing unless the seller's revenues are less than an appropriate measure of its costs. If a significant portion of a customer's purchases is not subject to meaningful competition, further study of the practice is necessary before concluding that standard predatory-pricing analysis is appropriate.

(7) Antitrust liability for mere unilateral, unconditional refusals to deal with rivals should not play a meaningful role in section 2 enforcement.

(8) Exclusive dealing arrangements foreclosing less than thirty percent of existing customers or effective distribution should not be illegal. When a firm with lawful monopoly power utilizes exclusive dealing, one should examine whether the exclusive dealing contributed significantly to maintaining monopoly power and whether alternative distribution channels allow competitors to pose a real threat to the monopoly before potentially imposing liability. Only exclusive dealing arrangements whose anticompetitive effects are disproportionate to their benefits should be condemned.

(9) Prohibiting a defendant from engaging in specific acts, defined by clear and objective criteria, is the proper remedy if it would be effective. In some circumstances, however, re-establishing the opportunity for competition requires the imposition of additional affirmative obligations on defendant. Structural remedies, including various forms of divestiture, may be appropriate if there is a clear, significant causal connection between defendant's monopoly power and the unlawful acts. Radical restructuring of the defendant, however, is appropriate only if there is no other way to achieve the remedial goals and the determination is made that restructuring would likely benefit consumers. Further consideration of appropriate monetary damages and penalties for section 2 violations may be useful.

(10) Enforcers should continue to explore ways of strengthening cooperation with counterparts in other jurisdictions and increasing convergence on sound enforcement policies.

Reflecting these enforcement principles, key themes that emerged from the Section 2 Report included the following:

* Aggressive unilateral business behavior generally promotes a vibrant economy and should not be lightly discouraged. There are instances, however, when specific unilateral actions harm welfare and merit antitrust prosecution.

* An appropriate antitrust enforcement regime with respect to single firm conduct should employ decision-theoretic considerations and seek to minimize the costs of false positives (which are particularly pernicious), false negatives, litigation costs, and related administrative costs. The general benefits of aggressive single firm conduct should be kept in mind in performing this rough-and-ready calculus. A number of specific principles, set forth below, flow from this approach.

* In applying the antitrust rule of reason, unilateral conduct will be upheld unless it can be shown that the harm it imposes greatly ("disproportionately") outweighs its efficiency benefits.

* Safe harbors and related screening devices (market share for monopoly power, recoupment for predatory pricing, price-cost standards for bundling, restrictive tests for refusals to deal, exclusive dealing, and tying) should be adopted. They can enhance welfare by structuring section 2 investigations and clarifying the bounds of acceptable conduct for business decisionmakers.

* Conduct that falls outside safe harbors or simple screens should not be presumed problematic and should be struck down based only on solid empirical evidence, backed by sound economic analysis, of disproportionate harm relative to benefits.

* Remedies should be proportionate to the violation in question and commensurate with the evidentiary support. Concerns of efficacy, administrability, and the maintenance of efficiency and innovation should be paramount. Cease and desist prohibitions are often the most effective at achieving these goals. Private treble damage remedies may chill efficient conduct, and monetary remedies in general may merit closer scrutiny.

* In light of the proliferation of diverse antitrust regimes, American antitrust enforcers should work hard to promote beneficial convergence of SFC standards (as well as other antitrust standards) based on sound economic principles.

IV. THE SECTION 2 STATEMENT

The Section 2 Statement took issue with "four fundamental premises" it believed informed the Section 2 Report. First, the Statement noted that in embracing the theory that the promise of monopoly profits drives firms to innovate and compete, the Report understated the facts that monopolies tend toward inefficiency, have reduced incentives to innovate, and may leverage monopoly power in one market into other markets. Second, the Statement opined that the Report's emphasis on the risk of over-enforcement of section 2 was overstated; the Statement said that public enforcers and the private bar are up to the task of deciding which section 2 claims are appropriate. Moreover, the Statement viewed the Report as downplaying the risk of underenforcement, given that markets can take long periods of time to correct themselves and consumers will suffer in the meantime. Third, the Statement disagreed with the Report's concern with costs of administration in section 2 litigation, asserting that there is no methodology for comparing the relative costs to businesses and consumers of section 2 enforcement. Fourth, the Statement called into question the Report's emphasis on particular bright line rules for legality, indicating that the benefits of clear rules must be balanced against the benefits of effective law enforcement in the absence of safe harbors. The Statement also asserted that the Report overstated the extent to which the Supreme Court has embraced such bright line rules. In sum, the Statement took the position that neither the views of section 2 stakeholders nor the Supreme Court's holdings justified the need for the "drastic" changes proposed by the Report.

The Section 2 Statement also assessed a number of the practice-specific proposals found in the Report. With respect to single product predatory pricing, the Statement expressed concern about the Report's support for the legality of pricing above average avoidable cost, on the ground that such pricing could in certain cases allow a monopolist to exclude a rival that has constrained the exercise of monopoly power. In the case of loyalty discounts, the Statement found no authority for the Report's proposed price-cost safe harbor. Similarly, with regard to bundled discounts, the Statement found a basis lacking for price-cost rules of legality and the requirement of "disproportionality" of costs over benefits. Similarly, with respect to tying, the Statement found no support in the law for an ill-defined "significant disproportionality" of costs over benefits liability standard. The Statement also disagreed with the Report's conclusion that unilateral refusals to deal should play "no meaningful role" in section 2 enforcement; the Statement stressed that even the Supreme Court has acknowledged that a monopolist's right to refuse to deal is not unqualified. Finally, the Statement took issue with the Report's approach to exclusive dealing, critiquing the use of a market share safe harbor and the "disproportionality" of costs to benefits test.

V. DOJ'S WITHDRAWAL OF THE SECTION 2 REPORT

On May 11, 2009, newly confirmed Assistant Attorney General for Antitrust Christine Varney withdrew the Section 2 Report, stating specifically that "[w]ithdrawing the Section 2 [R]eport is a shift in philosophy" and "I do not agree with the conclusions of the Section 2 [R]eport." (12) Varney explained that "the [Section 2] [R]eport advocated hesitancy in the face of potential abuses by monopoly firms," reflecting "the [incorrect] notion that most unilateral conduct is driven by efficiency and that monopoly markets are generally self-correcting." (13)

In a May 12, 2009, speech, Varney rejected "proposing any one specific test to govern all Section 2 matters at this time." (14) Rather, she opined that DOJ should "go back to the basics" and evaluate single firm conduct against "tried and true standards that set forth clear limitations on how monopoly firms are permitted to behave," (15) reflected in such landmark section 2 cases as Lorain Journal, (16) Aspen Skiing, (17) and Microsoft. (18) Varney also cited cases such as Dentsply (19) and Conwood (20) as "strong examples of successful challenges to exclusionary conduct ... [that] the [Justice] Department will look to ... in establishing its Section 2 enforcement priorities." (21) She summarized her section 2 enforcement approach as follows: "[F]ollowing the D.C. Circuit's decision in United States v. Microsoft, we will need to look closely at both the perceived precompetitive and anticompetitive aspects of a dominant firm's conduct, weigh those factors, and determine whether on balance the net effect of this conduct harms competition and consumers. Going forward, the Department is committed to aggressively pursuing enforcement of Section 2 of the Sherman Act in furtherance of the principles embodied in [the] cases [cited above]." (22)

VI. HOW WILL FTC AND DOJ POLICY BE HARMONIZED?

The obvious tensions between the Section 2 Report and the Section 2 Statement created problems for U.S. competition officials on both the domestic and international planes. On the domestic plane, these tensions shed doubt on the standards that federal antitrust enforcers will apply when assessing SFC, creating complications for business planners and judges (who may look to federal agency policy statements for sound analysis) alike. On the international plane, these tensions made it more difficult for the United States to promote the convergence of national SFC enforcement policies toward sound, commonly agreed-upon principles. (23) DOJ's withdrawal of the Section 2 Report eliminates the problem of a direct conflict between the FTC's and DOJ's enforcement policies, but it does not offer businesses immediate answers as to the exact contours of the new administration's SFC enforcement agenda.

