Predatory-Pricing-300x200

Author: Steven Cernak

Your much larger competitor sells the same products as you do but at a much lower price, so low you think that it must be losing money on each sale. Can such “predatory pricing” ever violate the antitrust laws? It is a very difficult monopolization case to make but, as Uber recently discovered, not all such claims are quickly dismissed.

Monopolization is illegal under Sherman Act Section 2 of the antitrust laws. Such claims can only be lodged against a “monopolist,” a competitor with monopoly power. Finding “monopoly power” is a difficult question this blog covered here. But even a monopolist is only liable for “monopolization,” actions that help it acquire or maintain that monopoly. There is no general test to judge a monopolist’s actions; instead, courts have developed different tests for different actions, including predatory pricing.

Predatory pricing has been defined by the U.S. Supreme Court as “pricing below an appropriate measure of cost for the purpose of eliminating competitors in the short run and reducing competition in the long run”.¹ The Court expressed skepticism toward such claims several times for two reasons. First, it noted that “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful”.² Second, it can be difficult to distinguish pro-competitive low prices from predatorily low ones; after all, “cutting prices in order to increase business often is the very essence of competition”.³

Because of that skepticism, the Court has established a test that is difficult for plaintiffs to meet. In Brooke Group, the Court evaluated claims that a cigarette producer was using low prices to discipline a competitor.⁴ The Court held that predatory pricing allegations will be upheld only if ”the prices complained of are below an appropriate measure of its rival’s costs … [and the defendant] had a … dangerous probability of recouping its investment in below-cost prices.⁵

On the “below cost” element, the Court has declined to specifically define the “appropriate measure” of costs.⁶ While commentators have developed several potential measures, the most popular are variations on prices below a manufacturer’s reasonably anticipated marginal costs,⁷ such as average variable costs.⁸ The rationale is that no competitor would knowingly spend the incremental costs to make one more product if it did not plan to sell it for a price that covered at least those incremental costs unless such pricing was part of an anti-competitive scheme.

The “recoupment” element itself has two parts. First, the low prices must be capable of driving competitors from the market: “This requires an understanding of the extent and duration of the alleged predation, the relative financial strength of the predator and its intended victim, and their respective incentives and will.”⁹ Second, those expelled competitors and any other new entrants must stay out of the market and the market must have other attributes, such as high entry barriers, necessary to sustain high monopoly pricing so that the costs of the low prices can be recouped.¹⁰

The Brooke Group test has proven difficult for plaintiffs to meet. Despite those difficulties, plaintiffs continue to make predatory pricing claims, as illustrated by two 2019 opinions. But a May 2020 case involving Uber shows that some predatory pricing claims can survive a motion to dismiss.

In Clean Water Opportunities, Inc. v. Willamette Valley Co., plaintiff claimed that defendant put it out of business through various tactics, including predatory pricing.¹¹ In an unpublished opinion, the Fifth Circuit affirmed dismissal of this claim because plaintiff’s claims were both conclusory and implausible.¹² Plaintiff only alleged that defendant’s discounts to plaintiff’s customers “were substantial and represented a benefit below [defendant’s] cost to produce [product].” The court affirmed the lower court’s ruling that this allegation required “further factual enhancement” to rise above mere conclusory allegations that the court was not bound to accept as true under the motion.¹³

The remainder of the allegations in the complaint made the possibility of such “factual enhancement” unlikely. Plaintiff alleged that its and defendant’s original undiscounted price both were well above the alleged competitive price. The court found that this allegation left plenty of room for defendant to undercut plaintiff’s price while staying above the competitive price, let alone any potential measure of defendant’s average variable costs.¹⁴

Continue reading →

Resale-Price-Maintenance-Toys-300x252

Author: Jarod Bona

If you are looking for controversy, you came to the right place. Today, we discuss resale price maintenance, one of the most contentious issues in all of antitrust. If you look around and see a bunch of antitrust economists, hide your screen so they don’t start arguing with each other. Trust me; that is the last thing you want to experience.

Let’s start with some background: A resale price maintenance agreement is a deal between, for example, a supplier and a retailer that the retailer will not sell the supplier’s product to an end user (or anyone, for that matter) for less than a certain amount. It is a straight vertical price-fixing agreement.

That type of agreement has a storied—and controversial—past. Over a hundred years ago, the Supreme Court in a case called Dr. Miles declared that this type of vertical price fixing is per se illegal under the federal antitrust laws. This is a designation that is now almost exclusively limited to horizontal agreements.

During the ensuing hundred years or so, economists and lawyers debated whether resale price maintenance (RPM) really should be a per se antitrust violation. After all, there are procompetitive reasons for certain RPM agreements and the per se label is only supposed to apply to activity that is universally anticompetitive.

