The Roberts Court and Supreme Court's new antitrust law for the global knowledge and entrepreneurial economy in a "perfect storm" of danger - and opportunity.
The greatest theory then known to science, Newtonian physics, failed to explain them.
"All of my attempts to adapt the theoretical foundation of physics to this knowledge failed completely," Albert Einstein explained. "The ground had been pulled out from under us, with no firm foundation to be seen anywhere." (1)
Einstein accepted the new facts and crafted an entirely new theory. His theory explained the new facts regarding the photoelectric effect, something Newtonian physics could not do, and was the basis for his only Nobel Prize. He was twenty-six years old. (2)
Similarly in the fall of 2008, in the midst of the greatest financial turmoil since the 1980s and the Great Depression, borrowing Einstein's words, the ground has again been pulled out from trader us and no firm foundation is seen anywhere. In the words of the "preeminent management thinker of our time," (3) Peter Drucker, we are in an "age of discontinuity," the "foundations have shifted under our feet," (4) and the best known theories in antitrust, economics, government, and other fields cannot be assumed to work adequately with the new facts--like Newtonian physics in 1905. Three facts cited by Drucker are especially promising, and in ways revolutionary:
* Global Knowledge Economy is Replacing National Industrial Economies. "Knowledge has become the central economic resource" for creating wealth, in the U. S. and internationally. (5)
* New Entrepreneurial Economy. The "most significant and hopeful event to have occurred in recent economic and social history" is "the emergence of a truly entrepreneurial economy in the United States," starting in the 1970s and now spreading worldwide. (6)
* Knowledge is Changing From Disciplines to Application. "What is totally new," and "in contradiction to all the modern university has ever believed," is the "shift away from disciplines as the center of teaching and learning" to organization by applications, which was "bound to happen as application became central to knowledge." (7) This shift also makes each discipline accountable to something beyond its own walls and its own members--areas of application, just as science and law are accountable to an outside measure, factual reality.
These new factual realities can unleash a "perfect storm" of opportunity for the United States and for people around the world. Palpable proof of the opportunity in these doom and gloom times includes these examples:
* Google did not exist ten years ago. Today it has cash revenues of $20 billion and a market capitalization of $150 billion.
* Apple's iPod/iTunes did not exist five years ago. Today they generate $10 billion in revenue and have helped Apple's stock grow from a market capitalization of $1 billion in 2003 to $150 billion in 2008.
* Manufacturing companies like Cleveland's Parker-Hannifin and Nordson Corp., Canton, Ohio's Timken Co. and Akron's B. W. Rogers Co., have switched from cost-plus pricing to customer-value pricing to prosper in the global economy. (See part V.)
At the same time, the new factual realities of a global knowledge and entrepreneurial economy raise critical questions about the assumptions of antitrust law and policy crafted in another economic era. Moreover, they provide a fundamentally new factual foundation for antitrust law and policy. This article explores the application and implications of these new factual realities for antitrust law and policy under the Roberts Court since 2005 and in the future, as well as the sea-change in applicable law by the Supreme Court since 1977.
Part I highlights some of the key factual differences between a global knowledge and entrepreneurial economy and the national industrial economy facts upon which U.S. antitrust law and policy of the past rest.
Part II shows that the Roberts Court since 2005 and the Supreme Court since 1977, like Einstein responding to new facts, have already significantly revised antitrust law and litigation.
As to antitrust litigation, part II.A shows that the Roberts Court 2007 Twombly (8) decision is just the tip of the iceberg of the Supreme Court's major changes in litigation law impacting antitrust from inside and outside antitrust, as if responding to the stunningly low regard with which World Economic Forum surveys of over 10,000 people doing business internationally rank the U.S. state and federal judicial systems. (See part II. A.).
As to substantive antitrust law, part II.B shows that the Roberts Court since 2005 has continued what the Supreme Court started in 1977 with GTE Sylvania. (9) Two unanimous decisions, Illinois Tool (10) and Dagher, (11) by the Roberts Court in 2006 overruled and rejected, respectively, two per se presumptions, poignantly capturing the Court's sea-change shift in antitrust law since 1977 from legal formalisms to demonstrated economic effects on markets.
Is this The End of Antitrust as We Know It? Mark Whitener of General Electric and the ANTITRUST magazine's editorial chair asked? (12) This article answers "yes," with more good news likely in the future from current members of the Roberts Court, for private market innovation and competition, for companies doing business in the United States, for the people who earn their livings with them, and for the communities where both live (although not for the plaintiffs' bar).
Part III explores what the Roberts Court is likely to do in the future in antitrust based in significant part on what the Court has already done since 1977. Contrary to what an ideological analysis might predict, only one of the Roberts Court's seven decisions to date, Leegin, (13) was decided by a five to four vote. Further, of the eighteen Supreme Court antitrust cases decided since 1993, plaintiffs lost all eighteen. Sixteen of the eighteen majority opinions were written by sitting members of the Roberts Court. Moreover, eleven of the eighteen were unanimous decisions and only two were five to four decisions.
Specifically, part III shows that antitrust in the future is likely to include the following:
1. More litigation relief from "anemic" cases;
2. Per se and "quick look" presumptions will apply more narrowly and require more basic facts be proven;
3. "Legitimate" joint ventures, the dominant form of doing business today, will not be subject to per se and "quick look" theories; 4. Booker-Gaudin will transform the "naked agreement" issue from a legal issue to a jury issue;
5. New constitutional limits started by Gypsum will be applied to antitrust presumptions and jury instructions;
6. Some criminal per se theories will be held unconstitutionally vague;
7. Jury instructions in civil and criminal cases will be updated to comply with Supreme Court precedent since 1977 and Roberts Court rulings;
8. Antitrust merger enforcement will be recognized as a failure and should be rebuilt on the Court's de facto new rule of reason and a new economic theory that is now Available and tested (see no. 9 and part V below);
9. The Court has largely crafted a de facto new rule of reason.
Part IV, however, shows that the United States and the world face the real risk of a "perfect storm" of danger, a risk that cannot be overstated. "[P]olicy blunders" by the government, economic theory, and others both caused and prolonged the Great Depression, Federal Reserve Chairman Bernanke, a lifetime scholar of the Great Depression, has concluded. The problem was that government and other policymakers applied "misconceptions of the time about how the economy worked," and "poor economic policymaking," so that "the Great Depression, far from being inevitable, could have been avoided--if only the state of economic knowledge had been better." (14) Most startling of all is his conclusion that a "desperate economic situation" was a "major reason for Adolf Hitler's election as chancellor of Germany in 1933." (15)
Nor is he alone in reaching that conclusion. Harvard economics professor Benjamin Friedman and Peter Drucker agree. Professor Friedman wrote recently that the "Nazis' rise to power and the events that followed under their rule constitutes the most dramatic episode in the modern history of the West demonstrating a connection between economic distress and perverse social and political development." (16)
Peter Drucker also "was convinced that the lack of a viable economic engine in Europe is what brought Hitler to power." (17) In his first book, he wrote that it was the "total failure of Marxism" that was "a main reason for the flight of Europe's masses into the fervency of totalitarian despair," which led to Hitler and the "'ultimate solution' of the killing of all Jews." (18)
Today's "perfect storm" of danger is magnified by the current economic crisis. It is further magnified by the fact that universities are organized by subject rather than application, and therefore, unlike science, set their own internal standards for value as opposed to meeting external standards and real world tests of success and failure. Hence the major risk that some people will have the power to apply "flawed theories," such as "wealth is fixed" and "zero sum" and "power determines rewards" (19) that ignore proven failure or have never been tested because the discipline does not use such standards. Part W reviews many such flawed, inadequate, or questionable ideas and theories.
Perhaps most controversially for antitrust, this article focuses on Judge Easterbrook's statement that an "antitrust policy that reduced prices by 5 percent today at the expense of reducing by 1 percent the annual rate at which innovation lowers the cost of production would be a calamity." (20)
Peter Drucker agrees, noting "[w]e are usually told, especially by economists," to "focus on costs" and "efficiency," but "no amount of efficiency would have enabled the manufacturer of buggy whips to survive." (21)
Brookings Institution economist Dr. Charles Schultze explains from a formal economic theory perspective that static efficiency economic theory is limited to "minuscule" increases in the standard of living compared to what an innovative economy produces. (22) This implies two things: One, that the economic theory based on static efficiency theory that has been adopted by the competition agencies as antitrust policy since the 1980s will be a "calamity" if it continues to be used in the future; and two, that the country urgently needs an economic theory for antitrust that goes beyond the static efficiency theory used today.
Serendipitously, a new economic theory, obviously little-known, was just published in October 2008. Part V presents this new economic theory, referred to here as Dynamic Productivity Economic Theory. (See figure below.) It has been developed and empirically tested over three decades by Ph.D. economist and Harvard Business School Professor Michael Porter. (23) Unlike any other known economic theories or other ideas covered in part IV, this theory measures its success, or failure, by the economic variable that matters to most people: Income. Money. Cash flow. (Technically speaking, the dependent variable in this theory is personal income, measured by gross domestic product per capita, adjusted for purchasing power.)
Basic tenets of this advance in economic theory include:
* "The dependent variable used ... is the level of GDP per capita, adjusted for purchasing power parity (PPP)."
* "[U]sing a clearly defined dependent variable is the only way to allow a rigorous development of the model, in contrast to arbitrary specification of indicators, data groupings, and weights that characterize most other index efforts."
* "High wages ... justified by high productivity, mean that a country represents an excellent value as a business location."
* "The world economy is not a zero-sum game. Many nations can improve their prosperity if they can improve productivity." (24)
No other known economic theory or any of the other ideas reviewed in part IV measure their success or failure by how well they explain or predict this key variable in economics: income per person. They all suffer from what Drucker identifies as a key defect of many academic disciplines: they are not measured by application results, but by standards they set internally for themselves. However, as discussed in part V, this new economic theory has an over 80% success rate at explaining differences in per capita income in over 100 countries.
Thomas Piraino, Jr., General Counsel of Parker-Hannifin Corp. in Cleveland and a long-time antitrust scholar, wrote: "Michael Porter's economic analysis can revolutionize the way we think about markets and competition." (25) Under this new Dynamic Productivity Economic Theory, for example:
* U.S. #1 in the world--the United States is second to none in terms of innovation, an innovative environment, and commercialization.
* Unlimited wealth--the potential for wealth is limitless because wealth is based on ideas and insights, not fixed because of scarce resources.
* High wages--it is not abundant, low-paying labor that attracts innovative companies, but highly talented, specialized, and often expensive labor.
* "Win-win" global economics--global competition is not a fight over a fixed pie because the pie can expand.
* Celebration, not a clash, of civilizations--cultural differences can provide the special advantages so important to improving the prosperity of people and nations in the global economy.
* Customer-value pricing provides a major breakthrough from the cost-plus pricing that dominates thinking today, since the latter implies the future prosperity of Americans is doomed in a low-wage world.
* There is a new way of Eradicating Poverty Through Profits, and Enabling Dignity and Choice Through Markets, the subtitles of C.K. Prahalad's The Fortune at the Bottom of the Pyramid, consistent with Professor Porter's advance in economic theory:
Four billion poor can be the engine of the next round of global trade and prosperity [if] we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers. (26)
Further, particularly important in a democratic society, the theory provides a basis for understanding and action by policymakers from companies and the people that earn their livings with them, to community leaders, politicians, government officials, and the ultimate policy makers in a democracy, citizens. For example:
* cost-plus pricing that dominates so much thinking, and gloom, today is replaced by customer-value pricing, where pricing is based on value not costs;
* making government work effectively by applying Brookings Institution's Dr. Schultze's unused idea of replacing "command and control" regulation with government's realigning private incentives to serve public interests;
* dropping accrual accounting in favor of Professor Alfred Rappaport's unused idea of long-term cash flow accounting (see part V.C.2.a) and
* eradicating poverty by focusing on dignity and choice for the poor with markets and profits demonstrated by C. K. Prahalad. (See part V.)
All are sources of new solutions if pursued by some or all of the policymakers described above, including ordinary citizens. (See part V.)
How big is the "perfect storm" of opportunity? "Practical innovation more than anything else," Sir Harold Evans concluded in They Made America, "is the reason America achieved preeminence while other well-endowed landmasses lagged or failed," with the American "magic" being "that somehow they got their hands on the most important ideas and then turned them into commercial realities with enormous impact" (27)--and cash flow.
The Roberts Court and the Supreme Court since 1977 have already substantially updated antitrust and will continue to do so in the future to help seize, rather than hindering, this "perfect storm" of opportunity in the global knowledge and entrepreneurial economy for the United States. The antitrust agencies, antitrust academics, businesses, politicians, and others can also play a critical role by embracing this new law and policy grounded in the demonstrated success of private markets and competition, (28) and adopting this more advanced economic theory, thus also helping prevent a "perfect storm" of danger from forming, and raging.
I. NEW FACTS OF THE GLOBAL KNOWLEDGE AND ENTREPRENEURIAL ECONOMY: A "PERFECT STORM" OF OPPORTUNITY
Peter Drucker first identified the tectonic shift to a global knowledge and entrepreneurial economy that is replacing national industrial economics, a shift that is accelerating. This tectonic shift also presents antitrust law and antitrust economic policy with facts as profoundly different as the facts Newtonian physics and Einstein faced 100 years ago, including:
* "Change came gradually, predictably, to businesses in the period following World War II through the early 1990s," Elizabeth Edersheim explains in The Definitive Drucker, a book she wrote with Drucker. "But then, boom! A silent revolution took place on a five fronts:
1. Information flew.
2. The geographic reach of companies and customers exploded.
3. The most basic demographic assumptions were upended.
4. Customers stepped up and took control of companies.
5. Walls defining the inside and outside of a company fell. (29)
* As Mr. Drucker emphasizes: "The assumptions on which most businesses are being run no longer fit reality." (30)
* Product life cycles now are often very short. Drucker's advice: "Every three years or so, the enterprise must put every single product, process, technology, market, distributive channel, not to mention every single internal staff activity, on trial for its life." (31)
* "We live in a time when the rate of change is such that today's unique product or service becomes tomorrow's commodity," A.G. Lafley, CEO of Procter & Gamble, explained. (32)
* A key asset in the knowledge economy, people, unlike plants and equipment in the old economy, are highly mobile. "Your assets walk out the door every day. You want them to come back at 9 a.m. the next day," is the way James Goodnight, the CEO of SAS, a software company, explains this new people reality. (33)
* Nearly half of Procter & Gamble's new products now are based on ideas that came from outside the company, illustrating the practical advantages of collaborations outside the four walls of a single company. "What's going on at P&G is so important that executives everywhere need to understand it" (34) is how the editor of the Harvard Business Review, Thomas Stewart, described it.
* Another reality of the global knowledge economy is the exciting way cutting-edge companies like IBM, Procter & Gamble, and Cisco are solving the enormous challenges of cultural, language, and distance barriers by using "common values and standards" as a common "guidance system," which allows people even "in the company's most culturally and geographically disparate locations," to act without micromanagement and to "team up on a project," and "communicate and collaborate efficiently," despite "great differences in backgrounds and cultural traditions." (35)
* Accordingly, the "greatest change in corporate structure, and in the way business is being conducted" in the global knowledge and entrepreneurial economy, Drucker emphasizes, is what antitrust terms "joint ventures," that is, "networks" and "alliances" in which "nobody has control" and "are not based on ownership," but are based on "partnerships" and trust, including many forms and types among companies and people, and even competitors. (36)
* The "legal entity" of the single company of the industrial era is increasingly a "fiction." (37)
* The Internet, of course, makes all the above happen faster, cheaper and globally.
Fortunately, by rising above the case by case level, the Supreme Court since 1977 and under Chief Justice Roberts and has already fundamentally revised both antitrust substantive law as well as procedural and other litigation law in ways that can profoundly help companies and the people who earn their livings with them compete and prosper in a global knowledge and entrepreneurial economy. At the same time, these refinements enable antitrust enforcement to more effectively protect and promote competition beyond static efficiency economics and legal formalisms, demonstrated next.
II. A "PERFECT STORM" OF OPPORTUNITY: A NEW ANTITRUST LAW FOR THE GLOBAL KNOWLEDGE AND ENTREPRENURIAL ECONOMY
Antitrust under the Roberts Court is best understood and predicted, it is suggested, by focusing on Supreme Court decisions since 1977 in antitrust and outside antitrust but relevant to antitrust litigation, the current members of the Court, and the Chief Justice himself and his view of his role.
