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Modernizing U.S. antitrust law: the role of technology and innovation.

Antitrust law is an important feature of the U.S. business environment, profoundly affecting the strategies and actions of firms of all sizes and in many industries. Furthermore, antitrust litigation can adversely affect the competitive outlook for a publicly-traded company that finds itself in the unenviable role of defendant. From time to time, the U.S. Congress has undertaken major reviews of current legislation to adapt it to emerging challenges in the economy. Thus, in July, 2004, the U.S. Antitrust Modernization Commission ("Commission") held its first public meeting in Washington, D.C. The Commission, a result of federal legislation passed in November 2002, is statutorily charged with four specific duties (Antitrust Modernization Commission Act, 2002):

* To examine whether the need exists to modernize the antitrust laws and to identify and study related issues;

* To solicit views of all parties concerned with operation of the antitrust laws;

* To evaluate the advisability of proposals and current arrangements with respect to any issues so identified; and

* To prepare and to submit to Congress and the President a report containing detailed findings and conclusions, together with recommendations for legislative or administrative action not later than three years after the first meeting of the Commission.

The bipartisan Commission has twelve members, with four appointed by the President, two each by the majority and minority leader of the Senate, and two each by the Speaker and the minority leader of the House of Representatives. The Commission is charged with reporting its findings to Congress by April 2007. This is the sixth time in U.S. history that such a national study commission or committee has been charged with making such a wide-spread review of U.S. antitrust law (Foer, 2003). (1)

As can be seen by its statutory charge, this Commission has no specific mandate or focus on any aspect of the federal antitrust laws. However, the Congressman who sponsored the bill creating the Commission, House Judiciary Committee Chairman F. James Sensenbrenner, Jr. (R-Wis.), attended the Commission's first public meeting (held on July 15, 2004). Addressing the Commissioners, Congressman Sensenbrenner called for the Commission to study the following areas of antitrust policy concern: how the antitrust laws operate in the modern, information-driven economy; the intersection between antitrust law and intellectual property law; conflicts between U.S. and foreign antitrust law; the relationship between federal and state antitrust enforcement; the application of antitrust laws in regulated industries; and the length of time taken to conduct reviews of mergers (Antitrust Modernization Commission, 2004). To help establish its review and study agenda, the Commission proposed a Federal Register notice calling for public comment to be received by September 30, 2004 (Antitrust Modernization Commission, 2004). (2)

In this article, I will focus on identifying the major competition-related areas of technology and innovation which have been recommended for study in the public comments received by the Commission and conclude by offering personal recommendations on where the Commission should focus its efforts in these particular areas of study. But first, as a primer for those not as familiar with antitrust policy and law, I will briefly review the economic and social philosophy underlying essential U.S. antitrust statutes.

U.S. Antitrust Policy and Law

Antitrust policy, representing the philosophical foundation of the antitrust statutes, has historically consisted of economic, political, and social goals, all delineated in legislative histories or judicial interpretations. (3) Most American scholars of antitrust policy have identified four general objectives of antitrust policy that have emerged over the last century:

* the protection and preservation of a competitive economic environment;

* the protection of consumer welfare by prohibiting deceptive and unfair business practices;

* the protection of small, independent business firms from the economic pressures exerted by competition from big business;

* the preservation of small-town American values and customs.

Depending on one's disciplinary perspective, antitrust law may be viewed differently. In the case of Robert H. Bork (1978), a legal scholar, it is a form of business regulation. Contrarily, Irving M. Stelzer, an economist, views the antitrust laws as an effective tool for avoiding government regulation, thus leaving resource allocation to competitive markets rather than assigning it to public regulators (Stelzer, 1997). Furthermore, Stelzer makes a convincing case for the proposition that the absence of competition in the marketplace is more likely to result in direct regulation of prices and profits or direct government provision of a good or service. When antitrust policy fails to prevent the creation or maintenance of private monopoly power through unfair business practices, says Stelzer, direct regulation is the usual government response in a society built on democratic capitalism.

Maintaining and promoting a competitive economic environment and protecting consumer welfare are at the heart of the Sherman Act of 1890 and the Clayton Act of 1914, the essential legislation governing U.S. antitrust policy. These are considered the central objectives of antitrust policy as enforced by the U.S. Department of Justice's (DOJ) Antitrust Section and the Federal Trade Commission (FTC). (4) In general, the Sherman Act proscribes illegal acts of combining or conspiring to restrain trade (i.e., cartels and monopolizing behavior, rather than simply a "monopoly"); the Clayton Act enjoins various practices "that may be substantially to lessen competition, or to tend to create a monopoly." The economic reasoning behind these statutes argues that consumers will be best served by firms that compete vigorously for their purchases, thereby eliminating collusion and the maintenance of higher-than-normal product or service prices. Under Section 5 of the FTC Act of 1914, the FTC is authorized to investigate business conduct, practices, and the management of companies and to define what methods of competition are unfair and thus unlawful. This expansion in the interpretation of the earlier antitrust statutes was a legislative response to a growing recognition of certain business methods that could be used to exploit or mislead consumers.