Under the Obama administration, senior FTC and DOJ officials may be expected to take steps to further clarify their views on SFC enforcement, ideally in a manner that harmonizes the agencies' views. (24) Perhaps the most direct way to do this is to bring cases. By fleshing out SFC conduct theories in the context of fact-specific situations, the enforcement agencies may be able to shed valuable light on the principles dominant firms should bear in mind to keep their business strategies in line with section 2 principles. (Recent complaints lodged against Intel and Transitions Optical by the FTC, (25) and against Blue Cross of Pennsylvania and major credit card companies by DOJ, (26) offer limited insights into particular types of single firm conduct that are of current interest to the agencies, but do not provide broad policy guidance on the agencies' SFC enforcement policies.) New agency leaders also might choose to give speeches or interviews that explain how SFC enforcement policy perspectives have become better aligned at the FFC and DOJ. FTC staff working papers on specific SFC topics, developed in conjunction with the Section 2 Hearings, provide a valuable resource for consultation. (27)

This article does not speculate on the analytical blueprint the agencies will follow in planning SFC enforcement initiatives. Nevertheless, in deciding how to proceed, new agency leaders will have to confront judicial constraints that could complicate their enforcement efforts. In his Comments on the Section 2 Report and FTC Statement, then-Chairman (now Commissioner) Kovacic highlighted the fact that U.S. federal courts have become most attentive to the potential efficiencies of SFC and the limitations of antitrust courts in applying enforcement principles sensibly. Moreover, "[m]odern Supreme Court jurisprudence gives no reason to conclude that future doctrine will be less hospitable to dominant firms in the foreseeable future. A proper appreciation for these trends ought to inspire caution before one embraces the proposition that U.S. antitrust doctrine and policy today expose dominant firms to significant, systematic risks attributable to over-inclusive liability rules." (28) Commissioner Kovacic's comments suggest two related points: (1) highly aggressive SFC enforcement policy is unlikely to fare well in the courts (at least in the foreseeable future), (29) and (2) current federal jurisprudence is at odds with claims that efficient SFC is being chilled by the threat of antitrust liability. Furthermore, according to Commissioner Kovacic, "[i]f, as I believe, judicial perceptions of overreaching by private suits are narrowing the zone of substantive liability, public agencies may be unable to do their job. This consideration points to the need for a deeper empirical examination of how the operation of private rights actually affects business decision making and how public agencies can prosecute cases without carrying burdens that courts have imposed on private litigants to cure perceived deficiencies in the system of private rights." (30) The extent to which courts will heed this call for a greater deference to public enforcers' as opposed to private plaintiffs' litigation positions remains to be seen, of course.

VII. THE EUROPEAN APPROACH TO SFC

Further thickening the SFC policy plot is a Guidance Paper on SFC enforcement (31) released in December 2008 by the EC and finalized in February 2009 (the EC Statement). The EC Statement, which is summarized below, emphasizes up front an effects-based approach to SFC enforcement, focused on case-specific facts, that seeks to protect an effective competitive process and not simply protect competitors and that has as its goal the enhancement of consumer welfare. (32) These principles may be deemed to reflect a general transatlantic competition policy consensus that existed both before and after withdrawal of the Section 2 Report. In other respects, the EC Statement was significantly at odds with the Section 2 Report. Withdrawal of the Report may pave the way for reconciliation of many (if not all) of these transatlantic differences.

The EC Statement is not a recitation of binding law but, rather, an analytical report intended to guide EC competition enforcement priorities regarding exclusionary SFC. (33) After delineating its general approach to exclusionary conduct, the EC Statement sets forth special tests that it will apply to four forms of abuse: exclusive dealing, tying and bundling, predation, and refusals to deal.

A. General approach

EC enforcement officials will, as a general matter, take enforcement action against a firm that has been found to be dominant and to have engaged in anticompetitive foreclosure of competitors, unless the firm can show that its conduct was objectively necessary or produced substantial efficiencies that outweigh any anticompetitive effects on consumers. The discussion in the EC Statement suggests businesses will find it very hard to make successful objective necessity and efficiencies justifications.

1. DOMINANCE A finding of dominance (generally analogous to substantial market power or monopoly power in the United States) is a prerequisite to enforcement action. Paragraph 11 of the EC Statement provides "that an undertaking which is capable of profitably increasing prices above the competitive level for a significant period of time ... will generally be regarded as dominant." ("Increase prices" is used as shorthand for such competitively relevant factors as prices, output, innovation, variety, and quality.) Market shares are significant--the higher the market share and the longer it has been maintained, the more likely EC enforcers will find dominance. A finding of dominance is unlikely if the undertaking's market share is below forty percent in the relevant market, but there may be cases below this threshold that will warrant EC enforcement attention (because of competitors' supply limitations, for example). In addition to market share, expansion or entry and countervailing buyer power will also be weighed in assessing dominance.

2. FORECLOSURE If dominance is found, the EC will normally bring an SFC enforcement action if anticompetitive foreclosure (denial to rivals of effective access to supplies or markets yielding likely consumer harm) is found. (34) In deciding if anticompetitive foreclosure is present, the EC will examine various factors, including the position of the dominant undertaking; the conditions in the relevant market; the position of the dominant undertaking's competitors; the position of customers or input suppliers; the extent of the allegedly abusive conduct; possible evidence of active foreclosure; and direct evidence of any exclusionary strategy. This laundry list approach may raise difficult questions about whether or not actionable foreclosure will be found in a particular instance.

3. PRICE-BASED EXCLUSIONARY CONDUCT The EC will "normally" intervene only when a dominant firm's conduct has hampered, or is capable of hampering, competition by an as-efficient competitor, but will recognize that in certain circumstances (for example, when network and learning effects are present) constraints placed on a less efficient competitor may yield anticompetitive foreclosure. The EC is likely to use average avoidable cost (AAC) and long-run average variable cost (LRAIC) as cost benchmarks when deciding whether a competitor is as-efficient. (35)

4. OBJECTIVE NECESSITY AND EFFICIENCIES A dominant firm whose actions threaten anticompetitive foreclosure may avoid liability by demonstrating that its conduct is justified. It may do so by showing that its conduct is objectively necessary and proportionate (health and safety reasons may in special situations fit this bill) or that it involves substantial efficiencies that outweigh any anticompetitive effects on consumers. It may be very hard to meet the efficiencies test--efficiencies will have to be realized as a result of the conduct; the conduct must be indispensable to the efficiencies; and the conduct must not eliminate effective competition by removing all or most sources of actual or potential competition. (The EC Statement also applies these stringent efficiencies conditions to all specific forms of conduct that are subject to special tests, discussed below.)

B. Exclusive dealing

The EC Statement deals with exclusive purchasing obligations and with conditional rebates under the rubric of exclusive dealing.

1. EXCLUSIVE PURCHASING OBLIGATIONS Such obligations "require[] a customer on a particular market to purchase exclusively or to a large extent only from the dominant undertaking." (36) The EC will weigh multiple factors in deciding whether an exclusive purchasing obligation causes anticompetitive foreclosure. It will examine whether, without the obligations, an important competitive constraint is exercised by competitors that are not yet present in the market or are not in a position to compete for the full supply of customers. Among the various relevant factors are the length of the exclusivity obligation (the longer it is, the greater the foreclosure effect) and whether the dominant firm is an unavoidable trading partner for all or most customers (if so, even a short exclusivity arrangement can yield anticompetitive foreclosure).

2. CONDITIONAL REBATES Conditional rebates involve granting the customer "a rebate if its purchases over a defined reference period exceed a certain threshold, the rebate being granted either on all purchases (retroactive rebates) or only on those made in excess of those required to achieve the threshold (incremental rebates)." (37) (The Section 2 Report dealt specifically with retroactive, not incremental, rebates.) The general concern with conditional rebates is that they may foreclose the market significantly by making it less attractive for customers to switch small amounts of demand to a competing supplier. Applying a complex multifactor analysis, the EC will focus on whether a rebate system may hinder the expansion or entry of as-efficient competitors by making it harder for them to supply part of the requirements of individual customers. Using various cost thresholds, the EC will study whether below-cost pricing for the "contestable" portion of sales (the share of the dominant firm that realistically can be switched to a rival) would foreclose as-efficient competitors. Efficiency justifications will be weighed only if they are passed on to customers and meet the strict requirements of the general approach (discussed above) for evaluating efficiencies.

