The Refinement of U.S. Antitrust Law in a Global Environment presentation by Stuart M. Chemtob Wilson, Sonsini, Goodrich & Rosati at International Conference on Global Standard v. National Standards in Competition Law Center for Competition Law Seoul National University School of Law March 30. 2015 It is a pleasure to be here today on the occasion of this international seminar in honor of Professor Kwon Oh Seung. I am honored to be the only speaker from the United States on this important occasion, and will therefore try to contribute to this seminar by providing an American perspective. The theme of this conference in recognition of the important contributions of Professor Kwon is whether we are better off with global antitrust standards or national antitrust standards, and I will comment on that topic in my presentation today. The U.S. antitrust agencies the Department of Justice and the Federal Trade Commission have been active advocates of the American approach to competition law when interacting with other competition authorities. Some of the essential characteristics of the American approach include (1) consumer welfare oriented, (2) protection of competition rather than individual competitors, (3) general disregard for non-competition factors in enforcement decisions, (4) focus on deterring hard-core cartel conduct through active
enforcement based on a per se illegal approach and tough penalties, (5) use of Rule of Reason analysis for virtually all other conduct, with a focus on remedial measures rather than deterrent penalties, (6) concern with harm to inter-brand competition rather than intrabrand competition, (7) importance of defining relevant markets; (8) a preference for structural rather than behavioral remedies for anticompetitive mergers, (9) a relatively cautious approach to intervention against unilateral conduct and (10) reliance on due process rights of investigated parties to assist in reaching the correct decisions. The U.S. antitrust agencies have not been shy in commending the merits of this approach both bilaterally and in multilateral fora. It might therefore be surprising to hear that the United States has not been an ardent supporter of the adoption of global standards for competition laws. To the contrary, the U.S. antitrust agencies have been particularly wary of proposals to include substantive antitrust standards in multilateral instruments developed by WTO, UNCTAD or WIPO or even in U.S. bilateral or plurilateral free trade agreements. On the other hand, the United States has been a strong proponent of establishing global standards for antitrust enforcement procedures. In particular, the United States has sought to ensure that all competition agencies adopt rules on procedural fairness that will allow subjects of investigations to have effective opportunities to make arguments and submit evidence in their defense, convinced that reasoned arguments based on a full evidentiary record will lead to well-founded enforcement decisions. The Korea-U.S. Free Trade Agreement (KORUS Agreement) was the first U.S. free trade agreement with robust provisions addressing procedural fairness in competition law enforcement, and that agreement set a baseline for future U.S. free trade agreements. The U.S. proposals for the -2-
competition chapter of the Trans-Pacific Partnership (TPP) agreement seek to take those procedural fairness obligations even further, with the hope that adoption of these provisions in the TPP will form the basis for a global standard on transparency and due process in the enforcement of competition laws. The reticence of the U.S. enforcement agencies to support global substantive antitrust standards stems from a variety of concerns. The United States believes that multilateral institutions seeking to adopt rules on substantive antitrust standards would be required to accept the lowest common denominator in order to reach agreement. The fear is that such a result would lead to a watering-down of antitrust standards applied in the United States, a result that it believes would be to the detriment of American consumers and the relatively laissez-faire market approach of the U.S. economy. There is also concern that lowestcommon-denominator standards might act to ratify practices by some competition agencies that are not firmly rooted in economic analysis and that might therefore harm global competition and the global trading system.. Therefore, I believe that the United States would best be described, at least currently, as a supporter of national competition standards over global standards. What is at the core of U.S. concerns about global substantive antitrust standards is a kind of humility. Now humility is not a word that is often associated with the United States. But the humility that I am referring to stems from the recognition that our current understanding of the workings of the market and what may or not be procompetitive or anticompetitive may not be completely correct. This recognition comes, ironically, from the experience gained from the long history of antitrust law the United States. -3-
