1 1 UNITED STATES FEDERAL TRADE COMMISSION 2 and 3 UNITED STATES DEPARTMENT OF JUSTICE 4 5 6 7 SHERMAN ACT SECTION 2 JOINT HEARING 8 UNDERSTANDING SINGLE-FIRM BEHAVIOR: 9 EXCLUSIVE DEALING SESSION 10 WEDNESDAY, NOVEMBER 15, 2006 11 12 13 14 15 HELD AT: 16 UNITED STATES FEDERAL TRADE COMMISSION 17 601 NEW JERSEY AVENUE, N.W. 18 WASHINGTON, D.C. 19 9:30 A.M. TO 4:00 P.M. 20 21 22 23 24 Reported and transcribed by: 25 Susanne Bergling, RMR-CLR For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 2 1 MODERATORS: 2 DAN O'BRIEN 3 Chief, Economic Regulatory Section 4 Antitrust Division, Department of Justice 5 and 6 MICHAEL G. VITA 7 Assistant Director 8 Bureau of Economics, Federal Trade Commission 9 10 PANELISTS: 11 12 Morning Session: 13 Jonathan M. Jacobson 14 Howard P. Marvel 15 Richard M. Steuer 16 Mary W. Sullivan 17 Joshua D. Wright 18 19 Afternoon Session: 20 Stephen Calkins 21 Joseph Farrell 22 Benjamin Klein 23 Abbott (Tad) Lipsky 24 25 For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 3 1 C O N T E N T S 2 3 MORNING SESSION: 4 Introduction.................................... 4 5 Presentations: 6 Jonathan M. Jacobson.................... 52 7 Howard P. Marvel........................ 40 8 Richard M. Steuer....................... 7 9 Mary W. Sullivan........................ 19 10 Joshua D. Wright........................ 29 11 Moderated Discussion............................ 63 12 Lunch Recess....................................105 13 14 AFTERNOON SESSION: 15 Introduction....................................106 16 Presentations: 17 Stephen Calkins.........................108 18 Joseph Farrell..........................133 19 Benjamin Klein..........................145 20 Abbott (Tad) Lipsky.....................120 21 Moderated Discussion............................161 22 Conclusion......................................202 23 24 25 For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 4 1 P R O C E E D I N G S 2 - - - - - 3 MR. VITA: Good morning, everybody. My name is 4 Mike Vita. I am an economist here at the Federal Trade 5 Commission. My title is Assistant Director for 6 Antitrust in the FTC's Bureau of Economics. My 7 co-moderator is Dan O'Brien, Chief of the Economic 8 Regulatory Section at the Department of Justice, 9 Antitrust Division. 10 I am going to be leading the morning session, 11 and Dan will be leading the afternoon session, and 12 before we get started with the substance of today's 13 hearings, I am going to cover a few housekeeping 14 matters. 15 First, turn off the cell phones. You'll get 16 detention if you -- the BlackBerries and any other 17 devices that make noises, that's very important. 18 Second, for those of you who aren't familiar 19 with the setup here at 601 New Jersey, the rest rooms 20 are down the hall, past the guard's desk and to the 21 left. I think there are signs out there in the lobby to 22 guide you. 23 Third, a safety tip particularly for visitors. 24 In the unlikely event that the building alarms go off, 25 which they actually did yesterday, please proceed calmly For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 5 1 and quickly as instructed. Dan and I will keep 2 everything calm and orderly. If we must leave the 3 building, exit the New Jersey Avenue exit by the guards, 4 that's where you probably came in, and follow the stream 5 of people running to a gathering point where you can 6 await further instructions. 7 Finally, we request that you not make any 8 comments or ask questions during the session. Thank 9 you. 10 Okay, today's session concerns exclusive 11 dealing, one of the most interesting areas I think of 12 all the various topics involving vertical restraints and 13 vertical contracts. It has been an active area of 14 economic research and an active area of antitrust as 15 well. We are honored to have assembled a distinguished 16 panel of practitioners and professors who are very 17 knowledgeable in the issues we are going to tackle 18 today, and there are going to be two sessions, one in 19 the morning and then one later in the afternoon. 