Bingamans Antitrust Era
The Divisions Intensified Enforcement and Internationalization Agenda
by Janusz A. Ordover
President Reagans assistant attorney general for Antitrust in 1981, William F. Baxter, inaugurated three Republican administrations that reinvented modern antitrust policy and enforcement. Based on "Chicago School" theories, the policies championed minimal government intervention in the economy. When President Clinton appointed Anne K. Bingaman as the new administrations chief antitrust enforcer, some wondered whether she would devalue the role of economic theory, returning instead to populist rhetoric and anti-big business, antitrust policies. Bingamans career as a plaintiffs antitrust litigator with little experience or interest in doctrinal debates over economics fueled the fears.
True to her origins, Bingamans tenure at the Department of Justice will primarily be remembered for her aggressive enforcement of the antitrust laws rather than major additions to antitrust policy. She targeted high-profile cases (most notably the case against Microsoft) in order to demonstrate the Antitrust Divisions renewed enforcement vigor. Bingamans tenure was also notable for the internationalization of American antitrust law concepts. Her office assumed wider jurisdiction over cases of foreign anticompetitive behavior. In partnership with the Federal Trade Commission (FTC), her office issued new Guidelines for International Operations. To help businesses and consumers understand the antitrust aspects of the new, high-tech oriented economy, Bingamans office took the lead in promulgating new Intellectual Property Guidelines. Finally, in conjunction with the FTC, Bingaman issued two sets of new Health Guidelines that relieved the health industry from much antitrust scrutiny.
Some of Bingamans enforcement decisions were questionable, especially in light of antitrust practices of prior decades. Some cases would not likely have been brought by her Reagan and Bush administration counterparts. Though a vigorous enforcer, Bingaman did not realize her critics worst fears. Indeed, in retrospect, the Bingaman enforcement policies did not differ markedly from those of Assistant Attorney General James Rill and Federal Trade Administration Chair Janet Striger who took policy in a more activist direction during the Bush administration.
Augers of Enforcement
Bingaman indicated that she would take a pragmatic approach to enforcement at her Senate confirmation hearings on 9 June 1993:
[(In antitrust analysis] every case is unique, every market is unique . . . the set of companies and facts are a lifeblood of antitrust. . . . If I am confirmed, I pledge to you to enforce the antitrust laws as they were written by this Congress, as they have been interpreted by the Supreme Court, and as the facts before us warrant their application in any particular case.
And on 10 August of the same year, she explained the nature of the trade-off between theory and factual analysis:
As Assistant Attorney General, I intend to utilize both doctrinal and factual analysis in reaching enforcement decisions. Without the former, the business community is denied the guidance and reasonable certainty required for economic growth and efficiency. . . . Without the latter, however, there is a danger that theoretical constructs will be used to deny the existence of a real world phenomena, to the detriment of rivalry and innovation. As Assistant Attorney General, I expect to employ a balanced approach: one that applies sound theoretical analysis together with an appreciation that the facts on occasion will not square with theory.
Bingamans first official act was to withdraw the Reagan administrations Vertical Restraint Guidelines which had basically removed the Antitrust Division from the practice of scrutinizing vertical conduct. She also signaled her intent to pursue a policy of vigorous, fact-specific enforcement by increasing the enforcement sections personnel and budget, challenging more mergers, and pursuing high profile cases. While her critics complain that her tenure marked a return to pre-Reagan era, anti-business policies, her supporters believe that she brought renewed vitality to antitrust enforcement.
Between 1993 and 1996, Bingamans tenure was characterized by aggressive criminal, merger, and civil enforcement. Most noteworthy, the total number of corporate criminal fines for intentional price fixing or other illegalities increased sharply. Those fines totaled $10 million in FY 1986, stayed in an annual range of $20 million to $30 million until FY 1993, and then jumped to $40 million for each of the next three years. However, those figures dwarf the $100 million criminal fine in the Archer Daniels Midland (ADM) case in 1996. ADM admitted to price fixing on a grand scale.
Unprecedented merger activity during 1994 and 1996 led to more Antitrust Division scrutiny. From 1993 to 1996, the number of merger investigations initiated by the Department increased from 102 to 237. The latest merger wave has been motivated by strategic rather then financial considerations. In strategic mergers, an enterprise joins with a company producing a similar line of goods or services, allowing the new company to have a larger market share. Many of these transactions presented serious antitrust concerns to the Justice Department. As a result, the Antitrust Division initiated ten district court actions in 1994 and nine each in 1995 and 1996, with twenty-one restructured transactions in 1996.