In general, the language of the antitrust statutes is intentionally vague, allowing for the federal antitrust agencies to exercise their authority to interpret and enforce the laws according to the economic philosophy of the administration in power. (5) Specific changes in the antitrust statutes pertaining to business conduct or practices statutorily codified are rare and occur only in response to an overwhelming need for business management and public/private enforcement guidance. Not surprisingly, the theories of industrial organization economists are strongly incorporated into the enforcement policies of federal antitrust agencies, as well as the growing body of academic knowledge in the business fields of marketing science and organizational theory/ strategy. As economics and management science have evolved, the contours of antitrust doctrine and enforcement policy have followed suit.

The modern interpretation of the antitrust statutes (especially Section 2 of the Sherman Act) emphasizes that modern firms may compete on the basis of "superior products" or "business acumen" and legally maintain a monopoly position (U.S. v. Grinnel Corp., 1966). This public policy emphasis on encouraging managerial and technological innovation is supported by both federal antitrust agencies in their enforcement of enabling statutes and by Congress in enacted legislation which encourages certain competitor collaborations. (6) Supporting an objective of facilitating an innovative market environment falls comfortably into the realm of an "economic" goal (i.e., the enhancement of consumer welfare and market efficiency), certainly in line with the post-1970s emphasis in antitrust enforcement. Simultaneously, encouraging innovation also addresses traditional societal political concerns for diffusion of private power and maximum opportunity for individual enterprise (Shenefield and Stelzer, 1999).

Technology and Innovation Issues

Throughout the 1990s, in speeches given by officials of the federal antitrust enforcement agencies, jointly published FTC-DOJ industry guidelines, and trial arguments of their attorneys, the federal antitrust agencies have focused on an emerging public policy objective: encouraging technological and market innovation (Beard and Kaserman, 2002). As then-chairman of the FTC, Robert F. Pitofsky, commented, "Innovation is more and more the central arena in which competition plays out. [It] is the hot issue for the foreseeable future (Business Week, 2000)."

As mentioned earlier, the Commission requested public comments recommending competition issues that the members should consider for its review and study agenda. As a result of this Notice, 35 interested parties, representing think tanks, industry and business associations, corporations, non-profit advocacy groups, academicians, business economists, and practicing antitrust attorneys, responded with suggested issues and questions that the Commission members should pursue. In this article, the comments relating to issues pertaining to technological change and market innovation will be presented, then categorized as a result of an analysis of the comments received (with representative sources cited).

Clarify the Interface between Intellectual Property Rights and Antitrust Law

According to the Business Roundtable (2004), the antitrust laws and the intellectual property laws share a common objective: the enhancement of consumer welfare through the promotion of innovation. The antitrust laws promote innovation largely through promoting vigorous competition to stimulate innovation. The intellectual property laws stimulate innovation by enabling innovators to profit from their work. The different legal regimes sometimes come into conflict, principally where the antitrust laws arguably limit the exercise of the rights conferred by the intellectual property laws. In its comments, the U.S. Chamber of Commerce (2004) posits that antitrust enforcement should be consistent with intellectual property policy.

In its comments, Sun Microsystems, Inc. (2004) recommends that the Commission study whether antitrust law and policy should require standards-setting organizations to adopt procedures and intellectual property rights policies that require disclosure--particularly of the intellectual property to be incorporated in a proposed standard and relevant license terms--early in the standard development process and prior to voting on the standard in question (referred to as ex ante adoption). Sun also recommends that consideration should be given to permitting standards development working groups to discuss these matters so that informed decisions can be made on the desirability of incorporating intellectual property rights in the design of the standard.

Furthermore, the following questions might be considered by the Commission as a means to stimulate competition and innovation, and to protect intellectual property rights:

* Should legislation be enacted to create a new administrative procedure to allow post-grant review of and opposition to patents? (American Bar Association, 2004) (7)

* Should the appropriate decision-makers consider possible harm to competition--along with other possible benefits and costs--before extending the definition of patentable subject matter? (American Bar Association, 2004)

* Does the evolution of intellectual property rights in recent years raise the risk that protection of monopoly in the name of innovation will unduly reduce the role of competition? Should there be a dedicated court for intellectual property (American Antitrust Institute, 2004)?