C. Tying and bundling

"Tying" occurs when customers that buy one product from the dominant firm are also required to buy another. Bundling refers to cases in which products are sold and priced jointly by the dominant firm (in "pure" bundling, products are sold in fixed proportions, in "mixed" bundling, the products may also be sold separately, but at an aggregate price that exceeds the bundled price. Tying or bundling may have anticompetitive effects in the tying market, the tied market, or both. The EC will attack tying or bundling arrangements that yield anticompetitive foreclosure, based on an evaluation of the general conditions for anticompetitive foreclosure listed above, plus additional factors including (1) the length of the tying or bundling arrangement (technical tying that is costly to reverse may be especially problematic); (2) the number of bundled products over which a firm is dominant; (3) whether there are enough customers who would buy the tied product alone to sustain competitors of the dominant firm; (4) whether tying is used to avoid a substitution between tying and tied products; (5) if tying is used to avoid tying product rate regulation; and (6) if tying is used to make entry into the tying product market alone more difficult. If firms competing with the dominant firm are selling identical bundles, the EC will focus on whether the price of the bundle as a whole is predatory. Efficiency justifications (savings in production, distribution, or transaction costs, or new product introduction savings, any of which might benefit customers) will be subject to the demanding requirements of the general approach (discussed above) for evaluating efficiencies.

D. Predation

The EC will generally challenge arrangements under which a dominant firm deliberately incurs losses or forgoes short term profits, so as to foreclose or be likely to foreclose one or more actual or potential competitors, with an eye toward strengthening or maintaining its market power and thereby harming consumers. Actionable predation requires "sacrifice" and anticompetitive foreclosure. The EC will in most cases deem pricing below AAC as a clear indication of sacrifice. The EC's concept of predatory sacrifice also extends beyond AAC. Specifically, the EC may investigate whether alleged predatory conduct led in the short term to net revenues lower than could have been expected from reasonable alternative conduct (i.e., whether the dominant firm incurred a loss it could have avoided). The EC will apply the previously listed general factors in assessing the existence of anticompetitive foreclosure. (38) In addition to these factors, it will investigate whether and how particular suspected conduct reduces the likelihood that rivals will compete. (Firms need not necessarily have exited the market if they have been prevented from competing vigorously.) Consumers are likely to be harmed if the dominant firm can reasonably expect its conduct will increase its post-predation degree of market power. In general the EC believes predation is unlikely to create efficiencies, although it will apply its previously described general efficiencies analysis.

E. Refusal to supply and margin squeeze

A refusal to supply includes a broad range of practices, including refusing to supply products to existing or new customers, to license intellectual property, or to give access to a network or essential facility. The EC recognizes that imposing a supply obligation may undermine investment incentives and harm consumers. Nevertheless, the EC is concerned about refusals that harm competition, especially when the dominant firm competes in a downstream market with a buyer whom it refuses to supply. The EC is also concerned about margin squeezes, in which a vertically integrated dominant firm charges a price for a product in an upstream market which, compared to the price it charges in the downstream market, denies an as-efficient competitor the ability to trade profitably in the downstream market on a lasting basis. (The EC will use as a benchmark in margin squeeze cases the LRAIC of the dominant firm's downstream division.) As a general matter, the EC will focus its enforcement on cases in which a dominant firm's refusal to supply: (1) relates to a product or service "objectively necessary" for effective downstream competition; (2) is likely to eliminate effective competition downstream; and (3) is likely to cause consumer harm. Various considerations relevant to applying these factors are discussed. Once again, in considering efficiency justifications for refusals to supply, the EC will apply its very stringent general efficiencies analysis.

VIII. HOW WIDE IS THE REMAINING U.S.-EU SFC POLICY GAP?

Despite the agreement on broad principles (effects-based analysis, case-specific facts, protection of the competitive process, consumer welfare emphasis) between the Section 2 Report and the EC Statement, a policy gap separated the two reports. (39) I will highlight the five principle policy differences that separated those documents, and comment, where possible, on how withdrawal of the Section 2 Report may have narrowed the transatlantic SFC policy gap.

First, the Section 2 Report employed an (arguably prodefendant) disproportionate balancing test (harm must disproportionately outweigh benefits for liability) in assessing general exclusionary conduct, whereas the EC seems to apply a theoretical equal weights balancing test once dominance (substantial market power) and an anticompetitive foreclosure effect have been shown. Assistant Attorney General Varney's May 12th speech implicitly supports an equal weights balancing test, suggesting at first blush that the policy gap regarding this overarching principle may have closed (at least as regards DOJ). In practice, however, the balancing approach employed by the EC de facto may often require that efficiencies disproportionately outweigh anticompetitive effects in order for a dominant firm to avoid liability--a disproportionality test that would disfavor defendants, in contrast to a neutral equal weights balancing exercise. This conclusion follows from the fact that the EC Statement would require that defendants "demonstrate, with a sufficient degree of probability, and on the basis of verifiable evidence," (40) that the conduct is indispensable to the realization of the efficiencies and does not eliminate effective competition. Dominant firms may be unable to make a showing of indispensability and the future preservation of effective competition. Accordingly, as a general matter, it appears unlikely that the balance will be struck on a defendant's behalf, once dominance (based on market shares lower than the shares required for section 2 monopoly power) and anticompetitive foreclosure are found to be present. Whether this is a good result depends upon one's assumptions regarding the general plausibility of efficiency claims. Whether as a practical matter this will yield different transatlantic outcomes in real cases (how often will U.S. equal balancing exercises reach the same conclusions as EU indispensability analyses) is also uncertain.

Second, unlike the EC Statement, the Section 2 Report was concerned with establishing safe harbors for particular categories of conduct that meet certain thresholds, including bundling, tying, loyalty discounts, and exclusive dealing. This reflected a concern for avoiding false positives. The EC Statement, in marked contrast, emphasizes assessment of multiple criteria, in most cases involving these practices, before deciding whether to seek enforcement action. This seems to reflect an EC concern with avoiding false negatives, even at the cost of sacrificing some business certainty that safe harbors could provide. (In other words, the EC views false negatives as at least as important a concern as false positives.) It also embodies a belief that, armed with facts and the latest economic tools, enforcers can and should engage in complex case-specific inquiries that weigh multiple factors, rather than rely on a series of presumptions grounded in decision-theoretic concerns. Which approach is preferable may depend upon one's prior beliefs about the relative importance of false positives, false negatives, and business certainty. (41) The withdrawal of the Section 2 Report may have largely alleviated this source of divergence.

Third, the Section 2 Report viewed the technical tying together of products (technological tying) favorably (because of efficiencies that could be undermined by prosecutorial interference in producers' product design choices), while the EC Statement views such technical tying as problematic (because it is costly to reverse and reduces opportunities for resale of individual components). Here, the withdrawal of the Section 2 Report at least raises the possibility of fewer discordant outcomes, although the U.S. agencies have not specified their current position on technical tying.

Fourth, the Section 2 Report took a noninterventionist approach toward unconditional refusals to deal, whereas the EC Statement indicates a willingness to take action against refusals to deal under a variety of scenarios. (42) Withdrawal of the Section 2 Report does not immediately align EU and U.S. policies in this area, but it does create the possibility that U.S. enforcers will be more open to SFC refusal to deal causes of action in appropriate circumstances.

Fifth, unlike the Section 2 Report, the EC Statement does not grapple with the shaping of remedies for exclusionary SFC. Given the importance of remedies to securing effective relief in SFC cases (and to avoiding competition law cures that are worse than the anticompetitive disease), this is an area that could benefit from future transatlantic discussions. That general conclusion is not altered by the withdrawal of the Section 2 Report.

IX. BRIDGING THE U.S.-EU SFC POLICY GAP: SALIENT GUIDING PRINCIPLES

If convergence of SFC policy is to be pursued successfully in the ICN, attention should be paid to the remaining gap between EU and U.S. approaches to SFC enforcement. As the previous discussion suggests, while withdrawal of the Section 2 Report may have significantly narrowed the gap between American and European SFC policies, it has not entirely eliminated it. Although this article does not offer a magic formula for bridging the remaining gap, certain guiding principles may merit particular weight as policy makers from both sides of the Atlantic seek to find common ground. (43)

A. Use philosophical points in common to frame discussion

Both American and EC enforcers have stated that they are committed to an economics-centric, consumer welfare approach to competition law enforcement, based on fact-specific analysis. This allows the debate over particular potentially exclusionary practices to focus precisely on the economic ramifications of specified conduct, rather than on vaguer more general discussions of appropriate doctrine. (Of course, debate over the scope and nature of economic analysis will take place, but this can at least be done within the context of a common set of broad principles.)