As to Chief Justice Roberts himself, the Atlantic Monthly reports that Chief Justice John Marshall is his model, and that collegiality and unanimity is thus a personal goal. His view is that "the most successful chief justices help their colleagues speak with one voice," and that "[u]nanimous, or nearly unanimous, decisions are hard to overturn and contribute to the stability of the law and the continuity of the Court." (38) As to Chief Justice Marshall, he said:
[Marshall] had strongly felt principles, principles for which he had risked his life [at Valley Forge, for example, and] he was willing to explain, to talk it out with people, and he had a prodigious intellect but he didn't scare people off with it ... was friendly, open--people trusted him. (39)
Finally from a practical litigator's point of view, the Chief Justice is "one of the leading Supreme Court advocates of his generation," and provided advice for arguing cases before the Court that also may explain why only one of the Court's seven antitrust decisions was five to four:
You're always trying to persuade people, obviously, as an advocate.... [Y]ou can be generally more successful in persuading people, in arguing a case [when you] go in with something that you think has the possibility of getting seven votes rather than five. You don't like going in thinking, "Here's my pitch, and I'm honing it to get five votes." That's a risky strategy. (40)
For antitrust litigators in the Supreme Court, where only one of the seven Roberts Court antitrust decisions plaintiffs lost was five to four, the Chief Justice's advice is especially worth noting.
Some of the most important precedents for antitrust are from outside antitrust, in procedural and other litigation areas, and are covered first.
A. Fundamental changes in antitrust litigation law since 1977
The 2007 Twombly decision regarding motions to dismiss is just the tip of the iceberg of the Supreme Court's major changes in litigation law for all areas of law, not just antitrust, and in state as well as federal courts.
One of the underlying factors undoubtedly is the interest among all the members of the Court in maintaining and enhancing the legitimacy of the Court itself and the judicial system. Frankly, I was stunned by the low ranking the U.S. legal system receives internationally.
The World Economic Forum's annual survey of business decisionmakers around the world has found every year for years that the U.S. state and federal judicial systems are held in very low regard by the people who decide what countries, states, or cities in which to locate their businesses and which to leave. In a 2008 survey of more than 11,000 business executives worldwide, the U.S. judicial system was ranked a dismal 23 out of 134 on the question, "Is the judiciary ... independent from political influences from members of government, citizens, or firms?" (41)
The legitimacy of the judicial system at the national, state, and local levels is often a critical factor in where a company decides to locate or stay. Moreover, unlike the days of plants and equipment that were, as a practical matter, immobile, in the knowledge economy a key asset--people--is highly mobile, so that a business and the people that earn their livings with it can often, in relative terms, leave overnight. Personal and business taxes also affect a locality's prosperity environment for business and people.
The Supreme Court's procedural and litigation rulings therefore could not be more timely and important for companies doing business in the United States and the people that earn their livings with them in order to compete in the global knowledge and entrepreneurial economy. These changes include the following.
1. DISMISSAL ON THE PLEADINGS: TWOMBLY PLUS Although Twombly was a landmark antitrust case, it is even more powerful when seen in context as a continuation of what the recent Court has been doing in all areas of federal law on motions to dismiss.
In 2005 in Dura Pharmaceuticals, (42) Justice Breyer for a unanimous Court held that plaintiffs' securities action should be dismissed on the pleadings. Federal Rule 8(a)(2), he explained, "require[s] only 'a short and plain statement of the claim showing that the pleader is entitled to relief,'" but the "short and plain statement" nonetheless must "give the defendant 'fair notice of what the plaintiff's claim is and the grounds upon which it rests.'" (43) The "plaintiffs' lengthy complaint," he continued, "contain[s] only one statement that we can fairly read as describing the loss caused...." (44) This was legally insufficient as not providing enough factual information for the defendant to have fair notice of what the claim was and the grounds upon which it rests, and would, unacceptably, "permit a plaintiff 'with a largely groundless claim'" to obtain "an in terrorem increment of the settlement value....'" (45) He thus also expressed the importance the Court places on eliminating litigation abuses.
In 2007, Twombly continued the Court's sea-change in procedural law for all federal litigation, including antitrust. Justice Souter, writing for the seven-member majority, held that "[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations," nonetheless "a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do...." (46)
Plaintiffs' pleadings must now provide "enough facts to state a claim to relief that is plausible on its face," and if they do not, "their complaint must be dismissed." (47) Moreover, the poster child of the Court's new procedural standards is the Court's overruling (48) of the Conley v. Gibson "no set of facts" test (49) that for fifty years has made the dismissal of an antitrust case at the pleadings stage virtually impossible. Justice Souter made clear that "Conley's 'no set of facts'" test, "after puzzling the profession for 50 years.... has earned its retirement." (50)
Why? The seven-member majority repeated Justice Breyer's concern about abusive litigation, stating that "the threat of discovery expense will push cost-conscious defendants to settle even anemic cases." (51)
In summary, Justice Breyer's unanimous opinion in Dura Pharmaceuticals, the Court's 7-2 majority in Twombly, and the 8-1 majority in Tellabs (52) ruled in favor of granting motions to dismiss. These three cases together substantially raise the bar for plaintiffs' complaints to be able to withstand motions to dismiss. Sufficient facts now must be pied beyond mere labels and conclusions and the mere recitation of the elements of a cause of action to state a plausible entitlement to relief.
Accordingly, antitrust cases now can, and should, be dismissed on their pleadings, without any discovery, if they do not assert enough facts to state a claim for relief that is plausible on its face, as merely reciting labels, conclusions, or the elements of a claim is no longer enough.
2. TRIAL EXPERTS AND THE DAUBERT QUARTET The Daubert quartet are four unanimous Supreme Court decisions that overturned seventy years of trial practice regarding when trial experts can, and cannot, testify: 1) Daubert v. Merrell Dow Pharmaceuticals, Inc. (53); 2) General Electric Co. v. Joiner (54); 3) Kumho Tire Co. v. Carmichael (55); and 4) Weisgram v. Marley Co. (56)
Before Daubert, when a judge said "call your next witness," experts were allowed to testify if they met the Frye (57) "general acceptance" test. Under the Daubert quartet, the Supreme Court has imposed a much tougher standard. If an expert's testimony is not reliable or relevant and doesn't fit the facts of the case, it must be excluded. (58) Under this standard all of the experts in the four Daubert cases were excluded. (59)
None of the four Daubert cases were antitrust cases, but they all apply to and profoundly affect every antitrust case. It is also important to note that two of the four opinions were written by current members of the Roberts Court (Justices Breyer and Ginsburg.
3. CLASS ACTIONS The class action has long been a major source of leverage for plaintiffs in antitrust cases coupled with treble damages and attorneys' fees. However, Professor John Coffee of Columbia Law School opines that "the long-term future of the class action is in doubt," as "the tide has turned against class certification" and there are "new barriers ... across a variety of contexts." (60)
4. SUMMARY JUDGMENTS Liberty Lobby, Celotex, Matsushita and Monsanto (61) are four summary judgment decisions in 1984 and 1986 that made it easier to dismiss "anemic" cases with summary judgments.
5. PATENT LAW The Court has substantially rewritten patent law as interpreted by the Federal Circuit, including the landmark KSR International Co. v. Teleflex Inc. opinion by Justice Kennedy for a unanimous Court in 2007. (62) The Court narrowed what was patentable by overruling the Federal Circuit's definition of "obvious," with Justice Kennedy explaining that otherwise "patents might stifle, rather than promote, the progress of useful arts," which is the purpose of the patent laws.
In addition to these issues that are directly relevant to antitrust are the following.
6. PUNITIVE DAMAGES The Supreme Court significantly limited punitive damage awards in state and federal courts on Constitutional grounds under Gore (63) in 1996 and State Farm (64) in 2003. The Court's 2008 decision in Exxon, (65) although based on maritime law, also telegraphs arguments that are likely to win under the Constitution in the future. Also in 2008, the Court showed its commitment to reining in punitive damages by granting review, for the third time, of the Oregon Supreme Court's reinstatement of a punitive damage award of $80 million. (66)
7. PREEMPTION OF STATE TORT LAW The Court has started to use federal law to preempt state tort claims when, for example, a federal agency like the Food and Drug Administration has a special expertise making it a better decisionmaker than a jury for the dispute at issue. (67)
8. FEDERAL ARBITRATION ACT ("FAA") The Court has upheld agreements to resolve disputes by arbitration and to waive litigation and jury trials many times, for many years, including in antitrust cases, and has preempted numerous state laws that would undermine arbitration under the FAA. (68)
9. CONSTITUTIONAL JURY ISSUES In Booker, (69) Gaudin (70) and other recent cases, the Supreme Court has revitalized the "historical and constitutionally guaranteed right of criminal defendants to demand that the jury decide guilt or innocence on every issue," (71) not the trial judge.
All of these non-antitrust procedural and other litigation issue decisions by the Supreme Court already are profoundly affecting antitrust practice and litigation and are likely to have an increasing impact in the future.
B. Fundamental changes in antitrust substantive law since 1977
1. THE PAST AS PROLOGUE: THE SUPREME COURT'S 1977-2004 ANTITRUST DECISIONS The past is prologue because so many members of the Roberts Court have been members of the Court for a long time and have participated in many of the decisions that have fundamentally changed antitrust substantive law since 1977. Plaintiffs lost all eighteen antitrust cases decided since 1993, and sixteen of the eighteen majority opinions were written by sitting members of the Roberts Court. Further, eleven of the eighteen decisions were unanimous. Only two of the eighteen were five to four. The Roberts Court has decided seven antitrust cases, and plaintiffs lost all seven. Of the seven, three were unanimous, and only one, Leegin, was five to four. (See appendix 1.)
Focusing on per se and other presumption decisions, the Court since 1977 has been implementing the policy it announced in GTE Sylvania: any "departure from the rule-of-reason standard must be based upon demonstrable economic effect," rather than upon "formalistic line drawing." (72) This GTE Sylvania distinction incisively summarizes the Court's decades of decisions that have fundamentally changed per se and "quick look" presumption law, as well as antitrust analysis itself, from the verbal formalisms that dominated antitrust since Justice Douglas's Socony-Vacuum Oil (73) per se price fixing opinion in 1940 to requiring evidence of competitive effects on markets, in effect largely adopting a de facto new rule of reason. Specifically, twelve decisions since 1977 overruled or rejected use of per se and "quick look" presumptions. (See appendix 2.)
Some of the notable Supreme Court decisions from 1977 to the Roberts Court in 2005 include:
* GTE Sylvania, (74) overruling and eliminating the per se presumption against vertical territorial restraints;
* Fortner II, (75) rejecting the use of the per se tying presumption;
* BMI, (76) rejecting the use of the per se price-fixing presumption;
* NCAA, (77) also rejecting the use of a per se rule; and
* Business Electronics, (78) overruling the per se price fixing presumption in vertical dealer cases by limiting it to cases proving an agreement on prices or price levels.
In 1999, the landmark decision in California Dental (79) captured the essence of where the Supreme Court had taken per se and other presumptions since 1977 and where the Roberts Court is likely to go.
At issue were alleged price restraints by a dental association. The facts seemed to present a straightforward per se or "quick look" price-fixing case. As Justice Breyer presented the facts in his minority opinion, the California Dental Association had adopted "innocent-sounding" ethical rules aimed at false and misleading price and quality advertising by dentists, but the evidence at trial showed that the rule "as implemented actually restrained the truthful and nondeceptive advertising of low prices, across-the-board discounts, and quality service," "'precluded advertising that characterized a dentist's fees as being low, reasonable, or affordable, ... precluded advertising ... of across the board discounts, ... and ... prohibit[ed] all quality claims,'" including the issuance of an "advisory opinion [that] 'expressly states that claims as to the quality of services are inherently likely to be false or misleading,'" and involving "'numerous cases'" where the Dental Association had "'advised members of objections to special offers, senior citizen discounts, and new patient discounts, apparently without regard to their truth.'" (80)
The FTC ruled the Dental Association's conduct unlawful under both a per se and "quick look" theory. The Ninth Circuit upheld the "quick look" theory. The Supreme Court, however, reversed. In a five to four opinion by Justice Souter, the majority held that "any anticompetitive effects" of the Dental Association's price and quality advertising restrictions were "far from intuitively obvious." (81) The Court applied a fundamentally new antitrust analysis highlighted by its contrast with Justice Breyer's opinion for the minority.
Justice Breyer, in dissent, explained that traditional antitrust analysis as to whether or not there was an unreasonable restraint of trade involved "four classical, subsidiary antitrust questions: (1) What is the specific restraint at issue? (2) What are its likely anticompetitive effects? (3) Are there offsetting procompetitive justifications? and (4) Do the parties have sufficient market power to make a difference?" (82)
He applied this analysis to the facts set forth above and would have affirmed.
The majority, however, reversed. Justice Souter's opinion for the majority fundamentally disagreed over the amount and kind of evidence needed to trigger a rebuttable presumption of an unreasonable restraint of trade, consistent with the policy the Court announced in GTE Sylvania in 1977.
"Ultimately our disagreement with Justice Breyer," Justice Souter elaborated, "turns on our different responses" to the use of a "general rule" such as the "quick look" presumption of an unreasonable restraint of trade before them. (83) Over and over again he rejected theoretical presumptions with little evidence of demonstrated economic effects. As he explained, the "very issue at the threshold of this case" was whether the price restraints at issue are "sufficiently verifiable in theory and in fact to fall within" the "quick look" rebuttable presumption of an unreasonable restraint of trade. (84)
"In theory," Justice Souter explained, the Court of Appeals considered the Dental Association's justifications, but "the court's adversion to empirical evidence" to probe the "plausibility of competing claims about the effects of the professional advertising restrictions rule[d] out the indulgently abbreviated review to which the Commission's order was treated." (85) In effect, he applied a 180[degrees] shift in analysis from an inward focus on the restraint and the firms involved to an outward focus on the markets allegedly affected. He elaborated this change to an outward focus on markets in detail:
[T]he absence of any empirical evidence on this point indicates that the question was not answered, merely avoided by implicit burden shifting of the kind accepted by Justice Breyer. The point is that before a theoretical claim of anticompetitive effects can justify shifting to a defendant the burden to show empirical evidence of procompetitive effects, as quick-look analysis in effect requires, there must be some indication that the court making the decision has properly identified the theoretical basis for the anticompetitive effects and considered whether the effects actually are anticompetitive. Where, as here, the circumstances of the restriction are somewhat complex, assumption alone will not do. (86)
What were the Dental Association's "plausible" justifications for the price and other restraints that barred use of the "quick look" presumption? Justice Souter also explained them in detail. The "CDA's advertising restrictions might plausibly be thought to have a net procompetitive effect, or possibly no effect at all on competition," (87) he stated, and thus general rules for horizontal price restraints could not be used. "The restrictions on both discount and nondiscount advertising are, at least on their face," he reasoned, "designed to avoid false or deceptive advertising in a market characterized by striking disparities between the information available to the professional and the patient," with "significant challenges to informed decisionmaking," including "'asymmetrical information'" and the fact that quality "tends to resist either calibration or monitoring," making "more than cursory treatment" required, because the CDA's restrictions were not "obviously comparable to classic horizontal agreements to limit output or price competition." (88)
Specifically, the Court held that a "quick look" presumption can be used only when the "likelihood of anticompetitive effects" is "intuitively obvious," "easily ascertained," "the circumstances of the restriction" are not "somewhat complex," when there are no "plausible" explanations of neutral or procompetitive effects, and when plaintiff's claims of anticompetitive effects are based on sound theoretical and factual evidence. (80) California Dental poignantly illustrates what the Court meant in GTE Sylvania when it stated that any "departure from the rule-of-reason standard must be based upon demonstrable economic effect," rather than upon "formalistic line drawing."
2. THE ROBERTS COURT ANTITRUST DECISIONS SINCE 2005 The Roberts Court to date, as noted, has decided seven antitrust cases, and in all seven cases the plaintiffs lost. Focusing on the three presumption cases, two, Leegin and Illinois Tool, overruled and one, Dagher, rejected the use of per se presumptions. In so doing, the Roberts Court continued the CTE Sylvania policy of eliminating formalistic line drawing and requiring proof of demonstrable economic effects on markets.
Leegin overruled the 100+ year-old per se vertical price fixing rule. In so doing, Justice Kennedy in his majority opinion quoted GTE Sylvania and emphasized that it is a "flawed antitrust doctrine" that creates "legal distinctions that operate as traps for the unwary." (90)
In the two unanimous decisions--Dagher and Illinois Tool--plaintiffs relied on formalistic line drawing and per se verbal formalisms, but were weak on evidence demonstrating actual economic effects on markets. In Illinois Tool (91) specifically, Independent Ink, Inc., a manufacturer of replacement ink for inkjet printers brought a tying action against Trident, Inc., and its parent, Illinois Tool Works Inc. Trident and Illinois Tool manufactured printing systems that included a patented piezoelectric impulse inkjet printhead, a patented ink container, and specially designed, but unpatented, ink. They sold their systems to original equipment manufacturers (OEMs) who were licensed to incorporate the systems into printers, which were then sold to companies for use in printing barcodes on cartons and packaging materials. The OEMs agreed that they would purchase their ink exclusively from Trident, and that neither they nor their customers would refill the patented containers with ink of any kind.