* In what ways should conflicts between the goals of intellectual property and antitrust law be resolved? Should the U.S. Court of Appeals for the Federal Circuit ("Federal Circuit") be abolished or modified (American Antitrust Institute, 2004)? (8)

* Should compulsory licensing of intellectual property rights for the stated purpose of promoting competition be an acceptable practice (Association for Competitive Technology, 2004)?

The Antitrust Laws, Dynamic Markets and the Network Economy

Given the rapid changes in technology today and the ease by which new technologies and firms can produce and market products, many firms with a dominant market position may be "transient monopolies." The Commission is recommended to review the application of the antitrust laws to dynamic markets and determine how to best apply those laws to these new markets (Zywicki, 2004). Furthermore, the use of static, price-based theory in antitrust analysis of high technology industries may not be adequate to assess competition. Such industries raise difficult questions in assessing competition (Coleman, Pleatsikas, and Teece, 2004):

* How does one determine the "relevant" market to assess competition?

* What does market power and monopoly power mean in such markets?

* How should one analyze the likely impact of a particular action (such as a merger) on innovation?

The increasing prevalence of networks in the modern economy (e.g., banking, mobile telecommunications, and digital databases) has generated debate about antitrust law and policy. With network effects, consumers and businesses may reap significant advantages that flow from the many consumers that utilize the same provider or platform. As a consequence, competition in industries in which network effects are important and in which competing networks are not interoperable may be "winner-take-all" (or "winner-take-most"). In addition, once one firm (or standard) starts to look as though it may become the winner, the market can quickly "tip" to favor it, as buyers in search of the advantages of network effects jump on the bandwagon of the likely winner (American Bar Association, 2004).

Some have suggested that network effects raise new considerations for antitrust law because externalities promote anticompetitive practices such as tying and predation. As with other issues in antitrust, however, network effects can often be pro-competitive and provide increased consumer benefits (Freedom Works Foundation, 2004).

Moreover, concerns have been raised about inefficient "lock-in," which constrains consumer choice to products of the dominant firm or an inferior technology path (called "path dependence"), even though superior alternatives may exist. Real-world markets, however, are very dynamic; and there is little evidence of detrimental lock-in (Freedom Works Foundation, 2004).

Considering the competitive dynamics of this new economy, the American Antitrust Institute (2004) asks a relevant question: Does the growth of network industries require any change in antitrust policy or analysis?

Assessing the Need for Legislative or Administrative Action

The comments and questions submitted by the interested parties provide a strong basis for the Commission to investigate important technology and innovation issues that are perplexing antitrust enforcers and corporations in the United States today. The issue of intellectual property rights and antitrust law affecting the very important de jure standards-setting process exercised in high-technology industries remains contentious--creating an increasingly chilly environment for standard development activities. Furthermore, the dynamic market approach to antitrust analysis, of particular relevance in rapidly evolving, high technology industries, can have a profound affect on whether the evidence supports a finding of an antitrust violation. Finally, the competitive importance of information and communications technology industries opens up a number of questions about the interpretation of antitrust analysis in the network-based economy.

Dennis W. Carlton, a University of Chicago industrial organization economist and member of the Commission, stated quite succinctly his idea of the best approach for the Commission members to successfully execute their Congressional charge:
 There have been a few, not a lot, [of] studies of the
 effectiveness of the antitrust laws, and I think one of the useful
 functions we could perform in coming up with a list of priorities is
 ... identifying where we think our antitrust laws have worked well
 and ... also [uncovering] evidence of where it [antitrust law]
 worked poorly. (Antitrust Modernization Commission, October 20,
 2004., p. 38.)

Not surprisingly, changes in the antitrust laws are rare--and purposely so. They tend to be incorporated in agency policy and court holdings, which recognize empirically-based theories developed in the nation's economics departments and business schools. In his comments submitted to the Commission, Bork (2004) offers advice to Commission members which they should consider as they execute their Congressional charge:
 The antitrust laws, in my opinion, are performing well, in fact
 better than at any time in the past seventy-five years. It follows
 that I think there is very little need for 'modernization.'
 This is not to say that all cases are being decided correctly,
 but such mistakes as are being made are due more to the human
 element, which can never be eradicated, than to any systematic flaws
 in antitrust doctrine.

I agree with Dennis Carlton: where there is evidence that antitrust law has not performed well (i.e., the results of antitrust law, policy, and enforcement have not provided the anticipated economic benefits), the Antitrust Modernization Commission should focus its legislative and administrative recommendations on remedying these deficiencies. Early indications are that the Commission will be actively soliciting public comments throughout the three-year investigative process. For those economists, attorneys, industry executives, and academics still perplexed by many of the antitrust issues related to technology and innovation, 2007 cannot come too soon.