But Bingamans true interest seemed to be not in merger enforcement, but rather in civil enforcement in non-merger situations. As one of her first administrative moves, Bingaman created a Civil Task Force that was, in the words of a Justice Department report, "dedicated to cases of national and international importance in order to enhance [the Divisions] civil enforcement effectiveness." She also created a New Cases Unit charged with, "the responsibility of reviewing and assessing potential cases." Those moves led to the filing of thirteen civil cases in 1995 and sixteen cases in 1996. In the past, the number rarely exceeded two or three per year. Some of the cases addressed vertical integration issues such as resale and price maintenance. During the 1980s, those practices did not attract Justice Department scrutiny. It is questionable whether the civil investigations (generally resolved through consent decrees) led to more robust competitive environments or helped consumers at all.
The Microsoft Investigation
The Antitrust Divisions investigation of Microsoft and the ensuing controversy over the consent decree demonstrate the problems that result when economic facts and economic theory intersect, especially in cases involving intellectual property rights in a high-tech industry characterized by an aggressive competitor. It also demonstrates the controversy which surrounds the resolution of investigations containing those elements.
The FTC began investigating Microsofts software licensing practices during the Bush administration in 1990. The Commis-sioners deadlocked twice on whether to pursue a case against Microsoft. Ultimately, the investigation was closed. Upon her appointment, Bingaman almost immediately announced that her Division would open its own investigation. Even though the FTC transferred the case "voluntarily," Bingamans unprecedented aggressive pursuit of the case did not bode well for future relations with the FTC.
It was unclear how Bingamans investigation would differ from the FTCs. It was well known that Microsoft shipped the lions share of operating systems software, had a large installed software base, and licensed MS-DOS and Windows software on a "per processor" basis. The license required PC manufacturers to pay Microsoft a fee for each computer shipped, whether the computer had Microsofts software installed or not. Microsoft also offered "per system" and "per copy" licenses. The former required an original equipment manufacturer to pay a fee for every computer shipped that bore the particular model names or numbers designated in the license agreement. Per copy licenses required payment for every installed piece of software on a system. Though the arrangements were not cost-effective for PC manufacturers, Microsoft required them as a condition for receiving discounts for the purchase of operating systems software.
Microsofts licensing practices also included volume discounts, required minimum "commitments" of two-year periods, and contained other allegedly exclusionary requirements. Finally, Microsoft might require non-disclosure agreements from manufacturers. The agreements forbade companies using software on a test basis from revealing the nature of the software.
The Antitrust Division alleged that Microsofts licensing practices were like a tax that obliged an original equipment manufacturer to pay twice for software on any unit shipped without Microsoft software; once to Microsoft and once to the producer of the competing operating systems software. Allegedly, the practices made it less likely that manufacturers would install any other software. The Division also alleged that Microsofts overly restrictive nondisclosure agreements prevented independent software vendors that were testing Microsofts new software from testing rival operating system software. Finally, there was concern about the ability of other companies to develop Microsoft-compatible software. The Antitrust Division concluded, "as a result of these practices, the ability of rival operating systems to compete was impaired, innovation was slowed, and consumer choice was limited."
The case turned on whether the Antitrust Division could prove that Microsofts market position was the result of its allegedly unfair exclusionary licensing practices or the result of market dynamics in which one product establishes itself as an industry standard, but could be dethroned by a superior product in the next round of technological competition.
The evidence indicated that MS-DOS and Windows established themselves as standards not because alternatives were excluded from the market, but because consumers preferred those products over the alternatives. Further, to prove a case against Microsoft, the Antitrust Division would have to prove that Microsofts restrictions did not have sound, pro-competitive business justifications, despite readily available evidence to the contrary.
The Antitrust Division wisely resolved its investigation in 1994 through a consent decree. It avoided years or perhaps decades of costly litigation. However, U.S. District Judge Stanley Sporkin, who presided over the so-called Tunney Act proceedings required to certify a consent decree, rejected the decree. He claimed that the settlement was not in the public interest because it did not provide an "effective antitrust remedy" against Microsofts alleged dominance. He focused primarily on Microsofts practice of announcing its forthcoming products. Sporkin alleged that some announced products, so-called "vaporware," were not even at the development or testing stage. The practice, he argued, was meant to attract consumers from rival products and discourage competing firms from undertaking software development.
The Court of Appeals for the District of Columbia Circuit reversed the decision and removed Judge Sporkin from the proceedings in part because he relied on information he read in a book that was highly critical of Microsoft, information not presented in the original case. The Appeals Court ordered entry of the consent decree as a final judgment. The judgment prohibited Microsoft from using per-processor licenses, disallowed minimum commitments, and shortened the licensing agreements to one year, renewable for an additional year.