In order to prove their tying claim, Independent Ink relied on the sixty-year-old per se presumption that a patented product had market power. The per se presumption that "'patent equals market power,'" as the Court explained it, had "migrated from patent law to antitrust law in International Salt" (92) in 1947. Under this per se rule, plaintiff did not need evidence of market power, just evidence that there was a patent, which in turn triggered this judicially created presumption of market power.
In Illinois Tool, the current members of the Supreme Court then unanimously overruled 8-0 this per se presumption. Justice Stevens's opinion held:
We conclude that the mere fact that a tying product is patented does not support such a presumption.... Rather than relying on assumptions, in its more recent opinions the Court has required a showing of market power in the tying product. (93)
Again GTE Sylvania set the standard requiring evidence demonstrating economic effect on markets, rather than formalistic line drawing based on assumptions. As California Dental stated concisely, "assumption alone will not do."
Dagher was also unanimous (8-0, with Justice Alito abstaining) for similar reasons, as plaintiffs relied on the per se price fixing presumption and formalistic line drawing rather than evidence of economic effect on markets. Dagher involved Texaco and Shell, two competitors in national and international oil and gasoline markets. In 1998 they formed a joint venture, Equilon Enterprises, which refined and sold gasoline in the western United States to their independent service stations and other downstream purchasers, ending competition between them in this respect. The joint venture sold gasoline at the same price for the two brands.
The service stations that purchased the gasoline then brought a class action alleging that Texaco and Shell had violated either the per se or "quick look" rules against price fixing. The District Court granted summary judgment to Texaco and Shell, holding that neither the per se nor "quick look" theory applied to the joint venture, and that, since plaintiffs did not assert a rule of reason theory, the case should be dismissed.
The Ninth Circuit reversed, ruling that the joint venture's "uniform pricing scheme" was a "naked" price fixing restraint and declared in resounding terms: "No antitrust violation is more abominated than the agreement to fix prices." (94)
The Supreme Court unanimously reversed. The Court hit the key issue on the head. Although "Equilon's pricing policy may be price fixing in a literal sense, it is not price fixing in the antitrust sense" because "a joint venture, like any other firm, must have the discretion to determine the prices of the products that it sells." (95) Further the Court emphasized, it "would be inconsistent with this Court's antitrust precedents to condemn the internal pricing decisions of a legitimate joint venture as per se unlawful," as the "business practice being challenged involves the core activity of the joint venture itself--namely, the pricing of the very goods produced and sold." (96)
For emphasis, the Court also quoted the dissent by Judge Fernandez in the Ninth Circuit to the same effect:
In this case, nothing more radical is afoot than the fact that an entity, which now owns all of the production, transportation, research, storage, sales and distribution facilities for engaging in the gasoline business, aim prices its own products. It decided to price them the same, as any other entity could. What could be more integral to the running of a business than setting a price for its goods and services? (97)
The Court arguably added an entirely new route to obtaining single entity status, which under Copperweht is limited to a control test. (98) The Court ruled that pooling capital and sharing risk is another way to be treated as a single entity. "When 'persons who would otherwise be competitors pool their capital and share the risks of loss as well as the opportunities for profit ... such joint ventures [are] regarded as a single firm competing with other sellers in the market.'" (99) In what appears to be a major simplification of the law, the Court expressly dropped any requirement of "integration," a term that is undefined yet relied on by the antirust agencies and that has blocked innovation for decades. By eliminating "integration" as a requirement, the Court has advanced innovation by combinations of firms significantly.
Finally, the Court discussed the ancillary restraint doctrine as an alternative basis for rejecting use of a per se rule, holding that "a naked restraint on trade" is "invalid," but that a restraint that is "ancillary to the legitimate and competitive purposes of the business association" is "valid." (100)
The Supreme Court concluded by holding that "the pricing decisions of a legitimate joint venture do not fall within the narrow category of activity that is per se unlawful under [section]1 of the Sherman Act." (101)
Some of the implications of the antitrust-related decisions of the Roberts Court and the Supreme Court since 1977 are explored next.
III. IMPLICATIONS AND PREDICTIONS FOR ANTITRUST IN THE ROBERTS COURT
A. More litigation relief from "anemic" cases
The procedural and other litigation decisions discussed in part II.A above demonstrate that there is a major opportunity to pursue motions to dismiss, Rule 11, Rule 23, and other procedural relief from "anemic" cases early, in order for the U.S. economy and people to prosper in the new global knowledge and entrepreneurial economy.
For example, the Court has already changed both antitrust and litigation law so profoundly that, were Dagher's price fixing case filed today, Twombly, Dagher, and three decades of other decisions suggest that the case would be dismissed at the pleading stage, thus saving enormous expenditures of time and money. (102)
B. Per se and "quick look" presumptions will apply more narrowly and require more basic facts be proven
Putting all the Roberts Court and Supreme Court opinions together since 1977, what basic facts must a plaintiff now prove to invoke either a "quick look" or per se presumed fact of an unreasonable restraint of trade? (103)
There are two levels of antitrust presumptions of the unreasonable restraint of trade element of a Sherman Act section 1 case:
Level 1 Rebuttable Presumptions
Level 2 Per Se Presumptions
The per se presumptions, for example, are "naked" price-fixing and market division agreements by competitors. The rebuttable presumptions are the "quick look" (104) and the Philadelphia National Bank merger presumption. (105)
1. LEVEL 1 REBUTTABLE PRESUMPTIONS As a result of Dagher, California Dental and their predecessors dating to GTE Sylvania, to be entitled to the "quick look" rebuttable presumption of an unreasonable restraint of trade that shifts the burden of proof to the defendant, the plaintiff must prove more basic facts, arguablly (1) there is no plausible mason why the restraint is competitively neutral or has a net pro-competitive effect; (2) the anticompetitive effects of the restraint are easily ascertained and obvious based on sound and factual evidence; and (3) the circumstances of the restriction are not complex.
2. LEVEL 2 PER SE PRESUMPTIONS Since per se theories are conclusive presumptions, and the "quick look" presumption theory is rebuttable, plaintiff must prove at least the basic facts necessary to trigger the "quick look" presumption, and more. What additional facts must be proven for plaintiffs to be entitled to a per se presumption of the tmreasonable restraint of trade element?
No known court has yet dealt with this question. I suggest that analysis should start with the foundation of per se rules, cartels. The Supreme Court has summarized the kind of conduct a cartel usually involves. "Cartels are neither easy to form nor easy to maintain," as "[u]ncertainty over the terms of the cartel, particularly the prices to be charged in the future, obstructs both formation and adherence by making cheating easier." (106) This implies that whatever cover a cartel may try to use, discovery is likely to reveal evidence of what is really going on because cartels require a lot of work to succeed. (107)
The Antitrust Division Manual also has elaborated on the elements of proof to bring a criminal per se case that can be applied to both civil and criminal per se cases (the elements being the same, but with different burdens of proof). Thus a plaintiff must prove a per se "naked restraint" by proving the Level 1 basic facts and the following indicia of no redeeming value:
* The formation and scope of the conspiracy, including:
** The events giving rise to the formation of the conspiracy.
** The identity of the companies that joined the conspiracy.
** The products or services that were covered by the conspiracy.
** The geographic scope of the conspiracy.
** The amount of commerce affected by the conspiracy.
** The nature of the anticompetitive agreement that resulted from the conspiracy.
* The operation of the conspiracy, including:
** How the conspirators communicated about the conspiracy during the conspiracy.
** The extent to which the conspirators attempted to and did, in fact, implement the anticompetitive agreement.
** The steps taken by the conspirators to police, enforce, and monitor the conspiracy.
* The steps taken by the conspirators to keep the anticompetitive agreement and their conspiratorial contacts a secret.
* The duration of the conspiracy, including how and when the conspiracy was terminated or ended.
* The role that each proposed defendant played in forming, implementing, and approving the conspiracy. (108)
Whatever the new basic facts required to trigger the per se, "quick look" or other presumptions may be determined to be, it seems clear that presumptions of all kinds now apply more narrowly and require proof of more basic facts than before.
C. Legitimate joint ventures, the dominant form of doing business today, will not be subject to per se and "quick look" theories
Professor Areeda stated in 1986 what he thought was obvious--that joint ventures by competitors that negotiate and set the joint venture's prices are not per se illegal price fixers.
"[N]o one believes they violate the per se rule against 'price fixing,'" he wrote more than two decades ago:
Suppose, for example, that two small producers, A and B, in a highly competitive market form a joint venture partnership, C, to realize economies of scale in purchasing a component or in selling the finished product. Assume that C negotiates the buying or selling price with suppliers or customers. In every ordinary sense, A and B are jointly fixing their buying or selling price; competition between them on the buying or selling side of the market is eliminated. Yet no one believes that they violate the per se rule against "price fixing." (109)
Yet, as any practitioner knows, the exact opposite has long been true. Many people in the agencies, as well as many practitioners, judges, and commentators take the position that joint ventures among competitors that include price negotiations are per se illegal price fixing. Even though the Supreme Court has repeatedly emphasized that the "economic, legal, or other considerations that lead corporate management to choose one structure over the other" is not the issue, that the issue in antitrust is "whether the enterprise's conduct seriously threatens competition," (110) the antitrust reality long has been that legal form matters a great deal. Legal form can be the difference between going to jail as a price fixer and having no antitrust exposure at all, depending on whether entities are under "common control." (111)
A classic illustration of the disparity between what Professor Areeda considered "obvious" and reality is the Ninth Circuit's 2004 price-fixing opinion in Dagher. (112) A classic illustration of where antitrust is going under the Roberts Court, continuing what the Court started in 1977, is its unanimous decision rejecting the per se theory. The Supreme Court concluded by holding that "the pricing decisions of a legitimate joint venture do not fall within the narrow category of activity that is per se unlawful under [section]1 of the Sherman Act." (113)
Thus, Dagher and the Supreme Court's changes to antitrust law since 1977 have brought antitrust law for joint ventures to the position Professor Areeda thought was "obvious." The Court's actions could not be more timely. As noted by Peter Drucker, joint ventures are now the dominant form of doing business in the global knowledge and entrepreneurial economy. After puzzling lawyers and the courts and blocking innovators for over a century, the Court has provided a simple solution for joint venture pricing and other restraints that should escape per se and "quick look" litigation early. All per se and "quick look" cases against joint ventures now should be first analyzed as to whether they are "legitimate joint ventures." (114)
What is a "legitimate joint venture" whose "pricing decisions" the Court has now held unanimously "do not fall within the narrow category of activity that is per se unlawful?"
The Court has now provided as a practical matter a simple solution. Whether an entity is a "legitimate joint venture" is determined by using the same criteria as those used to determine whether or not a per se or "quick look" presumption can be used, shown in III.B. above. Avoiding per se status, requiring a rule of reason theory, and using Twombly as a practical matter should end anemic challenges to joint ventures early.
D. Booker-Gaudin will transform the naked agreement issue from a legal issue to a jury issue
"Antitrust law treats naked agreements among competitors that fix prices or allocate markets as per se illegal," the Antitrust Division and FTC have succinctly stated per se law. (115) Further, it has long been assumed in antitrust civil and criminal practice that factual issues related to proving a "naked agreement" that triggers a per se presumption of an unreasonable restraint of trade or that support a per se jury instruction involve legal issues for the judge, not for the jury, to decide.
The ABA's Model Jury Instructions in Civil Antitrust Cases, for example, states that a per se jury "instruction is appropriate if a court determines that the alleged restraint is illegal per se." On the other hand, "if the court determines that the alleged restraint should be evaluated under the rule of reason, the jury should be instructed in accordance with the rule of reason." (116)
However, under the Booker-Gaudin line of cases, this standard antitrust practice, where the trial judge, not the jury, decides factual disputes on the naked agreement issue, now clearly seems to be unconstitutional. In Booker and preceding cases, (117) Gaudin, (118) and other recent cases, the Supreme Court has revitalized the "historical and constitutionally guaranteed right of criminal defendants to demand that the jury decide guilt or innocence on every issue," (119) not the trial judge. The Constitutional protections that a jury, not the judge, decide disputed factual issues relating to criminal and civil damage violations reside in the Fifth, Sixth, Seventh, and Fourteenth Amendments.
The Gaudin case is especially relevant to what has become standard antitrust practice regarding the per se naked agreement restraint issue in both criminal and civil cases. Gaudin was a criminal case involving an alleged false loan application to a federal agency. The issue before the Supreme Court was whether the judge or the jury must decide the "materiality" element of the crime. The Supreme Court held, unanimously, that the "Constitution gives a criminal defendant the right to have a jury determine, beyond a reasonable doubt, his guilt of every element of the crime with which he is charged, so that "the "trial judge's refusal to submit the question of 'materiality' to the jury was unconstitutional." (120)
In antitrust, one of the key issues of whether a defendant is guilty in a criminal case for per se illegal price fixing or any other per se theory turns on whether the restraint is "naked," a mixed law-fact question that, when disputed, must, like materiality, be decided by the jury, not the judge, trader the Constitution. The Constitutional right to jury determination of the "naked agreement" fact issues suggests the same result in civil cases, but that analysis is beyond the scope of this article.
E. New constitutional limits started by Gypsum will be applied to antitrust presumptions and jury instructions
"Antitrust law is filled with presumptions," Professors Areeda and Hovenkamp observed and every practitioner knows. (121)
Not widely known, however, is that in 1972 the Supreme Court adopted Federal Rule of Evidence 303 on Presumptions in Criminal Cases as well as Rule 301 for presumptions in civil cases. (See appendix 3.) Although Congress did not adopt Rule 303, the Supreme Court did, thus telegraphing the Court's views on presumptions in criminal cases and the Constitutional issues they raise. These 1972 rules of evidence and the Constitutional law of presumptions, like ships passing in the night, to date have largely not been applied to antitrust law.
"Serious questions under the United States Constitution are raised by the creation and use of presumptions in criminal cases." (122) Constitutional law and the law of evidence relating to presumptions have important implications for antitrust, indicated by the only known Supreme Court decision to consider the issue, United States v. U. S. Gypsum Co.
Six years after Rule 303 was adopted by the Court, the Court, in effect, applied it in Gypsum. The Court held that a jury instruction that "conclusively" presumed the criminal intent element was unconstitutional:
"A conclusive presumption [of intent] which testimony could not overthrow would effectively eliminate intent as an ingredient of the offense." ... The challenged jury instruction, as we read it, had precisely this effect; the jury was told that the requisite intent followed, as a matter of law, from a finding that the exchange of price information had an impact on prices. Although an effect on prices may well support an inference that the defendant had knowledge of the probability of such a consequence at the time he acted, the jury must remain free to consider additional evidence before accepting or rejecting the inference. Therefore, although it would be correct to instruct the jury that it may infer intent from an effect on prices, ultimately the decision on the issue of intent must be left to the trier of fact alone. The instruction given invaded this fact finding function. (123)
Applying Gypsum, Rules 301 and 303, and their Constitutional underpinnings to antitrust raises a number of important issues briefly discussed here.
First, Gypsum held that a jury instruction that "conclusively" presumed criminal intent was unconstitutional. This holding applies to all "conclusive" presumptions in criminal antitrust jury instructions, not just the intent element, including the per se "conclusive" presumption of an unreasonable restraint of trade. Under Gypsum and Rule 303, the per se jury instruction must leave "ultimately the decision on the issue" of the unreasonable restraint of trade element "to the trier of fact alone," the jury.
Second, "conclusive presumption" as that term is used in the law of evidence is not an evidentiary presumption, but substantive law. (124) However, the per se criminal offenses are common law, not statutory, crimes. Common law crimes are unconstitutional in the United States. (125) Since all of the per se violations are common law and not statutory, they would presumably be unconstitutional as common law crimes if considered substantive law. This Constitutional infirmity is avoided if the per se presumptions are deemed to be evidence of an unreasonable restraint of trade. However, they then would be subject to Gypsum and Rule 303.
Third, Rule 303 applies to jury instructions regarding presumptions in criminal cases and mandates that:
* The judge is not authorized to direct the jury to find a presumed fact against the accused.
* When the presumed fact establishes guilt or is an element of the offense or negatives a defense, the judge may submit the question of guilt or of the existence of the presumed fact to the jury, if, but only if, a reasonable juror on the evidence as a whole, including the evidence of the basic facts, could find guilt or the presumed fact beyond a reasonable doubt.