B. Work toward a common understanding of balancing tests

Both American and EC competition agencies endorse balancing the procompetitive benefits against the anticompetitive effects of SFC conduct as a default test when no conduct-specific standard applies." Transatlantic discussions aimed at a common understanding of balancing methodologies (informed by economic analysis and consumer welfare considerations) could pave the way for a broadly accepted balancing test that might eventually gain acceptance as a best practices default standard by ICN members. Such a test might perhaps employ structured presumptions to facilitate its application. (45)

C. To the extent feasible, seek to move toward a consensus with respect to particular practices

For example, both American and European competition enforcers recognize similar price-cost-based standards (based on AAC) for the evaluation of single product predation. Seeming transatlantic differences on the details concerning the assessment of particular practices (such as the recoupment requirement for single price predation, which has long been explicit in the United States but not in Europe) (46) can perhaps be reconciled or at least limited through consultations

D. Consider assessing conduct in light of its centrality to the competitive process (48)

For example, SFC involving discounting or new product innovations is most likely to be central to the competitive process, and tortious SFC (such as deception and abuse of government process) is clearly socially inefficient and at odds with the normal competitive process. But SFC involving distributional practices such as tying, bundling, and exclusive dealing may be more ambiguous. (Such practices may raise competitive efficiency or undermine the competitive process through inefficient exclusion or both. (49)) The "centrality to the competitive process" typology is not free from ambiguity, of course. It does, nevertheless, at least suggest a framework that may help jurisdictions quickly identify those practices that can be agreed upon readily (those at both ends of the clearly anticompetitive to clearly procompetitive spectrum) as compared to those practices that require more detailed discussion (practices that in theory may have both exclusionary and efficiency-enhancing effects).

E. Keep the latest empirical and experimental findings in mind in assessing the predominant competitive effects of particular practices

Empirical and experimental economics studies (50) may prove particularly useful in determining the predominant competitive effects of particular SFC practices. (51) Although such studies may not give unambiguous guidance as to the likely competitive impact of SFC in a particular case under investigation, they may help inform officials' cooperative efforts to devise particular standards to apply to specific forms of behavior. In particular, empirical and experimental research may help support or cast doubt upon the utility of suggested practice-specific SFC tests.

F. To the greatest extent possible, cooperate in SFC investigations

European and American competition agency staff have long collaborated closely on merger investigations and have also exchanged information on numerous nonmerger matters. With the proliferation of SFC practices that have an international dimension, there will be a growing number of opportunities for cooperation among American and European enforcers on SFC investigations. Such cooperative efforts may help build greater mutual appreciation for the appropriate use of analytical tools and empirical methods in assessing SFC and thereby may help close the gap between American and European SFC policy perspectives. Cooperative transatlantic discussions on the feasibility and likely welfare effects of alternative SFC remedies may be especially beneficial.

X. CONCLUSION

The reduction, if not total elimination, of divergent competition law approaches to SFC clearly may enhance welfare. The ICN is a long-term vehicle to promote beneficial convergence in this area. In order for SFC convergence efforts (based on best practices) to bear fruit at the ICN, however, reconciliation of SFC policies between Europe and the United States is key. Antitrust policy review within the Obama administration that resulted in withdrawal of the Section 2 Report may help harmonize DOJ and FTC approaches and set the stage for bringing American SFC policies closer to European norms. Furthermore, the common U.S.-EC understandings of the paramount importance of fact-specific economic analysis and consumer welfare, coupled with an extensive history of substantive case-related discussions among American and European agency staff, suggest that substantial progress is possible. Accordingly, leaders at both European and American agencies may wish to accord high priority to the transatlantic reconciliation of substantive SFC policies.

(1) The International Competition Network (ICN), a multilateral forum of international competition officials and private sector experts founded in 2001, has been the major force in promoting convergence. Through its working groups and annual meetings, it has worked to promote acceptance of best practices in merger process, substantive merger analysis, cartel enforcement, and single firm conduct. A description of the ICN's initiatives may be found at http://www.internationalcompetitionnetwork.org/index.php/en /about-icn.

(2) The ICN has a Unilateral Conduct Working Group, which focuses on issues of single firm dominance. At the 2009 ICN 8th Annual Meeting in Zurich, Switzerland, the ICN Membership adopted reports on the analysis of tying and bundled discounting and on the analysis of single-product loyalty discounts and rebates in over thirty jurisdictions. At the 2008 ICN 7th Annual Meeting in Kyoto, Japan, ICN Members adopted recommended practices on the assessment of dominance (or substantial market power) and on the analysis of state-created monopolies. Over the next year, the Unilateral Conduct Working Group intends to focus on how members assess refusals to deal (and related conduct, such as "margin squeezes").

(3) Compare U.S. DEP'T OF JUSTICE, COMPETITION AND MONOPOLY: SINGLE-FIRM CONDUCT UNDER SECTION 2 OF THE SHERMAN ACT (Sept. 2008) [hereinafter DOJ SECTION 2 REPORT], available at http://www.usdoj.gov/atr/public /reports/236681.pdf with U.S. FEDERAL TRADE COMM'N, STATEMENT OF COMMISSIONERS HARBOUR, LEIBOWITZ, AND ROSCH ON THE ISSUANCE OF THE SECTION 2 REPORT BY THE DEPARTMENT OF JUSTICE (Sept. 8, 2008) [hereinafter FTC SECTION 2 STATEMENT], available at http://www.ftc.gov/os/2008/09/080908section 2stmt.pdf. The FTC Section 2 Statement, agreed to by three of the four Federal Trade Commissioners (Chairman Kovacic did not sign on), states plainly that "the Department of Justice ... issued a Report that, if adopted by the courts, would be a blueprint for radically weakened enforcement of Section 2.... The Federal Trade Commission ... does not endorse the Department's [Section 2] Report." FTC SECTION 2 STATEMENT, supra, at 1 (citation omitted). Chairman William Kovacic issued a separate statement calling for greater empirical examination of and research on the issues raised by the DOJ Section 2 Report. See Statement of FTC Chairman William E. Kovacic, Modern U.S. Competition Law and the Treatment of Dominant Firms: Comments on the Department of Justice and Federal Trade Commission Proceedings Related to Section 2 of the Sherman Act (Sept. 8, 2008) [hereinafter Comments on the Section 2 Report and FTC Statement], available at http://www.ftc.gov/os/2008/09/080908section2stmtkovacic.pdf. DOJ withdrew the Section 2 Report on May 11, 2009, making clear that it no longer reflected DOJ antitrust enforcement policy. See Press Release, U.S. Dep't of Justice, Justice Department Withdraws Report on Antitrust Monopoly Law (May 11, 2009) [hereinafter Section 2 Withdrawal Press Release], available at http://www.usdoj.gov/atr/public/press _releases/2009/245710.htm. Although the DOJ Section 2 Report has been withdrawn, defense counsel in antitrust litigation may continue to cite it. Accordingly, although it no longer represents government enforcement policy, it may continue to have some influence and thus merits a brief discussion.

(4) As Judge Easterbrook put it: "Aggressive, competitive conduct by a monopolist is highly beneficial to consumers. Courts should prize and encourage it under the antitrust laws. Aggressive, exclusionary conduct by a monopolist is deleterious to consumers. Courts should condemn it under the antitrust laws. There is only one problem. Competitive and exclusionary conduct look alike." Frank L. Easterbrook, When Is It Worthwhile to Use Courts to Search for Exclusionary Conduct?, 2003 COLUM. BUS. L. REV. 345 (2003). The Court of Appeals made an analogous point in United States v. Microsoft, 253 F.3d 34, 58 (D.C. Cir. 2001) ("Whether any particular act of a monopolist is exclusionary, rather than merely a form of vigorous competition, can be difficult to discern: the means of illicit exclusion, like the means of legitimate competition, are myriad. The challenge for an antitrust court lies in stating a general rule for distinguishing between exclusionary acts, which reduce social welfare, and competitive acts, which increase it.").