This year marks the 125 th anniversary of the Sherman Antitrust Act, making the U.S. antitrust statute one of the oldest in the world. That longevity has brought with it a tremendous amount of experience and learning in applying antitrust laws to various types of conduct. That experience has come from a system where there are two different federal antitrust agencies, with largely overlapping jurisdictions but different enforcement procedures. In addition, there has been a robust some might say too robust history of private antitrust litigation, spurred by the availability of treble damages and class actions in the United States. The heavy reliance on the federal courts as the final arbiters of enforcement decisions and private complaints has resulted in a tremendous amount of court-led antitrust common law. And the transparency afforded by the large body of court decisions has allowed for a healthy debate among judges, lawyers, academics and economists regarding the wisdom of particular decisions as well as overall approaches to antitrust analysis. Over the course of the past 125 years we have seen an evolution in antitrust thinking by the courts and by the U.S. enforcement agencies. We have learned that our understanding of markets and of the role that competition laws should play in maintaining competitive markets is not perfect. We have also seen that markets and business practices don t stay the same, that new markets emerge, and that the nature of competition can change. For example, forty years ago few if any people would have understood the notions of two-sided markets or platform competition that are at the core of market competition in the Internet Age. Therefore, we have come to understand over these 125 years that, at least for the United States, the application of our antitrust laws must be allowed to change and evolve, and that we must continuously question and refine our approaches in light of new experience and -4-
new insights. The adoption of rigid international competition standards is not seen as compatible with the American experience. Take price-fixing for example. Pricing-fixing is one of the few categories of conduct that is subject to a rigid, per se unlawful, rule in the United States. Some may be surprised to learn that for the first 80 plus years of the Sherman Act, price-fixing and other hard core antitrust violations were viewed as minor crimes misdemeanors subject to minimal penalties for both corporations and individuals. It was not until 1974, after the need for greater deterrence of cartel conduct was recognized, that antitrust crimes were elevated to the level of a serious offense a felony. Corporate fines were increased significantly to $1 million (and later to the current maximum of $100 million) and maximum criminal sentences for individuals were increased to 3 years, and subsequently to 10 years. Since then, tough enforcement and severe penalties against hard-core cartel conduct has been one of the hallmarks of U.S. antitrust enforcement. But evolution does not always go in a straight line, or always lead to a better solution than what came before. There have been many examples of American antitrust law approaches that have proved to be evolutionary false starts, to be superseded by other, more appropriate approaches. One good example is the development of thinking in the United States regarding non-price vertical restrictions. In 1963, the U.S. Supreme Court in the White Motor case reversed a lower court s decision to treat a truck manufacturer s territorial and customer restrictions on its dealers as per se unlawful. The Supreme Court concluded that it knew too little about the actual impact of these practices to determine whether they should be categorized as per se violations, and therefore instructed the lower court to apply a rule of reason analysis to the case. But only four years later, in a case involving vertical restrictions -5-
imposed by a bicycle manufacturer, Schwinn, on sales by its distributors outside of their assigned territories or to unfranchised retailers, the Supreme Court ruled that such restrictions were per se unlawful. That decision caused confusion and inconsistent approaches by various lower courts. A decade later, in 1977, the Supreme Court issued its landmark decision in GTE Sylvania, overruling the per se rule it had adopted in the Schwinn decision. The Supreme Court recognized that restrictive arrangements between manufacturers and their distributors can be procompetitive if they foster competition between horizontal competitors, and therefore held that vertical non-price restrictions should be analyzed under the Rule of Reason. This new approach to vertical restrictions was fairly quickly extended into the realm of intellectual property licensing, where relationships between licensors and licensees are generally vertical in nature. And this new understanding led to a reevaluation of the proper relationship between intellectual property rights and competition law, which had traditionally been viewed as a hostile one. Now IP rights were understood to complement the goals of the antitrust laws by encouraging technological competition that can breakdown oligopolistic market structures and lead to enhanced competition and new products to the benefits of consumers and the economy as a whole. And although it took another 30 years, the Supreme Court in its 2007 Leegin decision ultimately used the same basic reasoning from its 1977 GTE Sylvania decision to overturn 100 years of precedent treating vertical minimum resale price maintenance agreements as per se unlawful. -6-