* Whenever the existence of a presumed fact against the accused is submitted to the jury, the judge shall give an instruction that the law declares that the jury may regard the basic facts as sufficient evidence of the presumed fact but does not require it to do so.
* In addition, if the presumed fact establishes guilt or is an element of the offense or negatives a defense, the judge shall instruct the jury that its existence must, on all the evidence, be proved beyond a reasonable doubt. (126)
Fourth, as to civil cases, Federal Rule of Evidence 301, Presumptions in General Civil Actions and Proceedings, was adopted by Congress and is now in effect. It reads as follows:
In all civil actions and proceedings not otherwise provided for by Act of Congress or by these rules, a presumption imposes on the party against whom it is directed the burden of going forward with evidence to rebut or meet the presumption, but does not shift to such party the burden of proof in the sense of the risk of non-persuasion, which remains throughout the trial upon the party on whom it was originally cast.
This version of Rule 301 in effect today is different from the Supreme Court's version. The Conference Committee explained the difference as follows:
Under the Senate amendment, a presumption is sufficient to get a party past an adverse party's motion to dismiss made at the end of his case-in-chief. If the adverse party offers no evidence contradicting the presumed fact, the court will instruct the jury that if it finds the basic facts, it may presume the existence of the presumed fact. If the adverse party does offer evidence contradicting the presumed fact, the court cannot instruct the jury that it may presume the existence of the presumed fact from proof of the basic facts. The court may, however, instruct the jury that it may infer the existence of the presumed fact from proof of the basic facts. (127)
This version of Rule 301 treats a presumption as a "bursting bubble," something new and important to antitrust law. Further analysis of how the Constitution, the Federal Rules of Evidence, and evidentiary law of presumptions apply to antitrust substantive law and jury instructions is beyond the scope of this article.
F. Some criminal per se theories will be held unconstitutionally vague
In Gypsum, the Supreme Court pointed out that "the indeterminacy of the Sherman Act's standards did not constitute a fatal constitutional objection to their criminal enforcement," (128) according to its decision in 1913 in Nash, (129) but raised serious questions about the Act's vagueness. "The Sherman Act, unlike most traditional criminal statutes, does not, in clear and categorical terms, precisely identify the conduct which it proscribes, ... [nor] has judicial elaboration of the Act always yielded the clear and definitive rules of conduct which the statute omits...." (130)
Per se theories were created well after 1913, and thus obviously were not at issue in Nash. Moreover, the Court's more modern jurisprudence suggests that the vagueness of some of the per se criminal theories, and issues as to what "basic facts" trigger a criminal presumption of an unreasonable restraint of trade, may very well not withstand a well-crafted vagueness challenge under the Constitution.
In United States v. Lanier (131) in 1997, for example, a unanimous Court held that the Constitution's "fair warning" requirement for any criminal law, such as the Sherman Act, requires that "'no man shall be held criminally responsible for conduct which he could not reasonably understand to be proscribed.'" (132) The "touchstone is whether the statute, either standing alone or as construed, made it reasonably clear at the relevant time that the defendant's conduct was criminal." (133)
A number of the per se criminal offenses do not seem to provide "fair warning," and are not "reasonably clear" as to what "conduct was criminal" and thus appear Constitutionally vulnerable.
G. Jury instructions in civil and criminal cases will be updated to comply with Supreme Court precedent since 1977
The profound changes to antitrust per se and other presumption law by the Supreme Court since 1977 and the Roberts Court since 2005 have in significant respects not yet been incorporated into criminal and civil jury instructions. Reading these jury instructions too often makes one think that the Supreme Court stopped making antitrust decisions after Socony. Jury instructions are obviously a very specialized and often rare area of practice. The ABA can perform a major public service, as they have done in the past, with updating both criminal and civil antitrust jury instructions, taking into account both the Supreme Court's most recent antitrust decisions and Constitutional decisions like Gypsum, Booker, and Gaudin that apply to antitrust jury instructions.
H. Antitrust merger enforcement will be recognized as a public policy failure and should be rebuilt Antitrust merger enforcement has been a major public policy failure in at least three areas.
1. HOSPITAL MERGERS AND HEALTH CARE In the 1980s-1990s, federal and state antitrust agencies lost virtually all of the hospital merger cases they litigated. (134) The result of this failure of merger enforcement is that many hospitals have merged all across the country. Predictably, the hospitals have raised hospital prices substantially, year after year. Recently, hospitals have begun to extend the same bargaining power strategy to physicians by employing physicians. (135)
The impact of this failure of antitrust merger enforcement is stunning. Peter Orszag, the Director of the Congressional Budget Office, stated recently that "our country's financial health will in fact be determined primarily by the growth rate of per capita health care costs." (136)
2. HOSTILE TAKEOVERS "There can be absolutely no doubt" that hostile mergers "are exceedingly bad for the economy," have been "a major factor in the erosion of American competitive and technological leadership," and "force management into operating short term." (137) Antitrust merger law and policy saw nothing and did nothing to stop these mergers.
3. MANY OTHER BAD MERGERS Moreover, current merger economic, accounting, and antitrust theory and law have failed to see, let alone prevent, the many other mergers that have done great damage to the U.S. economy because the theories used did not consider vital economic facts within their scope. (138) McKinsey & Co. and many others have shown the same. (139)
Peter Drucker specifically singles out defective antitrust policy as a major cause. The "antitrust laws ... probably are responsible more than any single factor for turning American industry away from building on a technological, science-oriented base" toward "financially based" companies, where "investment in long-range research and in the application of scientific knowledge to economic production becomes difficult," and for a fundamental change "from the scientific and technological toward the financial and from the long term toward the short term." (140)
Where was antitrust merger economics, accounting and enforcement? Many mergers have done great damage to the U.S. economy because the antitrust economic theories used did not consider the important harmful facts relevant. They did nothing because, like Newtonian physics in 1905, the theories did not cover important facts.
4. LOW HANGING FRUIT: OVERRULING PNB The Philadelphia National Bank ("PNB") (141) merger presumption, facing the same analytical and empirical scrutiny that overruled many presumptions from GTE Sylvania to Leegin, seems legally doomed. The factual and theoretical underpinnings of the PNB presumption have been discredited. The evidence and analysis undermining the PNB presumption is persuasive. For example:
* Judge Posner explained that in the 1960s he "accepted the oligopoly theory of economists Joe Bain and Edward Chamberlin" in Von's Grocery, but subsequent "empirical studies" have undermined concentration theory. (142)
* Judges Easterbrook and Posner have written that "new studies call into question the position which underlies much of antitrust law that increasing concentration creates a significant risk of cartels (or cartellike oligopolistic interdependence)." (143)
* Professors Scherer and Ross in their well-known text similarly report that later analysis of Joe Bain's work at the foundation of the PNB presumption "demonstrated that most, if not all, of the correlation between profitability and concentration found by Bain and his descendants ... was almost surely spurious." (144)
The Supreme Court has made clear that it can reconsider "its decisions construing the Sherman Act when the theoretical underpinnings of those decisions are called into serious question," (145) as Leegin and Illinois Tool recently illustrate. Thus as a legal matter, overruling PNB seems to be low-hanging fruit. (146)
In summary, current antitrust merger economics, accounting, policy and law are fundamentally flawed in two respects.
First, they do not see nor explain important new facts, just as Newtonian physics could not see or explain facts at the atomic level. Current antitrust merger policy is limited to efficiency theory, which cannot see or explain dynamic innovation in a global knowledge and entrepreneurial economy.
Second, efficiency theory is too abstract and theoretical to be adequately convincing in court, particularly under the Daubert quartet's higher standards of reliability, relevance, and fit. It needs to be replaced with new antitrust, economics, and accounting analyses. Fortunately, all already exist, discussed in parts III.I and V below.
I. The Court has largely crafted a de facto new rule of reason
As stated earlier, the Supreme Court since 1977 and the Roberts Court since 2005 have turned antitrust analysis 180[degrees] from an internal focus on the firms involved to an outward focus on demonstrable economic effects on markets and has abandoned formalistic line drawing. In substance, the Court's new analysis, focused outward on markets, is similar to Justice Brandeis's Cracking Oil (147) rule of reason analysis, a more advanced analysis than what he used thirteen years earlier in Chicago Board of Trade. (148)
As Professor Milton Handler explained, Justice Brandeis's Cracking Oil rule of reason analysis focused on two "concentric circles." (149) The inner circle was the "combination" of firms, to use the terminology of the times, that were acting jointly and at issue. The outer circles were any of the markets allegedly affected. Under Brandeis's analysis, the "fact that a combination eliminates competition inter sese is not controlling," and the key issue was "if the quality of competition in the market as a whole remains unimpaired." (150) The term "combination" is an analytically simple yet powerful term that includes all legal forms. Legal form was irrelevant, because what matters under Brandeis's analysis is the "combination's" effect on markets--on the outer circles.
Moreover, just as the Roberts Court and the Supreme Court since 1977 reject formalistic line drawing, Professor Handler emphasized that Justice Brandeis's "precise mind recoiled" from "elusive and question-begging epithets" and required instead, in Justice Brandeis's words, "a definite factual showing of illegality." (151)
Cracking Oil, specifically, was a government case against four major oil companies for fixing uniform royalties on sublicenses of pooled patents regarding the new method of making gasoline called the "cracking" process. The government won below.
The Supreme Court reversed, with Justice Brandeis holding that the horizontal price agreement on royalties for pooled patent sublicenses was lawful under his more advanced rule of reason. Under his Cracking Oil analysis, the focus was on the outer circles, the markets, and was not distracted by labels like "horizontal price agreement," even though the case involved a horizontal price agreement by four major oil companies.
Justice Brandeis applied his new rule of reason to analyze the effect of the combination on four outer circles, four markets: (1) the production of ordinary gasoline, (2) the production of "cracked" gasoline, (3) the sale of gasoline, and (4) the licensing of patented cracking process technology.
Justice Brandeis ruled there was no rule of reason violation in any of the four markets, even though at the inner circle level the major oil companies had agreed on prices. He focused 180[degrees] outward on the four outer circle markets to analyze competitive impact. He found that no "definite factual showing of illegality" (152) had been proven in any of the four markets.
In essence this change in focus from inward on the combination to outward on competition and the outer circles captures what the Roberts Court and the Supreme Court have been doing since 1997 and what the Roberts Court is likely to do in the future--requiring proof of "demonstrable economic effect[s]" in markets. There must be a "definite factual showing of illegality," and the "fact that a combination eliminates competition inter sese is not controlling, if the quality of competition in the market as a whole remains unimpaired." (153)
How to determine whether "the quality of competition in the market as a whole remains unimpaired"? Fortunately, an advanced economic theory published in October 2008 provides a rigorous and practical method for analyzing competition in various markets, something antitrust has never had in over 100 years. Unlike any other known economic theory or idea, it is a theory that measures its success or failure not by the standards set by an academic discipline, but by its ability to predict and explain hard data on personal income. It also fits the de facto new rule of reason like a glove. It is presented in part V.
The new factual realities of the global knowledge and entrepreneurial economy thus create an historic "perfect storm" of opportunity. However, at the same time, it is critical to understand there is a "perfect storm" of great danger brewing for the United States and the world, with a number of economic theories and other ideas that are proven failures at raising personal income and the standard of living or untested against those criteria. The looming danger of combining these ideas in whole or in part is covered next.
IV. A "PERFECT STORM" OF DANGER
A "perfect storm" of danger is created by the possibility that some of the following theories and ideas that have been around a long time, and are believed and advocated by powerful people, but are isolated from the rigors of application and factual testing that apply to theories in science and law and are insulated from facts that have proven they do not work or are inadequate, nonetheless are used in whole or part.
A. Current economic crisis: most economic theories missed warnings
Current micro- and macroeconomic theories and governments did not adequately see or effectively respond to the factual warning signals seen by others for years leading to the current financial and economic crisis, such as:
* Warren Buffet warned that derivatives are "financial weapons of mass destruction" in 2003. (154)
* John Bogle warned that the "traditional focus on the wisdom of long-term investing" has been replaced by "the folly of short term speculation," that the financial services sector has increased its share of the total profits of all U.S. companies from 6% in 1982 to over 30% in 2003, that mutual fund managers will be paid "more than three-quarters of the future cumulative financial wealth produced by stocks over an investment lifetime," with investors receiving less than 25%, and of "the grotesquely excessive compensation paid to chief executives." (155)
* accounting numbers that use accrued earnings and mark-to-market financial metrics that substitute quarterly mathematical computation and manipulation for long term cash flow and value.
B. Accounting's accrued earnings and mark-to-market failures
"We depend on cash flow because any second-year accounting student can manipulate a P&L," Peter Drucker bluntly advised. (156) One wishes his insight had been followed before the advent of subprime mortgages and derivatives.
Specifically, there are fundamental problems with adopting accrued earnings and mark-to-market as accounting standards.
First, as Professor Alfred Rappaport incisively has stated, "the root cause of accounting [and other] scandals" is "a widespread obsession with earnings that drives companies to push accounting standards to the limit." (157) Accrued earnings and mark-to-market are very easily manipulated.
Second, as Professor Rappaport explains in detail, they are the wrong financial metrics for long-term prosperity. The key number should be cash flow, both today and long term: "Cash is king." However, the numbers accountants and government agencies require currently are accrued earnings and mark-to-market.
Third, no one really understands the accrual and mark-to-market numbers. In the blunt words of the CEOs of six major accounting firms, U.S. accounting standards "can produce financial statements that virtually no one understands." (158)
C. Efficiency theory limited to "minuscule" increases in wealth
Brookings economist Dr. Charles Schultze has explained that efficiency economics, the current basis of antitrust policy, is a "formal economic theory of the market," but it is limited to a market's "static-efficiency characteristics," that is, "its ability to get the most out of existing resources and technology," and, as a result, efficiency theory can lead to only "minuscule" increases in the standard of living:
Had the triumph of the market meant only a more efficient use of the technologies and resources then available, the gains in living standards would have been minuscule by comparison. (159)
"We are usually told, especially by economists [to] focus on costs [and] efficiency," Peter Drucker observes, but "no amount of efficiency would have enabled the manufacturer of buggy whips to survive." (160) And for antitrust, Judge Easterbrook has stated that an "antitrust policy," such as that in force since the 1980s, "that reduced prices by 5 percent today at the expense of reducing by 1 percent the annual rate at which innovation lowers the cost of production would be a calamity." (161)
"Minuscule" increases in the American standard of living are obviously inadequate, and, indeed, would be a "calamity." Since the 1980s, antitrust economic policy has been based on static efficiency theory. Thus antitrust, and the country, urgently needs an economic theory that goes beyond static efficiency to avoid the "calamity" of "minuscule" increases in our standard of living.
D Government as the source of social betterment
Peter Drucker does not mince words: "Anyone who still preaches" that the "government is the agent of social change and betterment," whether "the 'liberal' or 'progressive' gospel of 1930--or even of 1960, of the Kennedy and Johnson years--is not a 'progressive' but a 'reactionary.'" (162)
Looking at the hard numbers, which surprised me and are likely to surprise many others, President Roosevelt's Treasury Secretary, Henry Morgenthau, reported in 1939 that "after eight years" and "spending more than we have ever spent before," the result is "it does not work ... we have just as much unemployment as when we started," and "an enormous debt to boot!" (163)
E. Keynesian economics' double failure
Keynesian economics is "unable to tackle the central policy problems of the developed economies--productivity and capital formation," (164) Peter Drucker asserts. The results of Keynesian economics under the New Deal cited immediately above also confirm Mr. Drucker's statement.
"Even more serious," the second failure of Keynesian economics, "may be the failure of the basic philosophical foundation of Keynesian economic policy: the belief in the 'economist-king,' the objective, independent expert who makes effective decisions based solely on impersonal, quantitative, unambiguous evidence, and free alike of political ambitions for himself and of political pressures on him.... Like 'enlightened despots,' the Keynesian 'economist-king' has proven to be a delusion," the idea of a "non-political economist who, at the same time, controls crucial political decisions." (165)
Japan's recent experience with Keynesian stimulus spending is most timely and alarming. In 1989 the Nikkei stock index was near 40,000. After trillions of dollars of stimulus spending, the Nikkei stock index was under 7600 in February 2009, and it had not come close to 40,000 since. (166)
F. Industrial policy economics' failure
Another economic theory that has been proven not to work is industrial policy. For example, an extensive study of Japan was started in the late 1980s, when Japan's industrial policy was widely thought to have made the Japanese economy the world leader, and was completed after Japan's economic performance plummeted. The authors analyzed both time periods.
