Large Tech Firms: Beware of Obama Administration’s Antitrust Plans

In a dramatic repudiation of Bush administration policies earlier this year, the Antitrust Division of the U.S. Department of Justice withdrew its recent report setting standards for the prosecution of monopolization offenses. Announcing the change of policy, Christine A. Varney, the new assistant attorney general in charge of the Antitrust Division, stated that “the Antitrust Division will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers.”

The withdrawn report, “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act,” was issued in September of 2008, after a series of hearings conducted by the Department of Justice and the Federal Trade Commission from June 2006 to May 2007. It was controversial from the start. The Federal Trade Commission declined to join the report after three of the commissioners called it a “blueprint for radically weakened enforcement” against anticompetitive practices.

Smaller Companies Encouraged to Complain

Varney’s announcement confirms the Obama administration’s plan to more vigorously enforce antitrust laws. While President Bush’s Justice department focused on preservation of competition in the marketplace, Varney signaled that the goal of her tenure would be to protect “consumer welfare.” The new policy more closely aligns the Antitrust Division’s views with those of antitrust regulators at the European Commission.

The Commission has aggressively pursued cases against technology companies. For example, in May, Intel was hit with a 1.06 billion euros (US$1.5 billion) fine, the largest in the Commission’s history. The Commission accused Intel of abusing its monopoly position by offering incentives to customers designed to exclude Advanced Micro Devices from the market. Among other things, Intel allegedly provided additional discounts to computer makers that agreed not to use AMD chips, and it paid retailers to stock only Intel chips. Intel disputes the Commission’s findings and plans to appeal.

The Commission’s investigation of Intel was the direct result of complaints lodged by AMD. As part of its new enforcement initiative, the Antitrust Division hopes to encourage smaller companies to report potential antitrust violations by their larger competitors. In order to investigate and prosecute the anticipated complaints, the Division has added several veterans of the Clinton administration to its senior ranks.

Consumer-Focused Approach Likely

While the Bush administration was reluctant to bring enforcement actions in the technology sector because of the fast pace of change and self-correcting market mechanisms, commentators have widely speculated that dominant players in the technology sector will soon face enforcement actions brought by the Obama Justice department.

For example, Google, the dominant player in the Web search market, has attracted the attention of regulators because it might be possible for Google to use its search engine to leverage advantages in other markets such as media, advertising, telecommunications and software. The Antitrust Division is examining Google’s recent settlement with authors and publishers for its book search service. At the same time, the Federal Trade Commission is investigating whether it is appropriate for Google to share two board members with Apple, a competitor.

The withdrawal of the 2008 report may also impact existing civil litigation that does not involve the Antitrust Division. Private litigants will no longer be able to cite the Antitrust Division’s report as the government’s official view of antitrust enforcement.

As a result of the change in position, the Antitrust Division is more likely to closely examine the conduct of companies with significant market power, regardless of their industry. For example, the Antitrust Division is expected to bring more cases for predatory pricing, tying, exclusive dealing and unilateral refusal to deal with rivals. There may also be increased scrutiny of bundled and loyalty discounts offered to certain customers. When analyzing unilateral conduct by a market-dominating company, the Bush administration usually took a cautious approach that erred against chilling legitimate competition. It is anticipated that the new administration will pursue a more aggressive, consumer-focused analysis.

More Antitrust Changes Ahead?

It is likely that the Obama Administration will consider further changes to antitrust enforcement, including new legislation intended to overturn some recent Supreme Court decisions. In 2007, for example, the Supreme Court held that minimum resale price maintenance should no longer be considered per se illegal and instead should be judged under the rule of reason [Leegin Creative Leather Products v. PSKS, Inc., 127 S. Ct. 2705 (2007)]. That decision was widely criticized by consumer advocates and discounting retailers.

In April, the Maryland legislature passed a new law that effectively reversed Leegin and reinstated the per se rule for minimum resale price schemes that affected sales in Maryland, including Internet sales to Maryland consumers by companies that have no physical presence in the state. Several members of Congress are on record as seeking similar federal legislation.

Companies with significant market power are advised to tread carefully when considering policies that may have a negative impact on consumers, competitors or competition. The Antitrust Division is waiting for your competitors to call.