(5) Decision theory delineates a process for making factual determinations and decisions when information is costly and imperfect. Decision theory's methodology is well suited to helping derive optimal antitrust rules, in light of informational constraints. See C. Frederick Beckner III & Steven C. Salop, Decision Theory and Antitrust Rules, 67 ANTITRUST L.J. 41, 41-42 (1999).

(6) In a similar vein, the Antitrust Modernization Commission recommended in its April 2007 Report to the President and Congress that "standards for applying Section 2 of the Sherman Act's broad proscription against anticompetitive conduct should be clear and predictable in application, administrable, and designed to minimize overdeterrence and underdeterrence, both of which impair consumer welfare." ANTITRUST MODERNIZATION COMM'N, REPORT AND RECOMMENDATIONS 82 (2007) [hereinafter AMC REPORT].

(7) See, e.g., Herbert Hovenkamp, Exclusion and the Sherman Act, 72 U. CHI. L. REV. 147, 147-48 (2005) ("Notwithstanding a century of litigation, the scope and meaning of exclusionary conduct under the Sherman Act remain poorly defined."); see also AMC REPORT, supra note 6, at 81 ("How to evaluate single- firm conduct under Section 2 poses some of the most difficult questions under antitrust law.").

(8) FTC & DOJ Hearings on Section 2 of the Sherman Act: Single Firm Conduct as Related to Competition, available at http://www.ftc.gov/os /sectiontwohearings/index.shtm] hereinafter Section 2 Hearings]. The Section 2 Hearings included 19 days of testimony (covering the period from June 20, 2006, to May 8, 2007) featuring roughly 120 expert panelists drawn from academia, law, business, and government (including foreign officials). The Section 2 Hearings record includes numerous written scholarly presentations as well as oral remarks and debates among panelists.

(9) This emphasis arguably is supported by modern Supreme Court jurisprudence. See, e.g., Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 768 (1984) (citing the importance of rules that do not discourage robust single firm competition that damages inefficient competitors in order to "reduce[] the risk that the antitrust laws will dampen the competitive zeal of a single aggressive entrepreneur"); Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 (2004) (stating that in the section 2 context, "[m]istaken inferences [supporting liability] and the resulting false condemnations 'are especially costly, because they chill the very conduct the antitrust laws are designed to protect.' ... [Thus] [t]he cost of false positives counsels against an undue expansion of [section] 2 liability.") (citation omitted).

(10) See Frank H. Easterbrook, The Limits of Antitrust, 63 TEX. L. REV. 1, 23 (1984) (explicating the position that in antitrust enforcement false positives impose relatively greater social costs than false negatives).

(11) A version of the disproportionality standard has been endorsed by the leading antitrust treatise writer, Professor Herbert Hovenkamp: "A workable definition is that [single firm] exclusionary conduct consists of acts that: ... either ... do not benefit consumers at all, or ... are unnecessary for the particular consumer benefits that the acts produce, or ... produce harms disproportionate to the resulting benefits." HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY 277 (3rd ed. 2005) (emphasis added) (footnote omitted).

(12) Section 2 Withdrawal Press Release, supra note 3, at 1, 2.

(13) Id. at 2.

(14) Christine A. Varney, Assistant Attorney General, Antitrust Division, U.S. Dep't of Justice, Address at the U.S. Chamber of Commerce: Vigorous Antitrust Enforcement in this Challenging Era 8 (May 12, 2009), available at http://www.usdoj.gov/atr/public/speeches/245777.htm [hereinafter Varney Remarks].

(15) Id. at 9.

(16) Lorain Journal v. United States, 342 U.S. 143 (1951).

(17) Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 595 (1985).

(18) United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (en banc).

(19) United States v. Dentsply Int'l, Inc., 399 F.3d 181 (3d Cir. 2005).

(20) Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768 (6th Cir. 2002).

(21) Varney Remarks, supra note 14, at 13.

(22) Id. at 13-14.

(23) Economist David Evans has argued that it is not optimal for different jurisdictions to adopt the same antitrust rules for particular practices, because different jurisdictions face different circumstances. For example, according to Evans, the lack of an active private treble damages litigation system in Europe justifies Europe's greater concern for false negatives and lesser concern for false positives, as compared to the United States (where the private liability--induced chilling of procompetitive behavior is presumed to be greater). Moreover, although uniformity in competition rules across countries has value (especially since a country will not account for spillover effects outside its jurisdiction that affect private actors), in Evans's view the costs of rejecting uniformity should be weighed on the margin against the benefits that accrue to individual countries in setting rules that best reflect their national circumstances. See David S. Evans, Why Different Jurisdictions Do Not (and Should Not) Adopt the Same Antitrust Rules, 10 CHI. J. INT'L L. 161 (2009). Although Evans's argument is an interesting one in the abstract, it is my view that United States federal antitrust agencies will continue to promote policy convergence in antitrust policies in order to avoid the significant costs that are imposed on both businesses and government agencies when divergent competition policies are applied to the same conduct. (Furthermore, in light of recent U.S. Supreme Court jurisprudence that has imposed greater obstacles on U.S. private antitrust plaintiffs, e.g., Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (imposing greater requirements on plaintiffs to survive a motion to dismiss), and of the availability of large civil fines for competition law violations in Europe but not the United States, it is perhaps less clear that chilling effects are more serious in the United States than in Europe. This lack of clarity makes it harder to base different policy approaches to false positives and negatives on differences in expected liability exposure.) A less sanguine view of the failure to promote substantial convergence among antitrust regimes is presented by Damien Geradin, The Perils of Antitrust Proliferation: The Globalization of Antitrust and the Risks of Overregulation of Competitive Behavior, 10 CHI. J. INT'L L. 189 (2009). For a general scholarly overview of the institutions that promote harmonization among competition law regimes, see Daniel A. Crane, Substance, Procedure, and Institutions in the International Harmonization of Competition Policy, 10 CHI. J. INT'L L. 143 (2009).

(24) The fact that the new agency chief economists (Bureau of Economics Director Joseph Farrell at the FTC and Deputy Assistant Director Carl Shapiro at DOJ) are former colleagues (at the University of California at Berkeley) and coauthors may facilitate the reaching of an interagency policy consensus, at least in the economic realm.