They analyzed the Japanese economy broadly, including competitive successes and failures in automobiles, cameras, car audio, carbon fibers, continuous synthetic weaves, facsimile machines, forklift trucks, home air conditioners, home audio equipment, microwave and satellite communications equipment, musical instruments (pianos), robotics, semiconductors, sewing machines, soy sauce, tires for trucks and buses, trucks, typewriters, VCRs, video game software, chemicals, civil aircraft, chocolate, detergents, securities, and software.
The study demonstrated four things relevant here.
1. INDUSTRIAL POLICY FAILED Japan's "much celebrated bureaucratic capitalism" in fact was "closely associated with the nation's failures." (167) Wherever industrial policy was applied, they showed, the industry failed.
2. COMPETITIVE SUCCESS AVOIDS INDUSTRIAL POLICY They also demonstrated that the industrial policy "government model was almost entirely absent" (168) in Japanese industries that were competitive successes.
3. EFFICIENCY ECONOMICS "DANGEROUSLY INCOMPLETE" Particularly important for antitrust policy currently based on efficiency theory is the finding that the Japanese method of all companies in an industry competing over the same thing--quality, continuous improvement, and cost reduction--was "dangerously incomplete" because it led to a "competitive convergence" (169) that destroyed profitability and long term success:
Japan's style of competing on total quality and continuous improvement--on doing the same thing as rivals but doing it better--did lead to success in the 1970s and the first part of the 1980s. However, this success came at the price of chronically low profitability.... Developments in the 1990s have underscored the flaw inherent in best-practice competition: It results in competitive convergence, which means that all the competitors in an industry imitate each other in a zero-sum competition that erodes price and destroys profitability. (170)
4. DYNAMIC PRODUCTIVITY COMPETITION The study's authors demonstrated that Japan's method of competing over static efficiency and of doing the same thing as competitors was a major factor in Japan's economic decline--a classic example of the "calamity" of which Judge Easterbrook warned. "Few Japanese companies," the study found, had a strategy of "distinctive ways of competing that can provide long term success":
[i]nstead of choosing distinctive ways of competing, tailoring activities, and making trade-offs, Japanese companies tend to proliferate products and features, serve all market segments, sell through multiple channels, and emulate one another's production approaches. Continuous operational improvement is confused "with strategy. (171)
They also concluded that for Japan to go to next level, it had to abandon industrial policy and static efficiency economics and advance to a dynamic model of competition based on productivity.
G. Hostile takeovers
"There can be absolutely no doubt" that hostile mergers "are exceedingly bad for the economy" and have been "a major factor in the erosion of American competitive and technological leadership," Peter Drucker advised, as hostile merger raiders "have no aim except to enrich the raider":
To achieve this end, he offers the stockholders more money for their shares than they would get on the market, which is to say, he bribes them. And to be able to pay the bribe he loads a heavy debt on the company that is being taken over, which by itself severely impairs the company's potential for economic performance. (172)
The reason is hostile mergers "force management into operating short term" so that "more and more of our businesses are forced to concentrate on results in the next three months." (173)
Various economic theories said nothing because, like Newtonian physics in 1905, the theories did not include critical facts about hostile mergers within their scope.
H. Many bad mergers
Professor Scherer reports that "study after study" has shown that many mergers fail the companies, the people who earn their livings with them, and the American economy. McKinsey & Co. and many others have shown the same. (174) Many mergers have done great damage to the U.S. economy because, again, the antitrust economic theories used to evaluate them did not consider the important harmful facts relevant.
I. Economic development failures in poor countries
William Easterly in The Elusive Quest for Growth revealed the failure of many theories of economic development for the poor around the world. We "economists have tried to find ... thought we had found [the] key that would enable the poor tropics to become rich, [including] foreign aid, ... loans [and] debt relief conditional on reforms, ... investment in machines, ... fostering education, [and] controlling population growth [but] none has delivered as promised," he reports; the "poor countries that we treated with these remedies failed to achieve the growth we expected." (175)
We "economists have too often pedaled formulas that violated the basic principle of economics," that "'[p]eople do what they get paid to do; what they don't get paid to do, they don't do.' ... 'People respond to incentives; all the rest is commentary.'" (176)
J. "Political correctness" focus on government-run economics and omission of market economics
Anthony Kronman, formerly Dean of Yale Law School, asserts that political correctness has "dominated the humanities for the past forty years and consists of three "intellectually ruinous ideas," including government-controlled rather than market economies, and has been "disastrous" for the humanities as an academic discipline and "even worse" for the "wider culture." (177)
Accordingly, humanities students for forty years, many of whom now occupy positions of power in the media, academia, government, and elsewhere, may not be aware of the failure and the dangers of government-controlled economies and may be uninformed about the success of market systems.
Economist Joseph Schumpeter in Capitalism, Socialism and Democracy defined government controlled economies as "an institutional pattern in which the control over means of production and over production itself is vested with a central authority," and where "the economic affairs of society belong to the public and not to the private sphere"; that is, "the means of production are controlled," and "the decisions on how and what to produce and who is to get what," are made by "public authority and not by privately-owned and privately-managed firms," resulting in "the migration of people's economic affairs from the private into the public sphere." (178)
Government run economics includes government-controlled Marxist economics and socialism. Those who think the danger is past and that the failure of Marxism and socialism is well known and accepted will be discomfited to learn Peter Drucker's view that his book on the failure of Marxist economics and how it led to the rise of Hitler was effectively banned from American universities for decades because "it was not 'politically correct'" to point out the failure of Marxist economics. (179)
K. Shift of spending from people to government
Dr. Charles Schultze of the Brookings Institution has also identified a major decline in the percentage of dollars spent by people and a major increase in the percentage spent by government. From 1929 to the publication of his book in 1977, the percentage of the gross national income (excluding national defense and foreign affairs) spent by the federal and state governments rather than by people changed as follows: (180)
Federal and State Year Governments People 1929 9% 91% 1960 18% 82% 1976 28% 72%
L. Compassion and brotherly love economics
"Societies seeking to achieve a high standard of living have three major options in organizing individual citizens toward that end," Dr. Schultze explains: " coercion (by democratic majority rule or authoritarian dictate),  self-interest incentives [of a market system] and  what we might loosely call the 'emotional' forces," which he defines as "compassion, patriotism, brotherly love, and cultural solidarity." (181)
The results of economics built on compassion and brotherly love are poor. "However vital they may be to a civilized society," Dr. Schultze continues, "compassion, brotherly love, and patriotism are in too short supply to serve as substitutes" for the market. "Market-like arrangements not only minimize the need for coercion as a means of organizing society; they also reduce the need for compassion, patriotism, brotherly love, and cultural solidarity as motivating forces behind social improvement." (182)
M. Government "command and control" regulation
Dr. Schultze indicates there is a real danger of more "command and control" regulation simply because that is commonly assumed to be the only option. "Our political system almost always chooses the command-and-control response," Dr. Schultze explains, even though time and time again, "command and control" approaches fail. "With some exceptions, modifying the incentives of the private market is not considered a relevant alternative." (183)
N. Theory of competent government officials with no special interests
Another theory of government believed by many is that "[m]ost problems could be straightened out by reforming election laws, reducing the influence of special interests, electing honest and intelligent politicians, appointing capable administrators, undertaking thorough and comprehensive policy analyses, and devoting more money to under-funded programs." (184) As a theoretical matter, there is "no denying the virtues of clean elections, competent officials, and professional analysis of social programs," but in the real world, Dr. Schultze observes, this is not "very helpful, or indeed relevant, in dealing with reality." (185)
O. The "mystery of the market" in Congress and government
Dr. Schultze also explained that "most congressmen and public administrators" do not understand market economics for a number of logical reasons, including the historical "concern of legislators" in the United States to delineate "human rights and their protection against encroachment," the indirect "way in which markets achieve results," the fact that for "two hundred years social legislation has dealt with problems that did not require the delicate and continuous adjustment mechanisms that market processes can provide," and because the conventional way of regulating, as noted, is "command-and-control" government regulation. (186)
P. The "mystery of the market" to the public
The ordinary American today often has little understanding of market economics and its successes and little confidence in any of the other macro-, micro- and other economic theories they hear reported that neither make sense nor provide them with the information they need to take action to control their futures.
Q. India and China now embrace the "'magic of the market"
The United States, perversely, faces the double danger of having baby boomers and others in influential leadership positions today who neither deeply understand the advantages of a market system nor experienced the Great Depression and the failures of government-run economics first hand.
Leadership in India and China, by contrast, are the exact opposite in both respects. They have experienced first-hand the abysmal failure of government-controlled Marxist and socialist economies. They and their advisers have also studied long and hard the advantages of a market system. They know, as Dr. Schultze concisely articulated, the advantages of a market system, such as the large "gains in living standards" it generates compared to other systems and the fact that "individuals can act voluntarily on the basis of mutual advantage" and thus "minimize the need for coercion." (187)
R. Increasingly outdated education curriculum
The education curriculum for K-12 and beyond, in the United States and worldwide, is made increasingly outdated by the rapid changes in content and skills people and companies need to prosper in the global knowledge and entrepreneurial economy. In the past, education was a ticket to individual and community prosperity. Peter Drucker warned that this is no longer true. "History shows a frightening parallel to the way our education is going today, [that is,] the decline of the [Ming Dynasty, the] world's most creative, most advanced, and most exciting civilization," and he warned that "we have traveled very far along" the same road. (188)
S. U.S. finances "running on empty"
Peter Peterson's book with this title details the factors that threaten to bankrupt America: Medicare, Social Security, pensions and retiree benefits that were either unfunded or underfunded even before the economic crisis that started in 2008. These bleak numbers were recently confirmed in detail by the Congressional Budget Office under Director Peter Orszag. (189)
T. The Supreme Court and Peter Drucker on the inadequacy of economic theories
The Supreme Court has bluntly stated, twice, that "'[i]n the real economic world rather than an economist's hypothetical model,' the latter's drastic simplifications generally must be abandoned." (190)
Peter Drucker is even more blunt, making today's economic crises even more worrisome:
There are few areas where right action depends as much on right theory as it does in economics. Yet in few areas is accepted theory as inadequate to the demands of practice and policy or to what we actually know.... In crucial areas such as the world economy, or the "microeconomy" of business, markets, producers, and consumers, we hardly have anything yet that deserves to be called folklore, let alone theory. (191) There is no greater obstacle to learning than to be the prisoner of totally invalid but dogmatic theories. The economists are where the theologians were in 1300: prematurely dogmatic. (192)
Drucker goes further, and provides suggestions for the new economic theory that is so urgently needed. He states that any new economic theory must be based on productivity and innovation, not efficiency:
The next Economics will thus require radically different microeconomics at its foundation. It will require a theory that aims at optimizing productivity.... The next microeconomics, unlike the present one, will be dynamic and assume risk, uncertainty, and changing technology, economic conditions, and markets. The theory we need will have to start out with a postulate that the theme of economic policy is genuine change in the wealth-producing capacity of the economic resources rather than their rearrangement. It will have to start out, in other words, with a postulate of innovation. (193)
Professor Porter's Dynamic Productivity Economic Theory implements Mr. Drucker's basic suggestions. (See the figure and part V.)
U. de Tocqueville's chilling warning
In 1840, Alexis de Tocqueville warned that "Americans might make it unusually easy to establish despotism," whereby government "little by little robs each citizen of the use of his own faculties," imposes "uniform, minute, and complex rules" through which "not even the most original minds and most vigorous souls can poke their heads," and thus reduces people to "nothing more than a flock of timid animals." (194)
In summary, all of these theories and ideas have been demonstrated to fail or to have serious limitations. The fundamental limitations of all of them are two. First, they have no rigorous connection to the ultimate issues in economics--cash flow and good money for people and companies. Second, specialization has created disconnected academic silos that lack the interdisciplinary connections crucial to rigorously explain and drive the public and private actions that lead to those sound economic outcomes. Hence the "perfect storm" of danger if they are used together, in whole or in part.
V. THE FORTUITOUS MAJOR ADVANCE IN ECONOMIC THEORY: DYNAMIC PRODUCTIVITY ECONOMIC THEORY
The Supreme Court has never adopted static economic efficiency theory as antitrust policy, although it has used some of its terms. More importantly, the Court has incisively observed on two occasions--like Einstein in 1905--that currently available economic theories do not work well with facts in the real world. (195)
Thus the Court is likely to be receptive to a new economic theory that does work in the real world. Fortunately, there is one.
Professor Porter's new Dynamic Productivity Economic Theory focuses outward on competition in markets and on how companies and the people who earn their livings with them can prosper providing goods and services that customers value and are willing to pay cash for. (196)
This advance in economic theory is based on productivity, not efficiency, is dynamic, not static, is "positive sum," not "zero sum," includes disruptive innovation and not just operational efficiency, and escapes the limitations of cost-plus pricing by emphasizing customer-value pricing. It is also a theory that has been widely used for decades in part by business people worldwide, although it is unknown to most antitrust practitioners, most Ph.D. economists, and most journalists.
It also is rigorously focused on the key variable in economics for most people: cash flow. Not utility or surplus or other abstract ideas.
The basic tenets of this new theory include:
1. The dependent variable used is GDP per capita, adjusted for purchasing power parity (PPP), a robust measure of a nation's standard of living. It is also the best overall measure of prosperity.
2. Using a clearly defined dependent variable is the only way to allow a rigorous development of a theoretical model, in contrast to the arbitrary choices of data that characterize many other economic indices.
3. Prosperity is determined by productivity.
4. Productivity depends both on the dollar value of a nation's products and services, measured by the prices they command in open markets, and on the efficiency with which they are produced.
5. Productivity is what supports high wages, a strong currency, good returns to capital, and thus a high standard of living.
6. A key economic challenge is to improve conditions for companies and employees to increase their productivity.
7. The world economy is not a zero-sum game, and many nations can improve their prosperity at the same time if they improve productivity. In turn this will improve local incomes, which expands the global pool of demand to be met.
8. High wages justified by high productivity make a country, state, or city an excellent location in which to do business. (197)
B. Three analytical tools
Three tools comprise the new theory's analytical pillars. (See the figure.) The first tool focuses on each company and its options to generate cash and make more money. The other two tools support, or undermine, the first.
* Tool #1: Company Sophistication as to "operations and strategy."
* Tool #2: Five Forces that impact the company's products and services in the markets it competes in, broadly construed, as explained further below.
* Tool #3: Business Environment Quality where companies and the people earning their livings and benefits and paying taxes are located (referred to here also as the Prosperity Environment).
1. TOOL #1: COMPANY SOPHISTICATION IN OPERATIONS AND STRATEGY How do an employer, its employees, and associates choose to make good money in the global economy? This tool can be adapted to actions that an employer, employees and associates can take at the company level to make more money. For example, rather than focusing on cost cutting to make money, focusing on delivering customer value that avoids commoditization and supports higher prices, that is, pricing on the basis of customer value, not cost-plus. (198)
2. TOOL #2: FIVE FORCES There are Five Forces that determine the intensity of competition and profitablity, with the strongest force or forces governing how much money and profits an employer, its employees and associates, and the industries they are in can make and retain. Porter's Five Forces are well known in the business community and have been used since 1980 worldwide. His five competitive forces are (1) entry, (2) threat of substitution, (3) bargaining power of buyers, (4) bargaining power of suppliers, and (5) rivalry among current competitors. They reflect the reality that competition in an industry goes well beyond the established players.
For example, even a company with a very strong market position in an industry where potential entrants are no threat will earn low returns if it faces a superior, lower-cost substitute. Even with no substitutes and blocked entry, intense rivalry among existing competitors will limit potential returns.... Different forces take on prominence, of course, in shaping competition in each industry. In the ocean-going tanker industry the key force is probably the buyers (the major oil companies), whereas in tires it is powerful original equipment (OEM) buyers coupled with tough competitors. In the steel industry the key forces are foreign competitors and substitute materials. (199)
3. TOOL #3: BUSINESS ENVIRONMENT QUALITY (PROSPERITY ENVIRONMENT) This tool focuses on actions that can be taken at each geographic level to improve the environment for employers, employees and associates, and thus their communities to prosper in the global economy, what Porter terms the Business Environment Diamond. Relevant factors include government regulation, taxes on individuals as well as employers, workforce availability, the education system, and the legal system, at each level they can affect--local, state, and national.
Fortunately for antitrust and market economic policy, and the standard of living in the United States as well as worldwide, these three tools provide a new theory of economics and government that has been built in the cauldron of empirical reality focused on income per person. It is a new theory that goes beyond the limitation of "minuscule" increases in the standard of living of efficiency theory in the words of the Brookings Institution economist Dr. Schultze. (See part I.B.)