The Antitrust Divisions investigation of Microsoft was notable for several reasons. First, the consent decree pleased almost no one. Many commentators observed that the investigation of Microsoft constituted regulatory harassment at a time when the Clinton Administration promoted high technology as an engine of economic growth and source of American competitiveness worldwide. Others, including Judge Sporkin, argued that the consent decree lacked the necessary force to loosen Microsofts iron grip over the operating systems software market.
Second, since full litigation of the case was avoided, antitrust enforcers and businesses have not had the opportunity to engage in a public policy battle concerning the applications of antitrust law in the new high-technology and network industries. Thus, many questions remain.
Third, unintentionally, the investigation clarified the limits of the role of the district court in certifying consent decrees.
And finally, the investigation provided the first test for the 1991 agreement between the United States and the European Union for conducting cooperative antitrust investigations. The agreement facilitated information exchanges between governments. The case demonstrated that, in a global economy, a firms conduct can be subject to scrutiny by competition authorities in several jurisdictions. When different enforcement standards exist in different jurisdictions, a firms response must reflect the global implications of its decision. Thus, while Microsoft may have been inclined to reject a consent decree with the Antitrust Division, the fact that the decree simultaneously resolved "potentially conflicting remedial orders" with the United States and the European Union made settlement more attractive.
Global implications are especially important in intellectual property cases. High technology, intellectual property-based markets are generally global. The effects of a settlement in one jurisdiction inevitably spill over into others, affecting a firms global operations and competitiveness. Unfortunately, the danger exists that the United States government could use international cooperation to enforce bad regulations.
Bingamans pursuit of Microsoft did not end with the software giants licensing practices. Bingaman later threatened to stop release of the Windows 95 software because of Microsofts plan to create the Microsoft Network (MSN), an Internet service provider that would compete with America Online, Compuserve, and other providers. Windows 95 would automatically place an icon on the computers desktop whenever the machine was turned on, allowing access to MSN with one click of the mouse. Critics argued that the icon would give personal computer users an added incentive to subscribe to MSN rather than the competitors.
But the Windows software would also allow a user, with three or four clicks of the mouse, to permanently place the icon for any competing system on the machines desktop. Whenever the machine was turned on, the icon for the competing Internet service provider would appear and could be accessed with a single mouse click.
The Antitrust Division did not follow through on its threat to block release of Windows 95. And Microsofts competing Internet service provider did not drive out competitors. However, the Antitrust Division maintains vigilance over Microsofts Internet and other business strategies.
Intellectual Property and Antitrust
In April 1995 the Justice Department released new Antitrust Guidelines for the Licensing of Intellectual Property. Although issued jointly with the FTC, Bingamans Antitrust Division performed most of the work on the revisions. Intellectual property (IP) is at the core of the current communications and technology revolutions. An essential right of owning property, including patents and copyrights, is the freedom to "rent" out the property or, in the case of patents, to license it for use by others. Yet antitrust enforcers maintain that certain licensing practices constitute attempts to monopolize markets beyond the exclusive right to use intellectual property.
The new IP Guidelines attempted to articulate the Antitrust Divisions views of antitrust constraints on the licensing and acquisition of IP rights. Initially, there was fear that the Guidelines would unduly restrict the use of intellectual property. There was relief when they did not. But some aspects of the IP Guidelines lack definition and clarity, and other aspects are controversial.
The guidelines state that the owners of IP rights should have wide latitude to realize their value through licensing and other means. The Guidelines identified the complex trade-offs between the pro-competitive benefits of licensing IP rights and the potential welfare-reducing and competition-restricting consequences of certain licensing practices, "antitrust concerns may arise when a licensing arrangement harms competition among entities that would have been actual or likely potential competitors in the relevant market in the absence of the license." They emphasized that the balancing of such trade-offs is fact-intensive, and very dependent on the particular circumstances of each case. Consequently, the Guidelines do not provide general answers about the resolution of those trade-offs in particular cases.
Lack of Clarity
Although the Guidelines intended to give greater freedom to IP owners, they were not without major shortcomings. To begin with, they did not provide adequate clarity about how the Antitrust Division and the FTC would balance the various effects of licensing practices. The analytical foundations of IP law and policy are not yet as well defined as the law and policy underlying other areas of concern to antitrust enforcers, for example, mergers. Thus it is not surprising that Bingamans IP Guidelines are not sufficiently precise to easily deal with real-world cases.