Imagine how the development of U.S. antitrust law might have been different had the Schwinn per se unlawful approach to vertical non-price restrictions been adopted into binding global rules. My point is that over time, based on accumulated experience, the United States has learned much about the workings of the market and how to use antitrust law in a more effective manner to safeguard competition, and has had the flexibility to be able to refine its approaches to accommodate that new learning. The refinement of U.S. antitrust principles and enforcement approaches continues to this day. I will highlight a few examples. First, the extent of the complementarity between IP rights and competition policy goals is now being re-evaluated by the courts and enforcement agencies. In its 2013 decision in Federal Trade Commission v. Activis, the Supreme Court held that so-called reverse payments by branded pharmaceutical companies to would-be generic entrants in return for the generic companies dropping their challenge to the validity of the relevant patent and a delay in their entry could be anticompetitive. This could be so even though entry would still be allowed to take place before the patent expired. The Supreme Court did not accept the Federal Trade Commission s arguments that these reverse payment practices should be viewed as presumptively unlawful, but also refused to say that they were presumptively lawful. The Supreme Court ruled instead that reverse payment agreements should be analyzed under the rule of reason, and that an analysis of the strength of the patents is not necessarily required. And just last month, the Department of Justice issued a favorable Business Review Letter regarding the IEEE s proposed revisions to its patent policy for standard-essential -7-
patents that were geared to pushing royalty rates lower. The IEEE is a standards-setting organization that developed the Wi-Fi standard. Although the IEEE policy change could be viewed as an agreement among licensees with significant buying power to reduce the royalties they would pay patent holders, the Department of Justice discounted concerns that such an agreement among licensees could have anticompetitive effects on innovation incentives that would reduce R&D and ultimately harm consumers. A second recent example of fine-tuning relates to the extraterritorial reach of U.S. antitrust laws. We are now seeing U.S. courts reconsidering whether U.S. antitrust law is reaching too far into foreign conduct that is better handled by the competition laws of other countries. The most notable recent development is a series of decisions in the private litigation brought by Motorola Mobility against AU Optronics and other Taiwan LCD producers to recover damages incurred as a result of price-fixing of LCDs purchased by Motorola s overseas subsidiaries. Motorola s foreign subsidiaries incorporated the LCDs into mobile phones and then shipped them to Motorola in the United States for resale. Motorola brought action in the United States claiming it suffered antitrust damages from the pricefixing that occurred on sales to its foreign subsidiaries. In a March 2014 opinion affirming the dismissal of this aspect of the complaint by the lower court, the Seventh Circuit Court of Appeals, in an opinion written by Judge Posner an eminent jurist held that these sales did not meet the direct, substantial and reasonably foreseeable effects prerequisite set out by the Foreign Trade Antitrust Improvements Act (FTAIA) for the application of U.S. antitrust law to foreign conduct. Judge Posner held that sales to a foreign intermediary for assembly into a finished product that was then sold into the United States did not have a direct effect on U.S domestic or import commerce. The -8-
implications of this holding were so significant that the U.S. Department of Justice, fearing that this holding might undermine its ability to criminally prosecute foreign cartel participants, asked the court to rehear the case and reconsider its decision. The Seventh Circuit agreed to do so, and vacated its March 2014 decision. In January 2015, Judge Posner issued a new amended opinion upholding the lower court s dismissal of the damages complaint but on much narrower grounds that did not directly affect the DOJ s criminal enforcement program. The court pointed to another requirement of the FTAIA that the direct, substantial and reasonably foreseeable effects of the challenged foreign conduct on U.S. domestic or import commerce must give rise to a claim in the United States. The Seventh Circuit held that when foreign subsidiaries of a U.S. parent company such as Motorola are injured by anticompetitive conduct outside the United States, the U.S. parent, as an indirect purchaser, cannot meet the gives rise to requirement and therefore cannot recover damages under U.S. antitrust law. Instead, the foreign subsidiaries must seek relief under the competition laws of the countries where they suffered harm. This narrower ruling, which was not based on whether the conduct had sufficiently direct effects on U.S. domestic commerce, eliminated any possible adverse effect on DOJ s criminal enforcement program. This ruling continued the trend by U.S. courts to limit the availability of treble damages actions for conduct taking place outside of the United States and to give some deference to international comity concerns. Motorola has filed an appeal with the U.S. Supreme Court, and if the Supreme Court agrees to hear the case, it will be interesting to see whether the Court decides to address the still open question of what constitutes a direct effect on U.S. domestic or import commerce. -9-
A third example of where American antitrust principles are undergoing some refinement is in the area of relevant market definition. I mentioned at the beginning of my talk that one of the characteristics of the American antitrust approach is the importance of defining relevant markets. However, while the rest of the world has been embracing the importance of defining relevant markets, the U.S. antitrust agencies in their 2010 Horizontal Merger Guidelines moved in the opposite direction by suggesting that they need not identify a particular relevant market if they can otherwise show that the merger has anticompetitive effects. Of course, without defining a relevant market it is impossible to apply the HHI tests set out in the Merger Guidelines. Thus, even one of the fundamental aspects of the American antitrust approach is not immune from refinement based on new developments in economic thinking. My presentation so far has focused on the process of evolution of U.S. antitrust laws and the perspective of the U.S. antitrust agencies that binding international antitrust standards may not allow for sufficient flexibility to accommodate necessary readjustment of U.S. antitrust policy as our learning and experience increase. This view is based in large part on my 33 years working in the Antitrust Division of the Department of Justice. Over that time I was deeply involved in promoting dialogue with the KFTC and other competition agencies and in encouraging soft convergence of competition law and enforcement policies. My position in the government led me to see antitrust issues from a broad, somewhat theoretical perspective. However, two years ago I moved to a private law firm, where I am now representing companies that are doing business in global markets. I am now seeing competition law -10-