20 I will just briefly introduce the panelists for 21 this morning before we get started, and I will give a 22 little more detailed introduction as each speaker takes 23 his or her turn. I do not know if everybody is in some 24 sort of order, but it looks like they are. 25 Okay, so immediately to Dan's left is Richard M. For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 6 1 Steuer, who is a partner at Mayer Brown Rowe & Maw, LLP. 2 Next to Richard is Mary Sullivan, who is an Assistant 3 Professor of Accountancy at George Washington 4 University. Next to Mary is Josh Wright, who is 5 Assistant Professor of Law at George Mason University 6 School of Law. Next to Josh is Howard Marvel, who is a 7 Professor of Economics in the Department of Economics at 8 Ohio State and also Professor of Law in the Michael 9 Moritz College of Law at Ohio State University. And at 10 the very end is Jonathan Jacobson, who is a partner at 11 Wilson Sonsini Goodrich & Rosati and a Commissioner of 12 the Antitrust Modernization Commission. 13 So, I think we will just get right into it, and 14 let me introduce in detail our first speaker, and in 15 those handouts that you got, there is a more detailed 16 biographical description of each of the speakers as 17 well, and you can also find them on the FTC and 18 Department of Justice web sites. 19 Our first speaker is Richard Steuer, who is a 20 partner at Mayer Brown Rowe & Maw, where he specializes 21 in the practice of antitrust law, including litigation, 22 mergers and acquisitions, intellectual property 23 licensing, franchising and e-commerce. Richard has 24 written a book and several articles on antitrust law 25 which have appeared in various journals throughout the For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 7 1 country. For three years Richard served as chair of the 2 Antitrust Committee of the Association of the Bar of the 3 City of New York. 4 Richard? 5 MR. STEUER: Thanks, Joe. 6 In baseball they say you can learn a lot by 7 watching, and I have been fortunate over the years to 8 have been able to observe a great deal about exclusive 9 dealing and in various contexts, both in litigation and 10 counseling, and I put what I knew into three articles 11 that I have written, and I thought that the best way to 12 try to present what I have learned about exclusive 13 dealing would be to go through those articles and 14 briefly outline what it is that I have learned from 15 watching. 16 The first one was an article on "Exclusive 17 Dealing in Distribution," focusing on how exclusive 18 dealing works when you are talking about selling to 19 resellers, and this appeared in 1983. I will not take 20 very much time on the history, but it is interesting 21 that once upon a time, the FTC considered most exclusive 22 dealing to be virtually per se unlawful. The Standard 23 Stations case in 1949 introduced the rule of 24 quantitative substantiality. Then the major case of 25 Tampa Electric in 1961 brought in qualitative For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 8 1 substantiality, and then we found a more nuanced rule of 2 reason approach with the Beltone case from the FTC in 3 1982, Jefferson Parish in the Supreme Court in '84, and 4 added to that are the nuances of rule of reason analyses 5 we get from California Dental. 6 Now, what I have found is the level of 7 distribution really matters in assessing the impact of 8 exclusive dealing. What we are measuring with exclusive 9 dealing -- why exclusive dealing is different from other 10 restraints -- is that we are looking more at foreclosure 11 of competitors than anything else. Exclusive dealing is 12 interesting among the vertical restraints. This is the 13 one that, although it has almost always been a rule of 14 reason offense, plaintiffs win quite often, and what we 15 are looking at is something quite different than in 16 vertical resale restraints where the restraint is on 17 reselling rather than purchasing. Exclusive dealing is 18 a restraint on purchasing, not on selling. 19 So, the level of distribution could be 20 wholesalers. One wholesaler can reach every retailer in 21 America, potentially. With retailers, it is different. 22 Retailers are chained to a location typically, although 23 with the Internet, that is not quite as true anymore, 24 and this is a fluid field. Retailers could be in 25 chains, but basically they have a universe of consumers For The Record, Inc. (301) 870-8025 - www.ftrinc.net - (800) 921-5555 9 1 that they reach. Wholesalers are a little bit 2 different, because foreclosing wholesalers does not mean 3 that you are foreclosed from reaching retailers. 4 Foreclosing retailers may or may not mean that you are 5 foreclosed from reaching end users. Reaching end users 6 is the simplest. To the extent that there is an 7 exclusive dealing arrangement tying up 10 percent of end 8 users, you have got 10 percent of the market.