After a trail of similar issues over the years, the question again landed in the Supreme Court’s lap in a case called Leegin in 2007. In a highly controversial decision that led to backlash in certain states, the Supreme Court lifted the per se veil from these controversial vertical agreements and declared that, at least as far as federal antitrust law is concerned, courts should analyze resale price maintenance under the rule of reason (mostly).

You can read more about Leegin and how courts analyze these agreements in our prior article. And if you want to learn more about how certain states, like California, handle resale price maintenance agreements, you can read this article. Finally, if you are looking for a loophole to resale price maintenance agreements, read our article about Colgate policies and related issues.

Minimum advertised pricing policies (MAP) are related to resale price maintenance: you can read our article on MAP pricing and antitrust here. You might also want to read Steven Cernak’s article about the four questions you should ask before worrying about the antitrust risks of new distributor restraints.

Continue reading →

Hollywood-Entertainment-Antitrust-300x212

Author: Jarod Bona

As an antitrust lawyer, I find it interesting to see the inner workings of different types of markets—how people and companies buy and sell things. And the entertainment industry is one of the more fascinating ones.

The entertainment industry includes an interesting mix of concentrated players at various levels of production and distribution, often vertically integrated. Streaming services like Netflix have brought on changes that the coronavirus pandemic will likely accelerate.

Indeed, the federal government is even ending the old Paramount Antitrust Consent Decree, which governed the motion-picture industry for decades. You can read about that from our attorney, Steven Madoff, who was a top-level lawyer for Paramount for years, and an expert (literally) in the entertainment and media industry.

If the entertainment market or Hollywood itself interests you, there is a federal antitrust case in the Central District of California that you should follow: William Morris Endeavor Entertainment, LLC. v. Writers Guild of America, West, Inc.

This is a lawsuit by the major Hollywood agencies against the Writers’ unions, along with a counterclaim by the Writers’ union against the agencies. Labor unions, of course, create some unique antitrust issues, which you can read about here.

On April 27, 2020, the Court granted in part and denied in part a motion to dismiss by the agencies.

What I found interesting about this case, among other items, is that it attacks a practice developed by Michael Ovitz and his Creative Artists Agency firm called “packaging.”

Before I dig into packaging, I have to recommend that you read Michael Ovitz’s autobiography: Who is Michael Ovitz? In his book, he is open about his successes and excesses. If you are building a professional services firm, like I am, you will particularly appreciate riding along as Michael Ovitz builds a talent agency that changes the way business is done in Hollywood. You hear some “inside baseball” about Hollywood and learn how to build a business from scratch, all at once. Indeed, you learn how to change an industry. Seriously, it’s a good read.

//ws-na.amazon-adsystem.com/widgets/q?_encoding=UTF8&ASIN=1591845548&Format=_SL250_&ID=AsinImage&MarketPlace=US&ServiceVersion=20070822&WS=1&tag=suchealif01-20&language=en_UShttps://ir-na.amazon-adsystem.com/e/ir?t=suchealif01-20&language=en_US&l=li3&o=1&a=1591845548

Back to “Packaging.” Instead of letting the studios take the lead in building movie or television projects and hiring the writers, actors, and directors that the agencies represented, the agencies would create their own project proposals for the studios. Not surprisingly, in doing so, they would “package” together a group of people, in different roles and positions, that they represent.

As part of the cost of this packaging service, the talent agencies would receive a fee from the studio. Before packaging, talent agencies were compensated by commissions as a percentage of their clients’ compensation.

The writer unions asserted that these packaging services harmed both writers and the guilds themselves and created conflict of interests for the agencies between their writer-clients and the production studios.

The complaint also alleged that the talent agencies price-fix the fees for these packages and exchange competitive sensitive information with each other about their packaging fee practices.

I won’t get into all the details here—my purpose is merely to whet your appetite to follow the case—but the writer guilds took certain actions that the talent agencies didn’t like, who then took their own actions, and eventually they all sued each other, leaving a California federal judge to sort it out.

As I mentioned above, the Court issued a motion to dismiss ruling, which allowed some claims, while dismissing others. I am not going to go into the details, but I will point out one interesting aspect of the ruling: The Court dismissed the federal antitrust price-fixing claims for lack of standing because the injured parties didn’t participate in the market that was competitively harmed. But the Court allowed a price-fixing claim under the same facts to go forward under the California antitrust statute—the Cartwright Act—because this statute doesn’t have the more restrictive definition of antitrust standing that the federal antitrust laws have.

For antitrust attorneys, this is particularly interesting because in most cases in which a plaintiff includes both federal and state antitrust claims, they rise and fall together. Here, the California antitrust claims (under the Cartwright Act) survived while the federal ones fell.

Continue reading →

Certificate-of-Need-Minnesota-300x225

Author: Jarod Bona

We do our best to describe antitrust and other legal issues as straightforwardly as possible here. We tend to speak directly and avoid the guarded language that you often see from lawyers elsewhere (a little secret: most big-firm attorneys are afraid of getting in trouble in one way or another).