(25) On December 16, 2009, the FFC filed a complaint charging that Intel Corp., the world's largest computer chipmaker, engaged in various types of anticompetitive behavior aimed at strengthening Intel's monopoly in central processing unit (CPU) computer chips and extending its monopoly into the market for graphics processing units (GPUs), as well as some other related markets. These actions violated section 5 of the FTC Act, according to the FTC. Complaint, In re Intel Corp., FTC Docket No. 9341 (Dec. 16, 2009), available at http://www.ftc.gov/os/adjpro/d9341/091216intelcmpt.pdf. As summarized in the press release accompanying the complaint, Intel's anticompetitive tactics included using threats and rewards aimed at coercing the world's largest computer manufacturers into not buying rival computer CPU chips; secretly redesigning "compiler" software in a way that deliberately stunted the performance of competitors' CPU chips (and deceptively failing to disclose that these performance differences were due to Intel's compiler design); and engaging in a similar anticompetitive strategy to smother potential competition from GPU chips made by competitors. See Press Release, U.S. Federal Trade Comm'n, FTC Challenges Intel's Dominance of Worldwide Microprocessor Markets (Dec. 16, 2009), available at http://www.ftc.gov/opa/2009/12/intel.shtm ("To remedy the anticompetitive damage alleged in the complaint, the FTC is seeking an order which includes provisions that would prevent Intel from using threats, bundled prices, or other offers to encourage exclusive deals, hamper competition, or unfairly manipulate the prices of its CPU or GPU chips. The FTC also may seek an order prohibiting Intel from unreasonably excluding or inhibiting the sale of competitive CPUs or GPUs, and prohibiting Intel from making or distributing products that impair the performance--or apparent performance--of non-Intel CPUs or GPUs.'). Although the FTC's allegations (sounding as they did in monopoly maintenance and monopolization) could be read as involving section 2 violations, the FTC's press release accompanying the complaint emphasized that Intel's activities violated not just the monopolization standards embodied in section 2 (as made applicable under section 5 of the FTC Act), but also section 5 standards of "unfair methods of competition" and "deceptive acts and practices" that extend beyond the scope of the antitrust laws. Id. ("According to the FTC's complaint, Intel's anticompetitive tactics violate Section 5 of the FTC Act, which is broader than the antitrust laws and prohibits unfair methods of competition, and deceptive acts and practices in commerce. Critically, unlike an antitrust violation, a violation of Section 5 cannot be used to establish liability for plaintiffs to seek triple damages in private litigation against the same defendant. The complaint also alleges that Intel engaged in illegal monopolization, attempted monopolization and monopoly maintenance, also in violation of Section 5 of the FTC Act."). On August 4, 2010, the FTC approved a proposed settlement with Intel. Press Release, U.S. Federal Trade Comm'n, FTC Settles Charges of Anticompetitive Conduct Against Intel (Aug. 4, 2010), available at http://www .ftc.gov/opa/2010/08/intel.shtm ("The FTC settlement applies to Central Processing Units, Graphics Processing Units and chipsets and prohibits Intel from using threats, bundled prices, or other offers to exclude or hamper competition or otherwise unreasonably inhibit the sale of competitive CPUs or GPUs. The settlement also prohibits Intel from deceiving computer manufacturers about the performance of non-Intel CPUs or GPUs.'). For an FTC analysis of the terms of the proposed settlement, see Analysis of Proposed Consent Order to Aid Public Comment, In re Intel Corp., FTC Docket No. 9341 (Aug. 4, 2010) , available at http://www.ftc.gov/os/adjpro/d9341 /100804intelanal.pdf. On November 2, 2010, following a public comment period, the FTC announced that it had given final approval to a modified settlement order in this matter. The modified order allows Intel to manufacture and sell a chip that does not contain a required interface, which would violate the order, because the chip had been in development before the proposed order was negotiated. The modified order, however, authorizes Intel to ship this product only until June 2013. All future generations of this chip must fully comply with all specifications of the final order. Press Release, U.S. Federal Trade Comm'n, FFC Approves Modified Intel Settlement Order (Nov. 2, 2010), available at http://www.ftc.gov/opa/2010/11/intel.shtm. See also Decision and Order, In re Intel Corp., FTC Docket No. 9341 (Oct. 29, 2010), available at http://www.ftc.gov/os/adjpro/d9341/101102inteldo.pdf.

On March 3, 2010, the FTC entered into a settlement with Transitions Optical, Inc., the nation's leading manufacturer of photochromic treatments that darken corrective lenses used in eyeglasses. The FTC alleged that Transitions illegally maintained its monopoly in photochromic lenses by engaging in exclusive dealing at nearly every, level of the photochromic lens distribution chain, thereby restricting the ability of optical retail chains and wholesale optical labs to sell competing lenses. In settling the FTC's charges, Transitions agreed to a range of restrictions, including an agreement to stop all exclusive dealing practices that pose a threat to competition. Press Release, U.S. Federal Trade Comm'n, FTC Bars Transitions Optical, Inc. from Using Anticompetitive Tactics to Maintain its Monopoly in Darkening Treatments for Eyeglass Lenses (Mar. 3, 2010), available at http://www.ftc.gov/opa/2010/03/optical.shtm. This case, which focused on allegedly anticompetitive exclusive dealing, a long-time well-recognized staple of section 2 enforcement, does not offer insights on novel theories of single firm anticompetitive conduct.

(26) On October 18, 2010, DOJ filed a civil antitrust lawsuit against Blue Cross Blue Shield of Michigan, alleging that "most favored nation" (MFN) clauses in its agreements with hospitals "raise hospital prices, prevent other insurers from entering the marketplace, and discourage discounts.... MFN provisions generally refer to contractual provisions between health insurance plans (buyers) and healthcare providers (sellers) that essentially guarantee that no other plan can obtain a better rate than the plan wielding the MFN." DOJ said that the MFN clauses "likely resulted in Michigan consumers paying higher prices for their healthcare services and health insurance." Press Release, U.S. Dep't of Justice, Justice Department Files Antitrust Lawsuit Against Blue Cross Blue Shield of Michigan (Oct. 18, 2010), available at http://www.justice.gov/atr/public/press_releases/2010/263227.htm. This matter, which remains in litigation, alleges violations of section 1 of the Sherman Act, and thus does not bear directly on DOJ's interpretation of section 2.

On October 4, 2010, DOJ announced that it had filed a civil antitrust lawsuit "challenging rules that American Express, MasterCard and Visa have in place that prevent merchants from offering consumers discounts, rewards and information about card costs, ultimately resulting in consumers paying more for their purchases" and increasing merchants' costs of doing business. At the same time, DOJ announced that it had "filed a proposed settlement with Visa and MasterCard, that, if approved by the court, would require the two companies to allow merchants to offer discounts, incentives, and information to consumers to encourage the use of payment methods that are less costly." Press Release, U.S. Dep't of Justice, Justice Department Sues American Express, MasterCard and Visa to Eliminate Rules Restricting Price Competition; Reaches Settlement with Visa and MasterCard (Oct. 4, 2010), available at http://www.justice.gov/atr/public/press_releases/2010/262867.htm. Similar to the Blue Cross matter, this case alleges violations of section 1 of the Sherman Act and thus does not afford insights on DOJ's approach to section 2 policy.

(27) These staff working papers, which deal with a wide range of topics covered in the Hearings, may be accessed at http://www.ftc.gov/os/sectiontwohearings/index.shtm. The working papers do not necessarily reflect the views of the FTC or of any individual FTC Commissioner.

(28) Comments on the Section 2 Report and FTC Statement, supra note 3, at 4-5.

(29) This article does not address the possibility that section 5 of the FTC Act might extend to SFC practices beyond the scope of section 2 of the Sherman Act and thereby allow the FTC to pursue a far more aggressive SFC enforcement program than could DOJ. The current chairman of the FTC has suggested neutral principles that could justify a more expansive role for section 5--namely the requirements that section 5 apply only to business behavior that is not "normally acceptable" and that harms consumers. See Jon Leibowitz, Commissioner, Federal Trade Commission, Remarks at the Workshop on Section 5 of the FTC Act: "Tales from the Crypt" Episodes '08 and '09: The Return of Section 5 (Oct. 17, 2008), available at http://www.ftc.gov /speeches/leibowitz/081017section5.pdf. Jon Leibowitz, an FTC Commissioner at the time he made this proposal, became chairman of the FTC on March 2, 2009. The FTC's December 2008 complaint against Intel for monopolization invoked both section 2 standards and broader section 5 standards of liability. Because the Intel matter was settled rather than litigated, further elaboration of the extent to which section 5 extends beyond section 2 awaits future FTC action. See supra note 25.

(30) Comments on the Section 2 Report and FTC Statement, supra note 3, at 8. Regarding the need for empirical research regarding SFC, at least one commentator has argued that the Section 2 Report does not offer empirical support for the propositions that false positives are particularly costly in the SFC context; that particular practices highlighted in the Report (such as precompetitive exclusive dealing) are being overdeterred; or, more generally, that decision theory supports the strong assumptions found in the Report. See Sean Gates, The DOJ Section 2 Report: It All Depends on Your Priors, GLOBAL COMPETITION POL'Y (Oct. 2008), available at http://www.globalcompetitionpolicy.org/index.php?id=1415&action=907. Attempting to determine whether potentially efficient SFC is being overdeterred is an extremely difficult task, however. Even assuming that current U.S. federal antitrust jurisprudence does not chill efficient SFC, one cannot easily gauge the extent to which aggressive yet efficient distribution, marketing, or other SFC plans are being displaced in favor of less efficient, second-best plans, in order to avoid the business disruptions and legal costs associated with facing an antitrust complaint (even one that is likely to be dismissed). Moreover, with respect to SFC that extends across national boundaries, firms that are not being seriously chilled by U.S. jurisprudence may be deterred from efficient programs due to concerns about foreign investigations (particularly from European or Asian enforcers). The "retooling" of business plans to meet varying standards in different jurisdictions could impose not insubstantial transaction costs. Policy makers could benefit from additional research as to whether such concerns pose a serious chilling effect or instead are merely theoretical and in fact insubstantial.