The Guidelines do not provide much, if any, guidance in cases such as the one the Antitrust Division pursued against Microsoft. IP licensers employing volume-sensitive pricing cannot be certain how the Division or the FTC will treat that common practice. Unfortunately, volume-sensitive pricing is generally an economically desirable effect of many licensing arrangements; particularly when there are high fixed costs and very low marginal costs incurred in the production of the licensed technology. Although lump-sum licensing fees may be pro-competitive compared to a fee paid for each use of software, the Microsoft consent decree expressly prohibits lump-sum payments.
The Guidelines do not tell the practitioner how to measure the rivalry of two firms competing to set a standard. Since two or more equally competitive standards are unlikely to exist, the winning firm could achieve a temporary monopoly. The market has witnessed MS-DOS take most of the market share from the Apple Macintosh operating system and the VHS video cassette format banish Betamax.
The Guidelines also state, "Agencies will not require the owner of intellectual property to create competition in its own technology." But they do not adequately explain this principle, and in particular, its application to "aftermarket" cases. Aftermarket issues concern servicing or other support for a product. For example, an automobile manufacturer makes and sells cars. But private garages unaffiliated with the manufacturer often provide the aftermarket services of auto repair and maintenance.
In a classic aftermarket case, the owner of a copyrighted product might have a legal right to refuse to license production of the product to competitors, even though this refusal might possibly keep others out of aftermarket competition. But while it might be legal for an IP owner to remain the exclusive producer of the product, the Guidelines are not clear about whether the IP owner can refuse to sell those products to aftermarket service providers, or set certain conditions on such sales. The Guidelines are silent as to whether the IP owner should be required to create or assist competition in the provision of aftermarket service.
The contention that the competitive effects of IP licensing and acquisition should be evaluated in an "innovation market" proved particularly controversial. The concept was first fully articulated in a proposed and subsequently abandoned merger between two heavy-duty transmission manufacturers. Antitrust scrutiny focused on the effects of business practices such as mergers, joint ventures, and licensing on incentives for research and development (R&D). Analysis of business practices in the context of innovation markets has become an important analytic tool for antitrust enforcers. In many merger cases, the FTC has focused on the effects of mergers on R&D competition, and has insisted on licensing or divestiture of key R&D assets as a precondition for merger approval.
Competitive effects within an innovation market are difficult to assess, and may require determination of how licensing or a merger affect present and future R&D competition. Little is known about the connection between current IP rights and incentives for R&D. Thus it is difficult to reach an informed judgment about the competitive effects of the current situation on future generations of IP.
In 1993, the Antitrust Division used the innovation market argument to successfully block the sale of General Motors Allison Transmission Division to its major rival, ZF Friedrichshafen. The complaint alleged that the transaction would reduce competition in the worldwide innovation market for future generations of heavy-duty automatic transmissions. In that case, the Division alleged that the proposed merger combined the only two firms engaged in bus and truck transmission R&D. In such a simple scenario, the merger might plausibly harm the innovation market for bus and truck transmissions.
In a somewhat similar scenario, the proposed merger between two manufacturers of specialized water pumps, Flow International Corporation and Ingersoll-Rand, the parties also abandoned the transaction before the innovation markets argu-ment could be tested in Court. The Guidelines do not provide adequate direction where there are more than two competitors.
Until either the courts sweep it away or a better approach is found, evaluating business practices according to the effects on innovation markets will be part of the legacy of Bingamans IP Guidelines.
International Antitrust Enforcement
Like her predecessor, James F. Rill, Bingaman focused on international enforcement and the concomitant need for cooperation among antitrust agencies worldwide. She made effective use of the 1992 United States-European Union Agreement in her investigation of Microsoft. The software giant allowed the Division and the European Unions Directorate General IV to share confidential company information in order to facilitate a global settlement. Such sharing is prohibited unless a company allows it.
Consistent with Bingamans interest in facilitating international cooperation, the Antitrust Division actively supported passage of the International Antitrust Enforcement Assistance Act of 1994. That Act, according to a Justice Department report, "improved [the Divisions] ability to prosecute international antitrust cases . . . involving foreign defendants and conspiracies conducted in other countries." Specifically, it gave the Antitrust Division improved ability to go after antitrust violations overseas. The Acts elaborate provisions protecting the confidentiality of business information permits effective international cooperation.
In 1995, the Antitrust Division released its Guidelines for International Operations. In several respects, the Guidelines were a significant departure from their predecessor, 1988 Anti-trust Enforcement Guidelines for International Operations.