(1) Other study commissions, described in Foer (2003), have included: The Temporary National Economic Committee (1938-41), The Report of the Attorney General's National Committee to Study the Antitrust Laws (1955), The White House Task Force Report on Antitrust Policy (the "Neal Report") (1967-69), The National Commission for Review of Antitrust Laws and Procedures (NCRALP) (1977-79), and the International Competition Advisory Committee ("ICPAC") (1998-2000).

(2) See 69 Fed. Reg. 43,969 (July 23, 2004).

(3) From the perspective of economists of the Chicago School, efficiency should be the only objective of antitrust policy.

(4) The DOJ may bring both criminal and civil charges against defendants, while the FTC only civil charges. The state attorneys general may bring both criminal and civil charges to bear against a defendant, while private litigants (persons and companies) can only bring civil antitrust charges against a defendant, both at the state and federal levels. Nearly 95 percent of all antitrust enforcement actions are initiated by private litigants. As pertains to compensation in civil cases, treble damages assessed against the defendant(s) are the norm.

(5) The judiciary also has the authority to interpret the meaning of the antitrust statutes in their rulings (Shenefield and Stelzer, 1999).

(6) See the National Cooperative Research and Production Act (NCRPA) of 1993. The NCRPA has two major technology policy goals: first, to increase the number of R & D and production joint ventures entered into by U.S. firms and second, to increase the global competitiveness of the United States in key technology areas of research, development, and production.

(7) The American Bar Association drew its questions from Federal Trade Commission (2003).

(8) The Federal Circuit was created in 1982 to promote uniformity in patent law. It has exclusive jurisdiction over appeals from the U.S. Patent and Trademark Office with respect to patent applications and from judgments in civil actions for patent infringements.


American Antitrust Institute. 2004. "Comments of the American Antitrust Institute on the Issues to be Included on the Commission's Agenda," September 30, @ (accessed November 27, 2004).

American Bar Association. 2004. "Report of the Section of Antitrust Law of the American Bar Association to the Antitrust Modernization Commission," September 30, (accessed November 27, 2004).

Antitrust Modernization Commission Act. 2002. Subtitle D, Public Law 107-273, November 2, (accessed November 25, 2004).

Antitrust Modernization Commission. July 15, 2004. Public Meeting Transcript. Washington, D.C., (accessed November 25, 2004).

Antitrust Modernization Commission. October 20, 2004. Public Meeting Transcript. Washington, D.C., (accessed March 29, 2005).

Association for Competitive Technology. 2004. "Prevent Antitrust Suits from Undermining Intellectual Property and Stifling Innovation," No specific date cited. (accessed November 25, 2004).

Beard, T. Randolph and David L. Kaserman. 2002. "Patent Thickets, Cross-Licensing, and Antitrust." Antitrust Bulletin 47:345-368.

Bork, Robert H. 1978. The Antitrust Paradox. New York: Basic Books.

Bork, Robert H. 2004. "Comments on the Status of the Antitrust Laws," No specific date cited. (accessed November 25, 2004).

Business Roundtable. 2004. "Comments of the Business Roundtable Regarding Commission Issues for Study," September 29, (accessed November 25, 2004).

Business Week. 2000. "Antitrust for the Digital Age," May 15, 46-48.

Coleman, Mary, Chris Pleatsikas, and David J. Teece. 2004. "Issues for Consideration: The Treatment of Innovation in Antitrust Cases," September 29, (accessed November 25, 2004).

Federal Trade Commission. 2003. To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy. October.

Foer, Albert A. 2003. "Putting the Antitrust Modernization Commission into Perspective," Buffalo Law Review 51:1029-1051.

Freedom Works Foundation. 2004. "Written Comments on the Antitrust Modernization Commission's Request for Public Comment," July 23, (accessed November 25, 2004).

Shenefield, John H. and Irwin M. Stelzer. 1999. The Antitrust Laws: A Primer, 3rd ed. Washington, DC: The AEI Press.

Stelzer, Irwin M. 1997. "A Conservative Case for Regulation." The Public Interest (Summer) 85-97.

Sun Microsystems, Inc. 2004. "Comments Regarding Commission Issues for Study," September 30, (accessed November 25, 2004).

U.S. Chamber of Commerce. 2004. "Suggestions from the U.S. Chamber of Commerce Regarding Antitrust Issues that are Appropriate for Commission Study," September 30, (accessed November 25, 2004).

Zywicki, Todd J. 2004. "Comments Regarding Commission Issues for Study," September 20, (accessed November 25, 2004).

Thomas A. Hemphill is a visiting instructor in the Department of Strategic Management and Public Policy in the School of Business at The George Washington University, Contact
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Author:Hemphill, Thomas A.
Publication:Business Economics
Geographic Code:1USA
Date:Apr 1, 2005
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