(31) European Commission, Guidance on the Commission's Enforcement Priorities in Applying Article 82 EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings (Dec. 3, 2008), available at http://eur-lex.europa .eu/LexUriServ/LexUriServ.do?uri=CELEX:52009XC0224(O1):EN:NOT [hereinafter EC Statement]. The EC Statement is an interpretation of the European SFC constitutional provision, Article 102 of the Treaty on the Functioning of the European Union, which prohibits the "abuse of a dominant position." (Article 102 was denominated Article 82 prior to a renumbering of the Treaty's provisions effective December 1, 2009. Because documentation cited in this article uses the old Article 82 nomenclature, for ease of reference I will use the old term "Article 82" when referring to Article 102 in this article.) The term "dominant undertaking" used in European Union SFC law is roughly equivalent to "monopolist" in American parlance, although the EC may find "dominance" at much lower market shares than are required for being deemed a "monopolist" under section 2 of the Sherman Act. Compare EC Statement, supra, at 7 (paragraph 14) (dominance "not likely" to be found for shares under forty percent) with Section 2 Report, supra note 3, at 22 (a market share of greater than fifty percent required by U.S. courts). Shortly after the EC Statement's initial release, in January 2009, Canada's Competition Bureau issued a revised version of its guidelines on Abuse of Dominance. See Competition Bureau of Canada, Draft Updated Enforcement Guidelines on the Abuse of Dominance Provisions (Sections 78 and 79 of the Competition Act) (Jan. 16, 2009), available at http://www.cb- bc.gc.ca/eic/site/cbbc.nsf/eng/02942.html. I do not discuss the Updated Enforcement Guidelines, which address many of the same substantive issues as the Section 2 Report and the EC Statement (while differing somewhat in the approach they adopt). In my opinion, the heart of the international policy debate on SFC will center on the American and European models (even though the Updated Enforcement Guidelines will, of course, be of particular interest to Canadian competition law practitioners).

(32) The EC Statement emphasizes that enforcers "will take into account the specific facts and circumstances of each case." EC Statement, supra note 31, at 5 (paragraph 8). Furthermore, the EC Statement says "that what really matters is to protect an effective competitive process and not simply protect[] competitors." Id. at 4-5 (paragraph 6). In addition, the EC Statement "outlines an effects-based approach for the application of Article 82 to exclusionary conduct by dominant firms.... The guidance sets out the Commission's determination to prioritize those cases where the exclusionary conduct of a dominant undertaking is liable to have harmful effects on consumers." European Commission, Antitrust: Guidance on Commission Enforcement Priorities in Applying Article 82 to Exclusionary Conduct by Dominant Firms--Frequently Asked Questions 1 (paragraph 2), available at http://europa.eu /rapid/pressReleasesAction.do?reference=MEMO/08/761&format=HTML& aged=0&language=EN&guiLanguage=en. The introduction and first chapter of the Section 2 Report lent general support to these principles. Section 2 Report, supra note 3, at 1-18.

(33) The EC Statement addresses exclusionary conduct ("exclusionary abuses"), not exploitative abuses (such as the charging of "excessively" high prices or price discrimination among customers), by a dominant firm. EC SFC enforcement activity in recent years has emphasized exclusionary conduct, rather than exploitative abuses, even though exploitative abuses also are covered by Article 82. The EC Statement does note, however, that, with regard to "[c]onduct which is directly exploitative of consumers, ... [t]he Commission may decide to intervene in relation to such conduct, in particular where the protection of consumers and the good functioning of the internal market cannot otherwise be adequately ensured." EC Statement, supra note 31, at 5 (paragraph 7).

(34) More specifically, anticompetitive foreclosure is "a situation where effective access of actual or potential competitors to supplies or markets is hampered or eliminated as a result of the conduct of the dominant undertaking whereby the dominant undertaking is likely to profitably increase prices to the detriment of consumers." Id. at 8 (paragraph 19) (footnote omitted).

(35) Failure to cover AAC indicates that an equally efficient competitor cannot serve targeted customers without incurring a loss, while failure to cover LRAIC (which is generally higher than AAC because it includes more fixed costs) indicates an equally efficient competitor could be foreclosed from the market. Id. at 11 (paragraph 25).

(36) Id. at 13 (paragraph 32).

(37) Id. at 14 (paragraph 36).

(38) Id. at 21 (paragraph 66) ("Normally only pricing below LRAIC ... [will be] deemed capable of foreclosing as efficient competitors from the market.").

(39) I take no editorial stance on the normative merits of particular SFC policies. The following discussion seeks merely to highlight the differences that American and European officials may have to confront if and when they undertake SFC policy convergence initiatives. (In notable contrast to SFC policy, there has been very little recent discussion about a major policy gap between European and U.S. approaches to merger control. This perhaps reflects the fact that the EU and United States have well-established horizontal merger guidelines that are largely consistent, and that U.S. and EU competition agency staffs routinely consult on merger matters, which arise far more frequently than SFC cases. Regular coordination on merger cases has spawned a mutual understanding and sharing of investigative methods and policy perspectives in the merger area.)

(40) EC Statement, supra note 31, at 12 (paragraph 29). This in itself appears to be a difficult standard to satisfy.

(41) It is unclear to what extent current enforcement policy creates a serious "chilling effect" that deters efficient business conduct. See discussion supra note 30.

(42) The EC Statement's treatment of margin squeezes may be characterized as an antitrust concern with refusals to deal on terms unprofitable for the nondominant firm. Although the Section 2 Report did not specifically address margin squeezes, the tenor of the Report's discussion of refusals to deal implicitly indicated a suspicion toward such theories. That suspicion was made manifest in DOJ's September 2008 amicus curiae brief before the Supreme Court in linkLine, in which DOJ took the position that a price-squeeze (equivalent to a margin squeeze) allegation based solely on the margin between a vertically integrated defendant's wholesale and retail prices is insufficient to state a claim under section 2 of the Sherman Act. See Brief for the United States as Amicus Curiae Supporting Petitioners, Pac. Bell Tel. Co. v. linkLine Commc'ns, Inc., 129 S. Ct. 1109 (2009) (No. 07-512), available at http://www.usdoj.gov/atr/cases/f237100/237148.htm. Significantly, the FTC (with Chairman Kovacic recused) issued a statement declining to join the DOJ brief and disagreeing with DOJ's analysis. See Statement of the Federal Trade Commission on Petition for a Writ of Certiorari in linkLine, 129 S. Ct. 1109 (No. 07-512), available at http://www.ftc.gov/os/2008/05/P072104stmt .pdf. On February 25, 2009, the Supreme Court decided the linkLine case, holding that when a firm has no antitrust duty to deal with competitors at the wholesale level and has not engaged in predatory pricing at the retail level, it cannot be held liable for violating section 2 of the Sherman Act. LinkLine, 129 S. Ct. 1109. In other words, an integrated firm with an upstream monopoly has no duty to preserve the margins of its downstream retail competitors by affording those firms wholesale rates that are favorable to them. In the case at bar, the Court found no antitrust obligation to deal and stressed that institutional concerns strongly counseled against an independent, price-squeeze cause of action not tied to retail price predation and for, in particular, the importance of clear rules in antitrust law, the great remedial difficulties that would arise from price-squeeze liability, and the business uncertainty and the related difficulty of judicial determination of a "fair price" resulting from the lack of a safe harbor for firms seeking to avoid price-squeeze liability. See id. at 1120-22. The linkLine holding underscores that a major gap now exists between United States and European case law on the subject of price or margin squeezes; it appears unlikely that this particular judicial gap will be bridged in the near future. It remains to be seen whether U.S. enforcers will consider deploying new theories and challenging types of conduct that might be characterized as margin squeezes.

(43) In setting forth these considerations, I assume that FFC-DOJ positions regarding SFC enforcement will become better aligned, allowing American officials to put forth a coherent message in this area. DOJ's withdrawal of the Section 2 Report supports that assumption. Also, I do not intend that these considerations be viewed as comprehensive; other factors may also prove particularly useful to officials as they work to reconcile SFC policy positions. Of course, new, more specific policy directions set by antitrust leadership in the Obama administration (which may be reflected in cases brought and in public statements) may largely close the gap between American and European positions. Such developments, however, would not detract from the usefulness of the principles delineated below.