First, the Antitrust Division issued the 1988 Guidelines alone. The 1995 Guidelines were issued jointly by the Division and the FTC. This continued the practice begun by James Rill, who issued the 1992 Horizontal Merger Guidelines jointly with the FTC. He implemented continuing coordination between the two agencies.
The 1988 Guidelines also included extensive discussions of substantive law. The 1995 Guidelines focused on a narrow range of antitrust issues directly related to international aspects of antitrust enforcement. The 1988 Guidelines reflected the less intrusive policies of the Reagan administration, particularly in the area of vertical restraint. The 1995 Guidelines offer more detailed direction on various aspects of international antitrust enforcement, such as principles of reciprocity and cooperation.
Third, the 1995 Guidelines removed footnote 159 from the 1988 Guidelines, expanding U.S. jurisdiction over certain international cases. The footnote stated:
Although the Foreign Trade Antitrust Improvement Act extends jurisdiction under the Sherman Act to conduct that has direct, substantial, and reasonably foreseeable effect on the export trade or export commerce of a person engaged in such commerce in the United States, the Department is concerned only with adverse effects on competition that would harm U.S. consumers by reducing output or raising prices.
Based on that footnote, Reagans Assistant Attorney General Richard Rule concerned his division principally with antitrust investigations of business practices that might directly harm American consumers. Assistant Attorney General Rill rescinded the footnote in 1992, and the 1995 International Guidelines continued Rills policy. Thus, the Antitrust Division could act against foreign conduct directly harming U.S. consumers, and against conduct that foreclosed foreign markets to U.S. export trade. The 1993 Pilkington case set precedent. In that case, the Antitrust Division took action against a British company for using trade secrets to hamper the efforts of an American firm, Pittsburgh Plate and Glass, attempting to invest in Asia. The case was resolved without a trial.
Example B in the 1995 Guidelines illustrates how international antitrust actions can be extended beyond cases that harm American consumers. In the example, no member of a foreign cartel can directly sell price-fixed goods in the United States or have any presence in the United States, the goods must be sold to an intermediary who resells the goods in the United States.
The case against Nippon Paper Industries Company and other foreign fax paper producers illustrates Example B. Japanese manufacturers allegedly conspired to fix the price of thermal fax paper throughout North America. The Japanese manufacturers sold the fax paper to unaffiliated trading houses, which resold the paper in the United States at allegedly inflated prices. The manufacturers themselves had no operations in the United States.
In an unprecedented move, the Antitrust Division brought a criminal case for violation of Section 1 of the Sherman Act against the Japanese producers. The U.S. District Court for the District of Massachusetts dismissed the case, ruling that the criminal provisions of the Sherman Act do not apply to wholly extraterritorial behavior. The appeals court reversed the decision, citing both Alcoa and Hartford Fire Insurance v. California (1993) which permitted civil antitrust claims under Section 1 of the Sherman Act to proceed despite the fact that the actions in the case occurred entirely on British soil.
Foreign governments regard such cases as extraterritorial enforcement of Americas laws. The Japanese government filed an amicus brief opposing the Department of Justices criminal prosecution. And the U.S. government cannot easily enforce decisions against firms that do not have operations in the United States. In many cases the prospect of establishing U.S. operations might induce foreign firms to alter their practices.
The fax paper case extends the extraterritorial enforcement of U.S. antitrust laws to new dimensions. An antitrust violation is a criminal offense in few other countries. Circuit Judge Lynch agreed that criminal sanctions were appropriate. He wrote, "rising of prices in the United States and Canada was not only a purpose of the alleged conspiracy, it was the purpose," and the volume of commerce affected a "not insignificant share of the United States market." Japanese authorities had no incentive to stop the conspiracy, since it had no effect on Japanese consumers.
But Judge Lynchs reliance on the volume of trade raises problems. Neither the Court of Appeals majority opinion nor the illustrative examples in the Guidelines provide any guidance as to the volume of affected trade necessary to trigger a criminal complaint against wholly extraterritorial conduct.
Assistant Attorney General Bingaman left a significant mark on antitrust enforcement. She dismantled the more laissez-faire policies of her predecessors. Instead she emphasized aggressive enforcement of both civil and criminal cases against firms that she felt were acting to limit competition. Luckily, many of these investigations never bore fruit.
High-tech innovations based on intellectual property and integrated into global markets increasingly drive the economy, the direction set by Bingaman at the Antitrust Division, if continued, will seriously affect the competitiveness of American enterprises. Whether for better or worse remains to be seen.
Antitrust Bulletin, Vol. 40, No. 2, Summer 1995.
"Symposium: Microsoft and the United States Department of Justice," pp. 257-396.
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