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DEFINING EXCLUSIONARY CONDUCT: SECTION 2, the RULE of REASON, and the UNIFY ING PRINCIPLE UNDERLY ING ANTITRUST RULES Mark S

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DEFINING EXCLUSIONARY CONDUCT: SECTION 2, the RULE of REASON, and the UNIFY ING PRINCIPLE UNDERLY ING ANTITRUST RULES Mark S DEFINING EXCLUSIONARY CONDUCT: SECTION 2, THE RULE OF REASON, AND THE UNIFY ING PRINCIPLE UNDERLY ING ANTITRUST RULES Mark S. Popofsky* I. INTRODUCTION The antitrust community is engaged in a renewed debate over the legal test for exclusionary conduct under Section 2 of the Sherman Act. We are mired, it is said, in a fierce “exclusionary conduct ‘definition’ war.” 1 Sparked by notable decisions in Trinko,2 Microsoft,3 and LePage’s,4 this struggle has produced no shortage of combatants. Indeed, scholars, economists, and notable practitioners have advanced numerous proposed general definitions of “exclusionary” conduct, the critical conduct element of Section 2’s monopolization offense.5 These tests include: (1) assessing net effects on consumer welfare (or net com- petitive effects)6; (2) engaging in a weighted comparison of competitive effects7; (3) determining if the defendant’s conduct involved a “profit- * Member California and District of Columbia Bars; Adjunct Professor, Georgetown University Law Center. I would like to thank Jonathan Jacobson, Kenneth Glazer, A. Douglas Melamed, M. Laurence Popofsky, Steven Salop, Christopher Sprigman, Phil Weiser, Gregory Werden, and the Editors of this Journal, for their helpful comments. 1 Andrew I. Gavil, Exclusionary Distribution Strategies By Dominant Firms: Striking a Better Balance,72Antitrust L.J. 3, 5 (2005). 2 Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004). 3 United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (en banc) (per curiam). 4 LePage’s Inc. v. 3M Corp., 324 F.3d 141 (3d Cir. 2003) (en banc), cert. denied, 124 S. Ct. 2932 (2004). 5 Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 (1985). 6 Steve C. Salop, Exclusionary Conduct, Effect on Consumers, and the Flawed Profit-Sacrifice Standard, supra this issue, 73 Antitrust L.J. 311, 313, 329–30 (2006) (“This competitive effect-based antitrust standard essentially would compare the beneficial and harmful com- petitive aspects of the alleged exclusionary conduct in order to determine the overall impact on consumers.”). 7 See 3 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 651a, at 72 (2d ed. 2002) (conduct is exclusionary if it “produce[s] harms disproportionate to benefits”); Herbert Hovenkamp, Exclusion and the Sherman Act,72U. Chi. L. Rev. 147, 148 (2005); see also Gavil, supra note 1, at 78–79 (arguing that balancing, although required in principle, 435 73 Antitrust Law Journal No. 2 (2006). Copyright 2006 American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 436 Antitrust Law Journal [Vol. 73 sacrifice” or made “no economic sense” absent maintaining or enhancing market power8; (4) assessing whether the defendant’s conduct excluded “equally efficient” rivals9; and (5) applying rules of per se legality and illegality depending on whether the conduct harmed rivals “only” through efficiency.10 Many of these tests, their proponents urge, supply a “one size fits all” framework within which the legality of all rival- impeding conduct can be assessed.11 My purpose is to step back from the contest among these positions and examine the legal basis by which courts adopt Section 2 liability tests. If unifying principles that guide the selection of appropriate Section 2 tests can be identified, such principles may pragmatically assist courts in choosing among often very different proposed tests, a task that the federal courts undoubtedly will confront in the coming years. The stakes in the outcome are high. Except for a few well-defined classes of conduct, the meaning of “willful” acquisition or maintenance of monopoly power is largely up for grabs. Many firms with putative monopoly power operate in industries where preserving incentives to innovate is crucial in order to produce significant contributions to con- sumer welfare. Section 2 liability tests that wrongly curb a monopolist’s incentive to compete or that improperly enable a monopolist to impede or vanquish would-be rivals threaten significant and lasting harm to both competition and consumers. is rarely necessary because the fact finder is unlikely to credit both the plaintiff’s and defendant’s evidence). 