Further, the theory has been tested empirically for years. Specifically, when applied to explain the differences in income per capita in more than 100 countries, the theory explains more than 80% of the difference between countries and points to actions to take to increase prosperity. (200)
Finally, the three tools are understandable and usable by a variety of policymakers, including company executives and the people who earn their livings at the companies, retirees depending on companies to generate cash to pay their benefits or to pay the taxes so that governments can provide services and to pay, for example, unfunded retiree benefits, community leaders, politicians, government officials, the media, and the ultimate policy makers in a democracy, ordinary citizens of all ages.
C. Illustrative applications of the three tools
1. COMPANY LEVEL TOOL
a. Pricing by Customer Value, Not Cost-Plus One action by itself is enough to revolutionize conventional thinking about prosperity and making money in the global economy in the United States and other wealthy countries, as well as in China, India, and other countries. Conventional thinking assumes wealth is fixed and that cutting costs, wages, and benefits is the only way to make money. Obviously if it is assumed that prices are determined only by costs, the future for Americans, America and many other developed countries is bleak in a global economy where both people and material can be sourced at low cost.
Cost-plus pricing is still widely used by many companies. It also is widely assumed by the public, the media, government officials, and many others to be a law of nature.
Fortunately, the assumption that prices are always determined by costs is false, especially in a knowledge and entrepreneurial economy. Two Cleveland manufacturing examples are illustrative, Parker-Hannifin Corp and Nordson Corp.
Parker-Hannifin is a $10 billion company that manufactures over 800,000 products. Parker applies knowledge to manufactured products that its customers value. For nearly a century Parker had priced its products on a cost-plus basis.
In 2001, Parker-Hannifin's CEO, Don Washkewicz, re-examined the cost-plus pricing assumption, threw it out, and replaced it with customer-value pricing for all 800,000 products, worldwide. As a result, Parker was able to raise prices, sometimes as much as 60%, for nearly 30% of its products. One representative of customer Ingersoll-Rand Co. explained that
he first objected when one of Parker's new hydraulic fan motors [for its Bobcat line] cost much more than he expected. But when Bobcat's purchasing people sat down with Parker's sales team, Bobcat learned that the new motor replaced 11 separate parts in the company's existing machines. Moreover, the new design reduced leakage by eliminating hydraulic connections, was easier to install at Bobcat's factories, and opened up space inside the machines--all of which saves Bobcat money. (201)
Another example of how customer-value pricing works well in manufacturing is Nordson Corp., which makes machines that apply adhesives and paints to, among other things, auto parts, watches, soft drink and soup cans. In 2007, its sales were over $1 billion, of which two-thirds were overseas. However, the majority of its employees are in the United States.
How does Nordson manufacture so much in America and stay competitive globally? CEO Ed Campbell explained the key, the difference between cost-plus pricing and customer-value pricing:
It's critical that leaders of a manufacturing organization listen very carefully to what is important to your customers and find a way to add value that will increase the likelihood of your customer being successful. It's very difficult for a U.S. manufacturer to be successful in global markets on the basis of being the lowest-cost producer. There needs to be some other means of adding value to your customer's commercial activities, other than simply low costs, whether it be in improving yields, better service, or adding proprietary features to your customer's products through what you offer them. (202)
Cost-plus pricing is used by the majority of companies in the United States. It is also the theory the media regularly uses, for example, "XYZ Company must cut costs, including wages, to compete with China and India." A shift in thinking and acting by business, the public, government, and others from cost-plus pricing that dominates thinking today to customer-value pricing is one of the central elements of Professor Porter's new economic theory.
At the company level, it means the company and the people who earn their living there can choose how they make money and their pricing strategy, depending on the customer: cost-plus pricing, customer-value pricing, or both.
For all other policy makers, in the community, state, or nationally, customer-value pricing can often provide a new path to prosperity, control, and hope. Thus, contrary to the many prophets of doom for manufacturing, the global knowledge and entrepreneurial economy offers major opportunities for those who understand and take advantage of it.
b. Cooperative Labor-Management Relations for Mutual Prosperity The United States ranks 22nd in the world in Cooperation in Labor-Employer Relations. (203) This means there is a major opportunity to make labor-employer relations more cooperative and less confrontational in the new global knowledge and entrepreneurial economy. Creating and providing unique customer value is maximized with a cooperative worker-management relationship.
David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan, recently reported what could be one of the most important labor-management breakthroughs in half a century: "What we are witnessing is the transformation from a confrontational way of working to one of collaboration, which is absolutely necessary"; Mr. Ron Gettelfinger, president of the UAW, also recently stated: "The kind of challenges we face aren't the kind that can be ridden out. They're structural challenges and they require new and farsighted solutions." (204) We can only hope it is not too late.
The key opportunity is to focus on customer-value pricing and the question of how to make money within a company, community, state and nation, by executives, workers, union leaders, and the media. And for labor-management relations to switch from confrontation to cooperation to be able to create unique customer value.
c. Unlimited Wealth The global knowledge and entrepreneurial economy presents historic opportunities for the United States and for people around the world because knowledge is an increasing source of wealth. Specific examples include the tenth birthday of Google in September 2008. Google started on September 7, 1998, with four computers in two college dorm rooms and $100,000. This year its revenues will be $20 billion, and it has a market capitalization of $150 billion. (205)s Similarly, Apple's iPod/iTunes did not exist five years ago. Today they generate $10 billion in revenue and have helped Apple's stock grow from a market capitalization of $1 billion in 2003 to $150 billion in 2008. (206) In manufacturing, Parker-Hannifin and Nordson are discussed above.
"The potential for wealth is limitless" because wealth "is based on ideas and insights, not fixed because of scarce resources," Professor Porter explains, and "it is not abundant, low-paying labor that attracts innovative companies, but highly talented, specialized, and often expensive labor," and "we must think of competitiveness not as a fixed pie that you're trying to fight over, but really a pie that expands." (207) He also has elaborated as follows:
The total profit pool expands, for example, when channels become more competitive or when an industry discovers latent buyers for its product that are not currently being served. When soft-drink producers rationalized their independent bottler networks to make them more efficient and effective, both the soft-drink companies and the bottlers benefited. Overall value can also expand when firms work collaboratively with suppliers to improve coordination and limit unnecessary costs incurred in the supply chain. This lowers the inherent cost structure of the industry, allowing higher profit, greater demand through lower prices, or both. Or, agreeing on quality standards can bring up industry-wide quality and service levels, and hence prices, benefiting rivals, suppliers, and customers. (208)
1. BUSINESS ENVIRONMENT QUALITY TOOL
a. Accounting: Replace Accrued Earnings and Mark-to-Market with Long Term Cash Flow As the current economic crisis makes painfully clear, accounting is much too important to be omitted from economic theory. Professor Alfred Rappaport has extensively developed an alternative to accrued earnings and mark-to-market accounting based on long term cash flow. (209) He proposes a three-part financial statement that separates realized cash flows from forward-looking accruals.
(1) Operating Cash Flows. This part tracks only operating cash flows. It does not replace the traditional cash flow statement because it excludes cash flows from financing activities--new issues of stocks, stock buybacks, new borrowing, repayment of previous borrowing, and interest payments. It excludes noncash charges, such as depreciation, amortization, deferred taxes, and asset and liability revaluations.
(2) Revenue and Expense Accruals. A second part presents revenue and expense accruals, which estimate future cash receipts and payments triggered by current sales and purchase transactions. Management estimates three scenarios--most likely, optimistic, and pessimistic--for accruals of varying levels of uncertainty characterized by long cash-conversion cycles and wide ranges of plausible outcomes.
(3) Management Discussion and Analysis. In a third section, management presents the company's business model, key performance indicators (both financial and nonfinancial), and the critical assumptions supporting each accrual estimate. (210)
Professor Rappaport's proposal consists of two basic ideas that can be understood and used by a wide variety of people, not just accountants, actuaries, and Wall Street analysts:
* Cash Flow, Not Accruals. Cash flow is something everybody can and does understand since it is basically the method of accounting they live with, day in and day out. They may not call it accounting, but more importantly, they live it.
* Long Term Cash Flow. Having separated accruals from cash flow, the financial issue profoundly changes from the largely unfathomable mathematics used by the few today to action metrics usable by many, focused on how a company and the people who earn their livings and benefits with it generate cash flow over the short and long term.
Changing to Professor Rappaport's long term cash flow-based accounting would help solve a remarkable number of problems:
* It changes fundamentally the focus of company finances from quarterly exercises in mathematics, too often divorced from business substance, to what matters, the long term cash flow prospects and strategy for the business.
* It allows most people, including employees, employers, unions, government officials, policy analysts, politicians, and ordinary people, to understand and act in ways to maintain and to improve their own, their employers', and their communities' standard of living.
* It helps generate actions that lead to the cash needed to pay unfunded public and private retiree benefits under FASB and GASB. States and local governments are in the midst of a stunning surprise caused by a change in their accounting rules. Under GASB 45, states and local governments now must report an accrual estimate for their retiree medical liabilities, similar to FASB 106 for private companies. The numbers are staggering: over $2 trillion, most of which is unfunded. (211) Where will the cash needed to pay retired teachers, firemen, policemen and others possibly come from, next year, and for decades to come?
* It eliminates the root cause of the Enron and other accounting scandals that led to the passage of the Sarbanes-Oxley Act and thus would reduce the need for unnecessary burdens on companies and workers under Sarbanes-Oxley while, at the same time, increasing investor protection.
* And in ways most importantly, it involves a major power shift from Wall Street and other accrual mathematical experts to everybody else, as cash and business thinking like Michael Porter's can be understood and used by many, including those I refer to as the "interactive generation."
Further, Professor Porter has included accounting in his economic theory for a long time. For example, he warned of the dangers of an accounting system that rewards short term rather than long term value and results in 1992: "The American system of allocating investment capital is threatening the competitiveness of American firms and the long-term growth of the national economy," (212) and we need to "give management a set of signals that are more aligned with the long-term health of companies instead of the current stock price." (213)
Similarly, in January 2008, he stated:
If both executives and investors looked at competition this way, capital markets would be a far more effective force for company success and economic prosperity. Executives and investors would both be focused on the same fundamentals that drive sustained profitability. The conversation between investors and executives would focus on the structural, not the transient, imagine the improvement in company performance--and in the economy as a whole--if all the energy expended in "pleasing the Street" were redirected toward the factors that create true economic value. (214)
As to antitrust in particular, his new economic theory led him to identify the following accounting issues as "additional U.S. antitrust issues" in the antitrust chapter in the book I published with him:
* eliminating "pooling-of-interests accounting [, which] obscures the financial consequences of a merger, and allows companies to report post-merger profit improvements that are misleading."
* imposing "stricter rules on merger write-offs and restructuring charges would also limit uneconomic mergers. If the purchase price of a merger can be partly written off, the ongoing reported [return on inventment] can be artificially high. Since companies must invest the full purchase price to acquire a company, the full purchase price should appear as an investment on the books. Restructuring charges and write-offs are artificial adjustments that do not make the amount of the investment any different."
* requiring "ongoing disclosure of total equity investment before write-offs would produce a better understanding of true return on shareholder investment. A company that generates improving returns by writing off a substantial part of its investment will be recognized for what it is, a company that has not used shareholder capital very well."
* establishing "a comprehensive data set on mergers and their longevity and outcomes would be useful and potentially revealing. In a 1987 paper, [we] examined the merger history of a sample of companies back to World War II, and calculated the share of mergers that were liquidated or divested. This proportion turned out to be well over 50 percent of all transactions. Data such as this would sensitize managers and investors alike of the risks of these transactions."
* "Today, an unhealthy situation has been created in which distorted reporting leads shareholders to believe that bad mergers are good. This then leads managers to pursue mergers with no real productivity benefits, and sets up a contest with antitrust officials to get such transactions approved." (215)
All of which, from an antitrust and competitive policy point of view, underscores the need for competitive policy and economics to include accounting standards within their scope, poignantly underscored by the current economic crisis.
b. Government Command and Control Regulation Disease--and Cure Dr. Charles Schultze of the Brookings Institution diagnosed the recurrent problem and then proposed a cure for the failure of much government regulation in The Public Use of Private Interest. "Our political system almost always chooses the command-and-control response," and "we usually tend to see only one way of intervening," which is to "specify in minute detail the particular actions" desired and to "then command their performance." (216) "Instead of creating incentives so that public goals become private interests, private interests are left unchanged and obedience to the public goals is commanded " (217)
Unfortunately time and time again command and control government regulation fails, "bogged down in Rube Goldberg regulations"; for example, "government attempts to deal with rapidly escalating health costs" of the Medicare and Medicaid programs "have produced only burgeoning volumes of regulations and no results." (218)
Peter Drucker similarly describes the "invisible cost of government" as a "dangerous and insidious disease" worldwide, inflicting a "real cost in money and, even more, in capable people, their time, and their efforts." (219)
The lost opportunity for wealth creation is real with government regulation that is ineffective and burdensome. Consider, for example, a recent global survey of venture capitalists in twenty-six countries that found that they considered U.S. technology in five areas the best in the world. It also found that they considered doing business in the United States much more challenging than in comparable countries. (220)
Fortunately, Dr. Schultze also provides a breakthrough "cure" for government regulation and thus an opportunity for federal, state, and local governments, and voters. His new approach to government regulation is for government to use what he describes as "perhaps the most important social invention mankind has yet achieved," which is to "modify the structure of private incentives" in order to "harness the 'base' motive of material self-interest to promote the common good." (221) Thus government regulation can take a new road, modifying private incentives to serve public purposes, to greatly enhance the environment for prosperity.
c. Individual and Corporate Taxes The U.S. corporate tax rate is 40%, the second highest in the world behind Japan, including both state and federal taxes, but not including Social Security, Medicare and other employer taxes. (222) Individual taxes, including property and income taxes, vary significantly by location. Obviously in a global knowledge economy driven by people rather than plants and equipment, high taxes drive people and companies away, lower taxes attract them.
d. Cooperative Labor-Management Relations for Mutual Prosperity The same analysis presented above at the company level also applies to the community level.
3. FIVE FORCES TOOL Mr. Porter had the same problem that antitrust practitioners and courts have had with the relevant market for decades. The
boundary of an industry is often imprecise, because distinctions between an industry's product and substitutes, incumbents and potential entrants, and incumbents and suppliers or buyers are often arbitrary, [boundaries are] frequently in flux, ... [p]roduct lines are rarely static, ... [f]irms can create new product varieties that perform new functions, combine functions in new ways, or split off particular functions into separate products, ... new buyers can become part of an industry, existing buyers can drop out, or buyers may alter their purchasing behavior, [and the] current array of products and buyers [does not necessarily reflect] the products and buyers that an industry could potentially encompass. (223)
Mr. Porter solved his relevant market problem by linking relevant market analysis to his competitive analysis. Analytically, rather than sequentially first defining the single relevant market and then analyzing competition, as current antitrust analysis does, his Five Forces and other tools provide a method to analyze competition directly and robustly. By focusing on the competitive effects, rather than the definition of the relevant market, the same competitive conclusions often apply to whatever definition of the relevant market is used.
The three tools can be applied in many other specific ways. These are just a few examples.
D. Implications of the new economic theory for antitrust
Together, this advance in economic theory, dynamic productivity economics, combined with the Roberts Court and the Supreme Court since 1977's antitrust-related precedent, have major implications for antitrust, including the following.
First, antitrust analysis for the first time in over 100 years has a robust set of tools to analyze competition itself. Rotating the analytical focus 180[degrees] to the ultimate issue, demonstrable economic effects on markets turns on its head the current "first define the relevant market, then analyze competitive effects." Instead of spending enormous resources defining the relevant market, under this new antitrust analysis, the latter--actual competitive effects--drives the former--the market studied. That is, by focusing on competition with the three tools, the ultimate issue of the competitive effects on markets is always the focus and a variety of markets can be analyzed. The following merger analysis is illustrative.
Example: Merger of the Only Two Ultra-deepwater Oil Drilling Companies. Assume there are only two deepwater offshore drilling companies, and they propose to merge. The two firms operate highly capital-intensive drilling units that cost up to $500 million apiece. The merger of the two companies would create a monopoly if the market is defined as ultra-deepwater offshore drilling, and thus the merger, if allowed, would create an HHI of 10,000.
However the market is defined--narrowly as ultra deepwater offshore drilling in Houston or broadly, say, oil drilling on land and sea worldwide--the same conclusion is reached. In particular, Five Forces analysis shows that the only customers in the industry are the major oil companies. They can put new rivals into business through long-term contracts that support the financing needed to build new drilling traits. Assets can be easily moved from one geographic market to another. The rigs are essentially undifferentiated, have high fixed costs, and low marginal costs. As a result, the business is prone to deep price discounting. Thus although it seems at first glance that high costs create formidable barriers to entry, actual entry barriers are modest. Thus the merger poses no real threat to competition. Moreover, debating or litigating what is or is not the relevant market is largely eliminated, and the focus of antitrust and competitive analysis has rotated 180[degrees] to where it should be, on competition itself, in each of the possible relevant markets defined interactively.