enforcement from a completely different angle, and it has led to some modifications in the views and understandings I held while in the government. From my new perspective, I have a deeper understanding of the problems faced by companies operating globally in a world of inconsistent national competition law standards. And I now have a greater appreciation of the desires of the business community for consistent standards applied globally that will allow them to adjust their business practices and have a reasonable degree of certainty that those practices will not be subject to challenge regardless of the countries in which they are operating. Some might argue that companies operating globally should simply adjust their business practices to the laws of the particular country in which they are doing business. However, in today s globalized economy, things are not so simple. Companies are competing in a global market based on global business models. In international commercial disputes, parties will look for any advantage to strengthen their negotiating position, including international legal forum shopping to find the most advantageous jurisdiction in which to battle their opponents and litigate their dispute. Differences in the competition regimes of different countries are exploited as part of this global battle. As a result, the jurisdiction with the most interventionist or nationalistic antitrust enforcement policy becomes the driver of what is and is not permissible for worldwide commercial relationships. We need only look at the legal battle between Samsung and Apple to illustrate this point. Thus from the perspective of at least the victims of this antitrust forum shopping, there is a longing for global antitrust standards that would provide the kinds of legal certainty and consistency that companies need in order to operate efficiently and profitably in the global marketplace. -11-
I am not suggesting that there is no room for differences between the competition laws of different jurisdictions. There are unique national market situations and structures that might best be addressed by customized competition law provisions that differ between nations. Korea s experience with its chaebols may be one example where specialized rules have been developed to address problems that arise from a unique market structure. China s Antimonopoly Law chapter dealing with the problem of local government administrative monopolies is another example. I can also appreciate arguments that support differing national competition standards on distribution practices in local markets, even if those standards act to entrench inefficient market structures and business practices. However, for markets and conduct where competition extends beyond national boundaries and is based on global business models and global platforms, I see some legitimacy to calls from international business circles for greater consistency in the application of national competition laws to such practices. Industries that compete on the basis of technological innovation or in technology markets, or Internet-based global competition, may be relevant but my no means exclusive examples of this. Conclusions So how do we make progress toward achieving some consistency in competition law enforcement in matters that involve competition on a global, rather than national, level? From the U.S. perspective, the U.S. antitrust agencies are well aware of the problems that arise from inconsistent or different competition law standards applicable to the same conduct across national boundaries. To address these problems, they have placed their faith and efforts in promoting soft convergence through bilateral dialogue and the work being done in such multinational institutions as OECD and the International Competition Network. -12-
Although the soft convergence process is unlikely to solve the thorniest of problems in a timely manner, we have seen some positive outcomes in terms of international consensus on merger review procedures, cooperation on cartel enforcement and even on approaches to predatory pricing. I would like to see more coordination and cooperation between competition agencies on investigations involving unilateral conduct or IP-related conduct where competition is at a global level. The goal should be to try to reach common understandings on the global competitive effects of such practices, and the need for and consequences of intervention by one or more competition authorities. And, at a minimum, there should be agreement to avoid conflicting decisions or remedies. Of course, this kind of coordination and cooperation will not work for dealing with private antitrust lawsuits. For that aspect of competition law enforcement, greater consideration by courts of principles of comity might help, as would expansion of judicial exchanges. Thank you again for this opportunity to present my views today. -13-