(44) The FTC Statement's critique of the Section 2 Report's support for disproportionate balancing, together with DOJ's withdrawal of the Section 2 Report, appears to have eliminated a substantial obstacle to reaching such an understanding. Transatlantic discussions might now focus, for example, on how the EU's apparent requirement that efficiencies be indispensable (see supra section VII.A.4) affects application of the European balancing test and how a U.S. balancing test might compare to the European formulation.

(45) In fact, U.S. federal courts almost never assign particular values to the benefits and costs of particular behavior when applying a balancing test. See generally Michael A. Carrier, The Real Rule of Reason: Bridging the Disconnect, 1999 BYU L. REV. 1267 (1999) (finding that federal antitrust courts actually almost never balance anything in litigated rule of reason antitrust cases). The use of structured presumptions is one means of crafting a sound balancing test that generally avoids the need to assign weights to costs and benefits. Such a structured approach is suggested by the opinion of the U.S. Court of Appeals for the D.C. Circuit in United States v. Microsoft Corp., 253 F.3d 34, 58-59 (D.C. Cir. 2001) (en banc). The court in this case suggested a highly structured balancing inquiry: (1) to be condemned as exclusionary, a monopolist's act must have an anticompetitive effect; (2) the plaintiff must show that the monopolist's conduct has the requisite anticompetitive effect; (3) if a plaintiff demonstrates an anticompetitive effect, the monopolist may offer a legitimate procompetitive justification (a nonpretextual claim that its conduct increases efficiency or enhances consumer appeal); (4) if the monopolist's justification is unrebutted, the plaintiff must demonstrate that the conduct's anticompetitive harm outweighs its procompetitive benefit; and (5) in carrying out the balance described in the fourth step, focus should be placed on the effect of the conduct, not its intent. (In applying this inquiry to the case at hand, the Microsoft appeals court found that particular actions by Microsoft were either clearly efficient and thus not actionable or clearly anticompetitive and thus exclusionary. This demonstrated that, as a practical matter, the balancing test can be employed in a rather uncomplicated fashion that does not require calculations that may strain the practical abilities of tribunals.

(46) The lack of an explicit recoupment requirement in Europe may reflect the fact that such an inquiry was deemed unnecessary. According to an EC enforcement understanding, predatory pricing occurred only when market entry to forestall post-predation price increases was found to be impractical, and thus a dominant firm's ability to recoup losses through future durable price increases was taken for granted. It might plausibly be argued that the new EC Statement implicitly acknowledges a recoupment requirement in stating that "the Commission will generally intervene where there is evidence showing that a dominant undertaking engages in predatory conduct by deliberately incurring losses or forgoing profits in the short term (referred to hereafter as "sacrifice"), so as to foreclose or be likely to foreclose one or more of its actual or potential competitors with a view to strengthening or maintaining its market power, thereby causing consumer harm." EC Statement, supra note 31, at 20 (paragraph 62) (footnote omitted). The direct reference to post- predation consumer harm (due to the foreclosure of competitors) might be read as implying that the predator will be able to recoup its losses, consistent with the U.S. understanding of predatory pricing. Nevertheless, the lack of a direct reference to recoupment (and the reference to net revenues being lower than what could have been expected from reasonable alternative conduct) suggests that EC enforcers may not deem recoupment (at least as understood in American antitrust law) as strictly necessary.

(47) In addition to general discussions of theory, consultation may also usefully be informed by the results of SFC investigations brought in Europe and the United States. For example, in May 2009 (in light of court losses), the FTC ended its longstanding monopolization litigation against Rambus, which had sought royalty fee licensing reductions. By comparison, in June 2009, the EC announced a proposed settlement of its litigation with Rambus that, if implemented, would include certain royalty license fee commitments by that firm. Compare Press Release, Federal Trade Comm'n, Statement in the Matter of Rambus (May 14, 2009), available at http://www.ftc.gov/opa/2009/05/rambus .shtm, with Press Release, European Comm'n, Antitrust: Commission Market Tests Commitments Proposed by Rambus Concerning Memory Chips (June 12, 2009), available at http://europa.eu/rapid/pressReleasesAction.do ?reference=MEMO/09/273&format=HTML&aged=0&language=EN &guiLanguage=en. In another major SFC development, the EC announced in May 2009 that it had imposed a fine of over one billion euros on Intel for abuse of dominant position, in particular, for certain rebates that, the EC maintained, contained conditions that disadvantaged equally efficient competitors. See Press Release, European Comm'n, Antitrust: Commission Imposes Fine of 1.06 bn [euro] on Intel for Abuse of Dominant Position; Orders Intel to Cease Illegal Practices (May 13, 2009), available at http://europa.eu/rapid/press ReleasesAction.do?reference=IP/09/745&format=HTML&aged=0 &language=EN&guiLanguage =en. The final EC decision was published on September 21, 2009. COMP/C-3/37.990, Intel Corp., available at http://ec .europa.eu/competition/sectors/ICT/intel_provisional_decision.pdf. See also Press Release, European Comm'n, Antitrust: Commission Published Decision Concerning Intel's Abuse of Dominant Position (Sept. 21, 2009), available at http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/09/400 &format=HTML&aged=0&language=EN&guiLanguage=en. On December 16, 2009, the FTC filed an administrative complaint alleging that Intel had engaged in various unfair methods of competition in an effort to strengthen or extend its monopoly power in various computer chip markets. Intel and the FTC (which had consulted with the EC prior to issuing this complaint) subsequently entered into a consent order settling this matter, pursuant to which Intel agreed to modify various practices that allegedly excluded or hampered competition. See supra note 25.

(48) This approach is suggested by Gates, supra note 30.

(49) In assessing distribution practices, enforcers may wish to keep in mind both post-Chicago research on possible exclusionary effects from vertical restraints, for example, Michael D. Whinston, Tying, Foreclosure, and Exclusion, 80 AM. ECON. REV. 837 (1990); and recent empirical research supporting the proposition that vertical restraints in general (including practices such as bundling and tying) are likely to be welfare-increasing or benign. See James Cooper et al., Vertical Restrictions and Antitrust Policy: What About the Evidence?, 1 COMPETITION POL'Y INT'L 45 (2005); Francine Lafontaine & Margaret Slade, Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy, in HANDBOOK OF ANTITRUST ECONOMICS 391 (Paolo Buccirossi ed., 2008). Potential tests for assessing more ambiguous practices continue to be generated. An interesting recent contribution to this burgeoning literature is Damien Geradin, A Proposed Test for Separating Pro-Competitive Conditional Rebates from Anti-competitive Ones (Dec. 12, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1315292&download=yes (proposing an effects-based test for rebates that (1) establishes through price-cost tests whether the rebates in question can foreclose equally efficient competitors from supplying the customers granted rebates, (2) requires that the customers foreclosed represent a substantial share of the relevant market, and (3) allows the dominant firm to demonstrate that its rebates are justified by procompetitive efficiencies).

(50) Purely theoretical models can be developed to show how virtually any SFC practice may be anticompetitive if certain assumptions are met. Whether such possibility theorems apply in any particular matter under investigation, however, may be extremely difficult if not impossible to determine. The empirical evaluation of widely cited theoretical models would, of course, if feasible, prove highly beneficial.

(51) Two recent noteworthy contributions in this genre are Timothy J. Muris & Vernon L. Smith, Antitrust and Bundled Discounts: An Experimental Analysis, 75 ANTITRUST L.J. 399, 432 (2008) (experimental study finding that "[e]ven in a controlled setting that incorporates the critical assumptions of the theoretical models that predict the existence of anticompetitive harm, bundling generally increases both total and consumer welfare"); and Joshua D. Wright, Slotting Contracts and Consumer Welfare, 74 ANTITRUST L.J. 439, 464-65 (2007) (empirical analysis of slotting contracts (payments from a manufacturer to a retailer in exchange for some type of promotional consideration) at military commissaries in 2000 and 2001 provided no support for anticompetitive theories of slotting and suggested that slotting is at least competitively neutral).

AUTHOR'S NOTE: The views expressed in this article are solely mine. They do not necessarily represent the views of the Federal Trade Commission or any Federal Trade Commissioner.

ALDEN F. ABBOTT, Deputy Director for Special Projects, Office of International Affairs, Federal Trade Commission.
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Author:Abbott, Alden F.
Publication:Antitrust Bulletin
Date:Mar 22, 2011
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