Second, although essentially unknown to most antitrust lawyers, judges and economists, Professor Porter's economics and competitive analysis is already widely used and understood in the United States and worldwide in whole or in part by the people who must understand and comply with antitrust law and policy--business people.
Third, a major draft of antitrust policy and analysis based on dynamic productivity economics and on productivity, rather than efficiency, has already been prepared by Professor Porter. (224)
Finally, competition advocacy by the antitrust agencies and others also can go to the next level, including innovation, customer-based pricing, long term cash flow accounting and other key factors identified by the three tools, and leaving behind what has become tired and often unpersuasive phraseology, particularly in these trying times. Instead, there are new ideas and tools that are understandable and usable by many focused on the fundamental purpose of economic activity: cash flow and raising the standard of living of the largest number of people.
Peter Drucker once said that "the best way to predict the future is to create it." (225) Fortunately, the Roberts Court and the Supreme Court since 1977 have already significantly revised antitrust law to support, rather than suppress, private market competition and innovation in the fundamentally new factual reality of a global knowledge and entrepreneurial economy, and the Roberts Court is likely to continue to do so.
This is fortunate because the United States and the world are at a crossroads between a "perfect storm" of opportunity, and a "perfect storm" of danger. Antitrust lawyers and the antitrust agencies can play a special role in achieving the former and preventing the latter. Lawyers have two special assets to help make this happen. First, legal thinking in key respects is the same as scientific thinking, which, as Nobel Laureate physicist Leon Lederman explained, "often involves the killing of an exquisite theory by an ugly fact." (226) Einstein's rejection of Newtonian physics in 1905 is a classic example. Lawyers are similarly trained and experienced at rejecting theories that do not fit the facts. Second, the ultimate decision maker in antitrust for most matters is the Supreme Court, a unique province of the bar and a special source of antitrust innovation since 1977.
Now could not be a better or more important time for lawyers and others that understand the demonstrated economic and democratic values of private markets, competition, and antitrust to act to create a future of opportunity, and to prevent a very dangerous future.
APPENDIX 1 18 Consecutive Supreme Court Antitrust Decisions Lost by Plaintiffs Since 1983 No. Case Year Vote Opinion 1 Bell Atlantic Corp v. Twombly, 127 S. Ct. 1955 2007 7-2 Souter 2 Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 2007 5-4 Kennedy 3 Credit Suisse Securities (USA), LLC v. Billing, 127 S. Ct. 2383 2007 7-1 Breyer 4 Weyerhaeuser Co. v. Ross- Simmons Hardwood Lumber Co., 127 S. Ct. 1069 2007 9-0 Thomas 5 Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 2006 8-0 Stevens 6 Texaco, Inc. v. Dagher, 547 U.S. 155 2006 8-0 Thomas 7 Volvo Trucks N. Am., Inc. v. Reeder-Simco GMC, 546 U.S. 164 2006 7-2 Ginsburg 8 F. Hoffmann-LaRoche v. Empagran, 542 U.S. 155 2004 8-0 Breyer 9 Postal Service v. Flamingo Indus., 540 U.S. 736 2004 9-0 Kennedy 10 Verizon Cominc'ns Inc. v. Trinko, 540 U.S. 398 2004 9-0 Scalia 11 California Dental Assn. v. FTC, 526 U.S. 756 1999 5-4 Souter 12 NYNEX Corp. v. Discon, Inc., 525 U.S. 128 1998 9-0 Breyer 13 State Oil v. Khan, 523 U.S. 3 1997 9-0 O'Connor 14 Brown v. Pro Football, Inc. 518 U.S. 231 1996 8-1 Breyer 15 Hartford Fire Ins. Co. v. California, 509 U.S. 764 1993 9-0 Souter 15 Brooke Group, Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 1993 6-3 Kennedy 17 Prof. Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49 1993 9-0 Thomas 18 Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 1993 9-0 White APPENDIX 2 12 Supreme Court Decisions Overruling or Rejecting Antitrust Presumptions Since 1977 No. Case Year 1 Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 1977 2 U. S. Steel Corp. v. Former, 429 U.S. 610 1977 3 Broad. Music, Inc. v. CBS, 441 U.S. 1 1979 4 Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 1984 5 NCAA v. University of Oklahoma, 468 U.S. 85 1984 6 Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717 1988 7 State Oil v. Khan, 523 U.S. 3 1997 8 NYNEX Corp. v. Discon, Inc., 525 U.S. 128 1998 9 California Dental Assn. v. FTC, 526 U.S. 756 1999 10 Texaco Inc. v. Dagher, 547 U.S. 1 2006 11 Illinois Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28 2006 12 Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S. Ct. 2705 2007
Federal Rules of Evidence Rule 303 Presumptions in Criminal Cases
(adopted by the Supreme Court; not adopted by Congress)
(a) Scope. Except as otherwise provided by Act of Congress, in criminal cases, presumptions against an accused, recognized at common law or created by statute, including statutory provisions that certain facts are prima facie evidence of other facts or guilt, are governed by this rule.
(b) Submission to jury. The judge is not authorized to direct the jury to find a presumed fact against the accused. When the presumed fact establishes guilt or is an element of the offense or negatives a defense, the judge may submit the question of guilt or of the existence of the presumed fact to the jury, if, but only if, a reasonable juror on the evidence as a whole, including the evidence of the basic facts, could find guilt or the presumed fact beyond a reasonable doubt. When the presumed fact has a lesser effect, its existence may be submitted to the jury if the basic facts are supported by substantial evidence, or are otherwise established, unless the evidence as a whole negatives the existence of the presumed fact.
(c) Instructing the jury. Whenever the existence of a presumed fact against the accused is submitted to the jury, the judge shall give an instruction that the law declares that the jury may regard the basic facts as sufficient evidence of the presumed fact but does not require it to do so. In addition, if the presumed fact establishes guilt or is an element of the offense or negatives a defense, the judge shall instruct the jury that its existence must, on all the evidence, be proved beyond a reasonable doubt.
(1) WALTER ISAACSON, EINSTEIN 96 (2007).
(2) Id. at 96-101.
(3) Amanda Bennett, Management Guru, WALL ST. J., July 28, 1987, at 1. See Peter Drucker, THE ECONOMIST, Oct. 17, 2008, http://www.economist.com/business / management/displayStory.cfm ?source=hptextfeature&story_id=12429448. ("Peter Drucker is the one guru to whom other gurus kowtow.").
(4) PETER DRUCKER, THE AGE OF DISCONTINUITY 10 (1992). See also Peter Drucker on the New Business Realities, in Symposium: New Foundations for Joint Ventures and Antitrust, 44 ANTITRUST BULL. 787, 799 (1999).
(5) DRUCKER, supra note 4, at 40.
(6) PETER DRUCKER, INNOVATION AND ENTREPRENEURSHIP vii (1985).
(7) DRUCKER, supra note 4, at 350.
(8) Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955 (2007).
(9) Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).
(10) Illi. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28 (2006).
(11) Texaco Inc. v. Dagher, 547 U.S. 1 (2006).
(12) Mark Whitener, The End of Antitrust as We Know It?, ANITTRUST, Fall 2007, at 5.
(13) Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007).
(14) Greg Ip, Lessons of the "30s: Long Study of Great Depression Has Shaped Bernanke's Views, WALL ST. J., Dec. 7, 2005, at 1.
(16) BENJAMIN FRIEDMAN, THE MORAL CONSEQUENCES OF ECONOMIC GROWTH 279 (2005).
(17) ELIZABETH EDERSHEIM, DEFINITIVE DRUCKER 14 (2007).
(18) PETER DRUCKER, THE END OF ECONOMIC MAN: THE ORIGINS OF TOTALITARIANISM XV, X (1999 ed.).
(19) Michael Porter, Overview, in MICHAEL PORTER, PETER STAUDHAMMER, SCOTT STERN & CHARLES WELLER, UNIQUE VALUE 32 (2004-05) [hereinafter UNIQUE VALUE].
(20) Frank Easterbrook, Ignorance and Antitrust, in ANTITRUST, INNOVATION, AND COMPETITIVENESS 119, 122-23 (Thomas M. Jorde & David J. Teece eds., 1992).
(21) PETER DRUCKER, MANAGEMENT 45 (1973).
(22) CHARLES SCHULTZE, THE PUBLIC USE OF PRIVATE INTEREST 25 (1977).
(23) Two 2008 articles detail Professor Porter's new economic theory and its three analytical tools: Michael Porter, Mercedes Delgado, Christian Ketels & Scott Stem, Moving to a New Global Competitiveness Index, WORLD ECONOMIC FORUM, THE GLOBAL COMPETITIVENESS REPORT 2008-2009 (2008) [hereinafter Porter 2008 GCR], and Michael Porter, The Five Competitive Forces That Shape Strategy, HARV. BUS. REV., Jan. 2008, at 79 [hereinafter Five Forces HBR 2008]. Professor Porter's Web site is also a rich source of detail. See http://www.isc.hbs.edu/. Finally, there are five chapters by Professor Porter on his new theory, including his chapter on a productivity-based antitrust law, and my summary and antitrust chapters in UNIQUE VALUE, supra note 19.
(24) Porter 2008 GCR, supra note 23, at 44-45, 58.
(25) UNIQUE VALUE, supra note 19, at iv.
(26) C.K. PRAHALAD, THE FORTUNE AT THE BOTTOM OF THE PYRAMID 1 (2004).
(27) HAROLD EVANS, THEY MADE AMERICA 11, 13 (2004).
(28) See PRAHALAD, supra note 26, and consider the contrast between the federal government's response to the financial crisis, and DuPont's response. DuPont CEO Chad Holliday reacted with great speed and rallied his entire company from top management to every employee at all levels to confront the emergency and focus on maintaining cash flow. Ram Charan, What DuPont Did Right, BUS. WEEK, Jan. 19, 2009, at 36.
(29) EDERSHEIM, supra note 17, at 19.
(31) DRUCKER, supra note 6, at 151.
(32) A.G. LAFLEY & RAM CHARAN, THE GAME-CHANGER 3 (2008).
(33) Quoted by Professor James Pfeffer, (Baker & Hostetler Partner Retreat, Sandusky, Ohio, June 6, 1999).
(34) Thomas Stewart, Old, but Not Old-School, HARV. BUS. REV., Mar. 2006, at 12, and Larry Huston & Nabil Sakkab, Connect and Develop: Inside Procter & Gamble's New Model For Innovation, HARV. BUS. REV., Mar. 2006, at 58.
(35) Rosabeth Moss Kanter, Transforming Giants, HARV. BUS. REV., Jan. 2008, at 43.
(36) Drucker, supra note 4, at 799.
(37) Id. at 798.
(38) Jeffrey Rosen, Roberts's Rules, ATL. MONTHLY, Jan. 2007, available at http://www.theatlantic.com/doc/200701/john-roberts.
(41) Porter 2008 GCR, supra note 23, at 368.
(42) Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).
(43) Id. at 346 (quoting Conley v. Gibson, 335 U.S. 41, 47 (1957)).
(45) Id. at 347 (quoting Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, 741 (1975) (emphasis added)).
(46) Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1965 (2007). Justices Stevens and Ginsburg dissented.
(47) Id. at 1974.
(48) Id. at 1962.
(49) Conley v. Gibson, 355 U.S. 41, 45-46 (1957) ("[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.").
(50) Twombly, 127 S. Ct. at 1969.
(51) Id. at 1967.
(52) Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007).
(53) 509 U.S. 579 (1993).
(54) 522 U.S. 136 (1997) (a tort case alleging that exposure to PCBs "prorooted" plaintiff's small cell lung cancer).
(55) 526 U.S. 137 (1999) (holding Daubert applied to all experts, and ruling that plaintiff's' tire expert did not meet Daubert standards and thus was properly excluded by the trial judge).
(56) 528 U.S. 440 (2000) (holding plaintiffs have, so to speak, only one bite at the apple; if their experts are excluded on appeal after testifying and winning at trial, the case is over).
(57) Frye v. United States, 293 F. 1013 (D.C. Cir. 1923).
(58) Daubert, 509 U.S. at 590-91.
(59) See also Charles Weller, Litigator's Guide to the Daubert Quartet, 1 Expert Evidence Rep. (BNA) 61 (Sept. 10, 2001); Charles Weller, Antitrust Economics as Science After Daubert, 42 ANTITRUST BULL. 871 (1998).
(60) John Coffee & Daniel Wolf, The Future of Class Actions, Class Action Litig. Rep. (BNA) S-3, S-42 (Nov. 28, 2008).
(61) Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); Celotex Corp. v. Catrett, 477 U.S. 317 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984).
(62) 127 S. Ct. 1727 (2007).
(63) BMW of N. Am., Inc. v. Gore, 517 U.S. 559 (1996).
(64) State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003).
(65) Exxon Shipping Co. v. Baker, No. 07-219 (June 25, 2008) (federal law, but reasoning can be applied to the preceding Constitutional cases).
(66) Williams v. Phillip Morris Inc., 2008-OR-R0201.001 (Or. 208), cert. granted, Philip Morris USA v. Williams (U.S. June 9, 2008) (No. 07-1216).
(67) See, e.g., Riegel v. Medtronic, Inc., 128 S. Ct. 999 (2008).
(68) See, e.g., Preston v. Ferrer, 128 S. Ct. 978 (2008); Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003); Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001). However, trial lawyers have reportedly spent more than $100 million in campaign contributions to eliminate these provisions of the FAA and other trial lawyer friendly federal legislation. Nick Timiraos, Groups Aim To Roll Back Curbs On Litigation, WALL ST. J., Nov. 3, 2008, at A5.
(69) United States v. Booker, 543 U.S. 220 (2005); See also Blakely v. Washington, 542 U.S. 296 (2004); Apprendi v. New Jersey, 530 U.S. 466 (2000).
(70) United States v. Gaudin, 515 U.S. 506 (1995).
(71) Id. at 513.
(72) Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 58-59 (1977).
(73) United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223 n.59 (1940). Footnote 59 is used in jury instructions and otherwise to define per se price-fixing to this day: a "combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing ... price" is "illegal per se." See, e.g., ABA, MODEL JURY INSTRUCTIONS IN CIVIL ANTITRUST CASES, at B-19-B-21 (2005); ABA, SAMPLE JURY INSTRUCTIONS IN CIVIL CASES, at B-16 (1999).
(74) Sylvania, 433 U.S. 36.
(75) U. S. Steel Corp. v. Former, 429 U.S. 610 (1977).
(76) Broad. Music, Inc. v. Columbia Broad. Sys., 441 U.S. 1 (1979).
(77) NCAA v. Univ. Okla., 468 U.S. 85 (1984).
(78) Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717 (1988).
(79) Cal. Dental Ass'n v. FTC, 526 U.S. 756 (1999).
(80) Id. at 783 (citations omitted).
(81) Id. at 759.
(82) Id. at 782.
(83) Id. at 771.
(85) Id. at 778 (emphasis added).
(86) Id. at 775 n.12 (emphasis added).
(87) Id. at 771 (emphasis added).
(88) Id. at 771-73.
(89) Id. at 759, 770, 771, 775 n.12, 781.
(90) Leegin Creative Leather Prods. v. PSKS, Inc., 127 S. Ct. 2705, 2723 (2007).
(91) Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28 (2006).
(92) Id. at 44, 38-39 (citing Int'l Salt Co. v. United States, 332 U.S. 392 (1947)).
(93) 547 U.S. at 31, 35.
(94) Dagher v. Saudi Refining Inc., 369 F.3d 1108, 1116 (9th Cir. 2004).
(95) Texaco Inc. v. Dagher, No. 04-805, slip op. at 6-7 (U.S. Feb. 28, 2006).
(96) Id. at 7-8.
(97) Id. at 8 (quoting 369 F.3d at 1127).
(98) Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 452 (1984).
(99) Dagher, slip op. at 6.
(100) Id. at 7.
(101) Id. at 5 (emphasis added).
(102) The enormous costs avoided can be seen in an article by one of the losing plaintiffs' lawyers. Daniel Schulman, Texaco v. Dagher: Opportunities Missed and Neglected, 52 ANTITRUST BULL. 531 (2007).
(103) "Basic facts" and "presumed facts" are part of the law of presumptions analyzed further in part III.E below.
(104) Cal. Dental Ass'n v. FTC, 526 U.S. 756 (1999).
(105) United States v. Phila. Nat'l Bank, 374 U.S. 321 (1963). The merger presumption applies to the Sherman Act and Clayton Act [section] 7.
(106) Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 726 (1988).