8 See, e.g., A. Douglas Melamed, Exclusionary Conduct Under the Antitrust Laws: Balancing, Sacrifice, and Refusals to Deal,20Berkeley Tech. L.J. 1247, 1255–62 (2005); Gregory J. Werden, The “No Economic Sense” Test for Exclusionary Conduct,31J. Corp. L. 7 (forthcoming) [hereinafter The “No Economic Sense” Test]; Gregory J. Werden, Identifying Exclusionary Con- duct Under Section 2: The “No Economic Sense” Test, supra this issue, 73 Antitrust L.J. 413, 414 (2006) [hereinafter Identifying Exclusionary Conduct]. See generally Salop, supra note 6, at 318–20 & nn.34, 36 (citing notable formulations of the profit-sacrifice test). Except where otherwise specifically indicated, I will use the “profit-sacrifice” and “no economic sense” tests interchangeably because I understand the “profit-sacrifice” test not to require a separate recoupment period. 9 See Richard A. Posner, Antitrust Law 194–95 (2d ed. 2001). 10 See Einer Elhauge, Defining Better Monopolization Standards,56Stan. L. Rev. 253, 323, 330 (2003). 11 See, e.g., Melamed, supra note 8, at 1267 (“The sacrifice test can provide a sound unifying antitrust principle for analyzing all exclusionary conduct that has efficiency benefits.”); id. at 1260 (arguing that even naked exclusionary conduct involves a profit sacrifice although conceding that “‘naked exclusion’” can “be condemned as anticompetitive conduct without need for the sacrifice test”); Salop, supra note 6, at 313–14; Elhauge, supra note 10, at 330 (advocating “mainly” employing the proposed rules of per se legality and illegality). The U.S. Department of Justice, although formally maintaining the position that the “no economic sense” test might not govern all conduct under Section 2, see infra note 203 (discussing Solicitor General’s merits brief in Trinko), has “consistently advocated the no economic sense test in all its Section 2 cases.” Werden, Identifying Exclusionary Conduct, supra note 8, at 413. 73 Antitrust Law Journal No. 2 (2006). Copyright 2006 American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 2006] Defining Exclusionary Conduct 437 In what follows, I explain that Section 2 is not “one size fits all.” Rather, the few clear guideposts in Section 2 case law demonstrate that courts properly apply different Section 2 legal tests to different conduct. The unifying principle is that each Section 2 legal test reflects a specific expression of the same underlying “rule of reason.” Although courts usually describe the rule of reason as a particular step-wise test for assessing the legality of concerted action, the rule of reason more gener- ally provides a principle for generating antitrust liability tests in a common- law fashion. This is, after all, the lesson of particularized legal tests courts have crafted under Section 1 (such as per se rules), all of which implement the rule of reason. Section 2’s rule of reason, so understood, asks: For the type of conduct at issue, which legal test likely maximizes consumer welfare over the long run? Applicable considerations in selecting the appropriate test include not only the likely consumer harms and benefits from the conduct, but also the risks of false positives, false negatives, and legal process costs. As settled Section 2 rules (such as the cost-based predatory pricing rule) illustrate, the appropriate test need not assess net competitive effects in a specificcase. Rather, the assessment of net competitive effects is first performed at a “systemic” level: the point at which the appropriate legal test is selected. Put differently, although Section 2 directs courts to apply a single underlying principle—maximize long-term consumer welfare— that principle need not, and indeed cannot, find expression in a single operational legal command. This understanding of Section 2’s rule of reason provides a foundation for courts to select among competing legal tests when confronted, as Section 2 courts often are, with conduct not governed by a settled liability rule. This is not to suggest that courts should create refined categories of conduct in wasteful litigation over characterization. Section 2 courts can develop practical and administrable tests, just as antitrust courts have for over a century in numerous other contexts. Moreover, focusing on the impact of applying different legal tests will sharpen, rather than obscure, the underlying analysis. What is required, as the Supreme Court has explained in a different context, is an “enquiry meet for the case.” 12 The stakes are too high to embark instead on a quest for a “universal test for section 2 liability,” a “‘holy grail’ that may never be precisely located.” 13 12 Cal. Dental Ass’n v. FTC, 526 U.S. 756, 781 (1999). 13 R. Hewitt Pate, The Common Law Approach and Improving Standards for Analyzing Single Firm Conduct, Address Before Fordham Corp. L. Inst. 8 (Oct. 23, 2003, revised Mar. 9, 2004), available at http://www.usdoj.gov/atr/public/speeches/202724.pdf. 73 Antitrust Law Journal No. 2 (2006). Copyright 2006 American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
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