(107) The Antitrust Division has provided an extraordinary "inside look" on real cartels and all the effort it takes to make them work, both in writing and in a video used at trial. See Scott D. Hammond, Caught in the Act: Inside an International Cartel, Speech at OECD Competition Committee Public Prosecutors Program (Oct. 18, 2005) and James M. Griffin, An Inside Look at a Cartel at Work, Address at ABA section of Antitrust Law Annual Spring meeting at 20-21 (Apr. 6, 2000.).
(108) DEP'T OF JUSTICE, ANTITRUST DIVISION MANUAL III-126 to III-127 (2008).
(109) PHILLIP AREEDA, 7 ANTITRUST LAW, [paragraph]1510C (1986) (footnotes omitted) (emphasis added).
(110) Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 452, 772 (1984) (footnote omitted) (emphasis added).
(111) Copperweld ended decades of litigation over intracorporate conspiracies, but left open complex and protracted issues of whether or not there was "control."
(112) Dagher v. Saudi Refining, Inc., 369 F.3d 1108 (2004). Another classic illustration is the disagreement between the Antitrust Division and the FTC on cooperative price advertising in the early 1960s. The FTC took the position that joint price advertising by a group of independent druggists was per se illegal, and the Antitrust Division (and Professor Areeda) disagreed. See H. R. REP. No. 88-699, Select Comm. on Small Bus., FTC Advisory Opinion on Joint Ads 25-32 (1963).
(113) 547 U.S. at 5 (emphasis added).
(114) It was not an issue in Dagher. Id. at 5 n.l ("We presume for purposes of these cases that Equilon is a lawful joint venture.")
(115) DEP'T OF JUSTICE & FED. TRADE COMM'N, STATEMENT OF ANTITRUST ENFORCEMENT POLICY IN HEALTH CARE 71, 107 (1996) (emphasis added).
(116) ABA, supra note 73, at B-21 (emphasis added).
(117) United States v. Booker, 543 U.S. 220 (2005); Blakely v. Washington, 542 U.S. 296 (2004); Apprendi v. New Jersey, 530 U.S. 466 (2000).
(118) United States v. Gaudin 515 U.S. 506 (1995).
(119) Id. at 513.
(120) Id. at 523.
(121) PHILLIP AREEDA & HERBERT HOVENKAMP, 2 ANTITRUST LAW 71 (3d. ed. 2007).
(122) KENNETH BROUN, McCORMICK ON EVIDENCE 585, 573 (6th ed. 2006). Leading cases include United States v. U. S. Gypsum Co., 438 U.S. 422 (1978) and Sandstrom v. Montana, 442 U.S. 510 (1979).
(123) 438 U.S. at 446 (emphasis added) (citation omitted).
(124) BROUN, supra note 122, at 573.
(125) See, e.g., United States v. Hudson & Goodwin, 11 U.S. 32 (1812).
(126) JAMES MOORE, MOORE'S FED. PRACTICE RULES PAMPHLET, PART 2, 1505-08 (1975).
(127) Id. at 309.
(128) Gypsum, 438 U.S. at 438-39.
(129) Nash v. United States, 229 U.S. 373 (1913).
(130) Gypsum, 438 U.S. at 438-39.
(131) 520 U.S. 259 (1997).
(132) Id. at 265 (citing Bouie v. City of Columbia, 378 U.S. 347, 351 (1964)).
(133) Id. at 267 (emphasis added).
(134) The cases lost include United States v. Carilion Health System, 707 F. Supp. 840 (W.D. Va), aff'd per curiam, 892 F.2d 1042 (4th Cir. 1989); In re Adventist Health Sys., 117 F.T.C. 224 (1994); FTC v. Freeman Hosp., 911 F. Supp. 1213 (W.D. Mo), aff'd, 69 F.3d 260 (8th Cir. 1995); FTC v. Butterworth Health Corp., 946 F. Supp. 1285, 1300-01 (W.D. Mich. 1996), aff'd, 1997-2 Trade Cas. (CCH) [paragraph] 71,863, 71,867-68 (6th Cir. 1997); United States v. Mercy Health Services, 902 F. Supp. 968 (N.D. Iowa 1995), vacated as moot, 107 F.3d 632 (8th Cir. 1997); United States v. Long Island Jewish Med. Ctr., 983 F. Supp. 121 (E.D.N.Y. 1997); FTC v. Tenet Healthcare Corp., 17 F. Supp. 2d 937 (E.D. Mo. 1998), rev 'd, 186 F.3d 1045 (8th Cir. 1999); California v. SuRer Health Sys., 84 F. Supp. 2d 1057 (N.D. Cal)., aff'd mere., 2000-1 Trade Cas. (CCH) [paragraph] 87,665 (9th Cir. 2000), revised, 130 F. Supp. 2d 1109 (N.D. Cal. 2001).
(135) See, e.g., John Carreyrou, Nonprofit Hospitals Flex Pricing Power, WALL ST. J., Aug. 28, 2008, at A1.
(136) Peter Orszag, The Challenge of Rising Health Care Costs--A View from the Congressional Budget Office, NEW ENG. J. MED., Nov. 1, 2007, at 1793. See also Peter Orszag, The Biggest Budget Buster, WALL ST. J. (Dec. 12, 2007), http://online.wsj.com/article/SB119742918489122827.html?mod=opinion _main_commentaries.
(137) PETER DRUCKER, THE FRONTIERS OF MANAGEMENT 231, 243-44 (1986). See also Leigh Trevor, Hostile Takeovers--The Killing Field of Corporate America, quoted in Charles Weller, Antitrust Economics as Science After Daubert, supra note 59, at 871.
(138) See F. M. Scherer, Some Principles for Post-Chicago Antitrust Analysis, 52 CASE W. RES. L. REV. 5, 11-12 (2002).
(139) See, e.g., Robert Frank & Robin Sidel, Firms That Lived by the Deal in the '90s Now Sink by the Downs, WALL ST. J., June 6, 2002, at A1; Michael Porter, From Competitive Advantage to Corporate Strategy, HARV. BUS. REV, May/June 1987, at 43 (over 50% of the mergers studied dating back to World War II were liquidated or divested); Gretchen Morgenson, What Are Mergers Good For?, N.Y. TIMES, June 5, 2005 (Magazine) at 56.
(140) Peter Drucker, Science and Industry: Challenges of Antagonistic interdependence, SCIENCE, May 25, 1979, at 806, 807.
(141) United States v. Phila. Nat'l Bank, 374 U.S. 321 (1963).
(142) United States v. Von's Grocery Co., 384 U.S. 270 (1966). See From Von's to Schwinn to the Chicago School: Interview with Judge Richard Posner, ANTITRUST, Spring, 1992 at 4, 5.
(143) RICHARD POSNER & FRANK EASTERBROOK, ANTITRUST CASES, ECONOMIC NOTES AND OTHER MATERIALS 41-43 (2d ed. Supp. 1984).
(144) F.M. SCHERER & DAVID Ross, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 411 (3d ed. 1990).
(145) State Oil Co. v. Khan, 522 U.S. 3, 20 (1997).
(146) See, e.g., recent government losses in these merger cases: United States v. Oracle Corp., 331 F. Supp. 2d 1(198 (N.D. Cal. 2004); United States v. SunGard Data Sys., 172 F. Supp. 2d 172 (D.D.C. 2001). For more detail, see Weller, UNIQUE VALUE, supra note 19, at 210-18.
(147) Standard Oil of Ind. v. United States (Cracking Oil), 283 U.S. 163 (1931).
(148) Chi. Bd. of Trade v. United States, 246 U.S. 231, 238 (1918). In Chicago Board of Trade, the Supreme Court held the horizontal price restraint involving grain in transit to Chicago imposed by a joint venture of competitors in the form of an organized exchange was lawful because there was uninhibited competition between that grain and grain which had already been or subsequently would be shipped to the city.
(149) Milton Handler, The Judicial Architects of the Rule of Reason, in TWENTY-FIVE YEARS OF ANTITRUST 1, 30-31 (1973).
(150) Id. at 30.
(151) Id. at 29 (quoting Cracking Oil, 283 U.S. at 179) (footnotes omitted).
(152) Cracking Oil, 283 U.S. at 179.
(153) Handler, supra note 149, at 30.
(154) Peter S. Goodman, Taking Hard New Look at a Greenspan Legacy, N.Y. TIMES, Oct. 9, 2008, at A1.
(155) JOHN BOGLE, THE BATFLE FOR THE SOUL OF CAPITALISM XX-xxii, 226 (2005). See also JOHN BOGLE, ENOUGH (2008).
(156) PETER DRUCKER, MANAGING IN THE NEXT SOCIETY 53 (2002).
(157) Alfred Rappaport, Beyond Quarterly Earnings: How to Improve Financial Reporting, WALL ST. J., Mar. 8, 2004, at R2. See also part V below.
(158) Samuel A. DiPiazza, et al., Global Capital Markets and the Global Economy: A Vision from the CEOs of the International Audit Networks (Nov. 2006), http://www.globalpublicpolicysymposium.com/CEO_Vision.pdf.
(159) SCHULTZE, supra note 22, at 65.
(160) DRUCKER, supra note 21, at 45.
(161) Easterbrook, supra note 20, at 119, 122-23.
(162) DRUCKER, supra note 6, at 145. See also MANCUR OLSON, THE RISE AND DECLINE OF NATIONS (1984).
(163) Mark Levey, Leave the New Deal in the History Books, WALL ST. J., Jan. 17, 2009, at All. See also AMITY SHLAES, THE FORGOTTEN MAN 246, 352 (2008) (citing unemployment rates for each year, inluding over 17% in January 1938); George Will, Learn from the Past, Before it's too Late: Economically, Obama May Repeat FDR's Mistakes, WASH. POST, Nov. 30, 2008, at B7.
(164) PETER DRUCKER, TOWARD THE NEXT ECONOMICS AND OTHER ESSAYS 2 (1981).
(165) Id. at 12-13.
(166) Hiroko Tabuchi, Japan's Slump Tests Faith in the Resilience of Stocks, N.Y. TIMES, Mar. 6, 2009, at B1.
(167) MICHAEL E. PORTER, HIROTAKA TAKEUCHI & MARIKO SAKAKIBARA CAN JAPAN COMPETE? 2-3 (2000).
(168) Id. at 29.
(170) Id. at xv.
(171) Id. at 91.
(172) DRUCKER, supra note 137, at 231, 243-44.
(173) Id. at 243.
(174) See supra notes 138-40 and accompanying text.
(175) WILLIAM R. EASTERLY, THE ELUSIVE QUEST FOR GROWTH i-ii (2001).
(177) ANTHONY KRONMAN, EDUCATION'S END 137-39, 202-03 (2007).
(178) JOSEPH SCHUMPETER, CAPITALISM, SOCIALISM AND DEMOCRACY 167, 415 (3d ed. 1950).
(179) DRUCKER, supra note 18, at x.
(180) SCHULTZE, supra note 22, at 7.
(181) Id. at 18.
(183) Id. at 6.
(184) Id. at 5.
(186) Id. at 76-83, 5.
(187) Id. at 16-25.
(188) DRUCKER, THE AGE OF DISCONTINUITY, supra note 4, at 317.
(189) See, e.g., Orszag, The Biggest Budget Buster, supra note 136.
(190) Ill. Brick Co. v. Illinois, 431 U.S. 720, 741-42 (1977) (quoting Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481, 493 (1968)).
(191) DRUCKER, THE AGE OF DISCONTINUITY, supra note 4, at 137, 142.
(192) DRUCKER, supra note 137, at 13.
(193) DRUCKER, supra note 4, at 145.
(194) ALEXIS DE TOCQUEVILLE, DEMOCRACY [N AMERICA, Vol. II at 818-21 (Arthur Goldhammer ed., 2(104).
(195) See part IV.T.
(196) See sources supra note 23.
(197) Porter 2008 GCR, supra note 23, at 44-45, 52, 58.
(198) Peter Drucker called this idea "cost-led pricing" and "price-led costing." PETER DRUCKER, CLASSIC," DRUCKER 105 (2006).
(199) MICHAEL PORTER, COMPETITIVE STRATEGY 6 (1980).
(200) See Professor Porter's chapters in WORLD ECONOMIC FORUM, THE GLOBAL COMPETITIVENESS REPORT 1998-2008, and Porter, chapters 3-5 in UNIQUE VALUE, supra note 19.
(201) Timothy Aeppel, Seeking Perfect Prices, CEO Tears Up The Rules, WALL ST. J., Mar. 27, 2007, at A1.
(202) Thomas W. Gerdel, Nordson Corp. at 50: Picture of Global Health, CLEV. PLAIN DEALER, Oct. 8, 2004, at B1.
(203) WORLD ECONOMIC FORUM, THE GLOBAL COMPETITIVENESS REPORT 2007-2008, at 456.
(204) Katie Merx & Tim Higgins, UAW's New Role: Shareholder, CLEV. PLAIN DEALER, Nov. 16, 2007, at C1; Mike Spector, Jeffrey McCracken & John Stoll, How Less Pay, More Risk Sells Itself, WALL ST. J., Oct. 10, 2007, at B1.
(205) Michael Liedtke, Google Turns 10 Years Old, CLEV. PLAIN DEALER, Sept. 7, 2008, at C1.
(206) Mark Johnson, Clayton Christensen & Henning Kagermann, Reinventing Your Business Model, HARV. BUS. REV., Dec. 2008, at 51.
(207) See PORTER, ET AL., UNIQUE VALUE, supra note 19, at 8, 31, 35.
(208) Five Forces HBR 2008, supra note 23, at 92.
(209) See, e.g., ALFRED RAPPAPORT, CREATING SHAREHOLDER VALUE (1986); Alfred Rappaport, The Economics of Short-Term Performance Obsession, 61 FIN. ANALYSTS J. 65 (2005); Alfred Rappaport, 10 Ways to Create Shareholder Value, HARV. BUS. REV., Sept. 2006, at 66; Alfred Rappaport, Beyond Quarterly Earnings: How to Improve Financial Reporting, WALL ST. J., Mar. 8, 2004, at R2; Alfred Rappaport, Show Me the Cash Flow, FORTUNE, Sept. 16, 2002, at 192; Alfred Rappaport, How to Avoid the P/E Trap, WALL ST. J., Mar. 10, 2003, at R2. On the defects of mark-to-market, see FedEx CEO Fred Smith's comments in Stephen Moore, Weekend Interview with Fred Smith, WALL ST. J., Oct. 25, 2008, at A11.
(210) Rappaport, 10 Ways, supra note 209, at 75.
(211) See, e.g., Jilian Mincer, Retiree Health Costs to Hit Government Employers, WALL ST. J., Nov. 9, 2006, at D3; E. J. McMahon, Accounting, Texas-Style, WALL ST. J., May 29, 2007, at A14; Mary Williams Walsh, Auditing Rule is Put at Risk by Texas Bill, N.Y. TIMES, May 18, 2(i)(i)7, at C1.
(212) MICHAEL PORTER, CAPITAL CHOICES 20 (1994).
(213) Steve Lohr, Fixing Corporate America's Short-Term Mind-Set, N.Y. TIMES Sept. 2, 1992, at B1.
(214) Five Forces HBR 2008, supra note 23, at 93.
(215) Porter, Competition and Antitrust: A Productivity-Based Approach in UNIQUE VALUE, supra note 19, at 185 (footnote omitted).
(216) SCHULTZE, supra note 22, at 13, 6, 65.
(217) Id. at 6.
(218) Id. at 4.
(219) DRUCKER, supra note 6, at 262.
(220) Matt Vella, The Moneymen Vote, Bus. WEEK, Dec. 1, 2008, at 68.
(221) SCHULTZE, supra note 22, at 18.
(222) Corporate Tax Rates Are Falling, THE ECONOMIST, Oct. 22, 2008, at 5.
(223) MICHAEL PORTER, COMPETITIVE ADVANTAGE 175, 233--34 (1985).
(224) Michael Porter, Competition and Antitrust: A Productivity-Based Approach, 46 ANTITRUST BULL. 919 (2001). A later version appears in Porter, Competition and Antitrust: A Productivity-Based Approach, in UNIQUE VALUE, supra note 19, at 154-86 (I was privileged to have assisted Professor Porter in preparing it).
(225) EDERSHEIM, supra note 17, at 5.
(226) LEON LEDERMAN, THE GOD PARTICLE 256 (1993).
BY CHARLES D. WELLER *
* Charles D. Weller, LLC, Cleveland, Ohio
|Printer friendly Cite/link Email Feedback|
|Author:||Weller, Charles D.|
|Date:||Mar 22, 2009|
|Previous Article:||Constraints on convergence in Chinese antitrust.|
|Next Article:||An emerging consensus on bundled discounts under section 2 of the Sherman Act?|