So, in case there was any doubt, I’ll tell you what I really think of certificate-of-need laws. These are laws, still on the books in many states, that actually require a new healthcare provider that wants to move into a market to get permission from the state to do so (a certificate of need). And, even more bizarre, the existing competitors—who certainly don’t want any more competition—often have a say or a role in whether the new provider receives a certificate of need, which can sometimes take months or years to obtain, if at all.

We hear all the time how important health and safety is: The sanctity of human life. Take care of yourself. Eat well. Exercise. Get your yearly physical. Follow your doctor’s advice.

We also hear complaints from every politician, news agency, and anyone that’s ever paid a medical bill about the costs of health care.

And, although healthcare workers have been heroes both before and during this pandemic, I think we would all agree that there is a lot of room for improvement in healthcare in the United States. I’ve been to the Mayo Clinic in Rochester, Minnesota many times and my son was born there, so I know how good healthcare can be. We have a lot of room to improve healthcare as a country.

I think we can all agree that healthcare is vitally important to us as human beings. That is what I hear the media tell me and what politicians preach all the time. And this makes sense: If you are sick or dying, getting better shoots up the priority list of needs and wants.

Switching gears briefly, here is something that I’ve learned as an antitrust attorney and as a student of economics: Markets with monopolists and markets with less competition have higher prices, lower supply, and lower quality for products and services.

Let’s say you are an evil troll that hates people. Let’s also say that you have the single opportunity to pass legislation in a state to hurt human beings that care about health and healthcare, but you don’t want it to be something that is so obvious that they’d just repeal it after your opportunity passes. You want something that is sneaky bad.

What would you do if you were that evil troll?

You’d pass certificate-of-need laws.

These laws are sneaky bad because it takes a couple steps of reasoning to see how they harm our health and healthcare. By creating the barrier to entry of these certificate-of-need laws, the evil troll can artificially limit the supply of healthcare, decrease its quality, and raise healthcare costs—almost without detection. And by offering the existing monopolist or provider an opportunity to participate in the process, the government agency is much less likely to award the certificate to improve people’s lives. At the very least, if the existing healthcare provider is involved, they will be able to help delay any competition.

Let’s say that you end up with a pandemic and really need a lot of hospital beds or other healthcare all at once. If that happens, the evil troll has won because their certificate-of-need laws are specifically designed to reduce the supply of healthcare, including hospital beds.

Bona Law opposes certificate of need laws and we call for their repeal and challenge. You can read our earlier article about certificate of need laws on this website here.

On April 28, 2020, Aaron Gott and I published an article in the Minneapolis Star Tribune entitled “State Certificate-of-Need Laws for Hospitals Must Go: These anti-competition laws have left us unprepared for the current pandemic, with fewer hospital beds for care.”

Continue reading →

exclusive-deailng-300x200

Author: Jarod Bona

Sometimes parties will enter a contract whereby one agrees to buy (or supply) all of its needs (or product) to the other. For example, maybe a supplier and retailer agree that only the supplier’s product will be sold in the retailer’s stores? This usually isn’t free as the supplier will offer something—better services, better prices, etc.—to obtain the exclusivity.

If you compete with the party that receives the benefit of the exclusive deal, this sort of contract can seem quite aggravating. After all, you have a great product, you offer a competitive price, and you know that your service is better. Then why is the retailer only buying from your competitor? Shouldn’t you deserve at least a chance? Isn’t that what the antitrust laws are for?

Maybe. But most exclusive-dealing agreements are both pro-competitive and legal under the antitrust laws. That doesn’t mean that you can’t bring an antitrust action and it doesn’t mean you won’t win. But, percentage-wise, most exclusive-dealing arrangements don’t implicate the antitrust laws.

You can read our article about exclusive dealing at the Bona Law website here.

It is important that I deflate your expectations a little bit at the beginning like this because if you are on the outside looking in at an exclusive dealing agreement, you are probably quite angry and you may feel helpless. From your perspective, it will certainly seem like an antitrust violation. And your gut feeling about certain conduct is a good first filter about whether you have an antitrust claim. What I am trying to tell you is that with regard to exclusive dealing, your gut may give you some false positives.

Of course, the market is full of exclusive or partial-exclusive dealing agreements and there are relatively few of these that turn into federal antitrust litigation. So if you see an exclusive-dealing claim in federal litigation, it doesn’t mean it is not one of the rare instances of an exclusive-dealing antitrust violation. We receive a lot of calls about exclusive-dealing agreements that are antitrust violations or close to antitrust violations. But people don’t call us for most varieties of exclusive dealing, which is perfectly legal under the antitrust laws.

So what is an exclusive dealing agreement?

An exclusive dealing agreement occurs when a seller agrees to sell all or most of its output of a product or service exclusively to a particular buyer. It can also occur in the reverse situation: when a buyer agrees to purchase all or most of its requirements from a particular seller. Importantly, although the term used in the doctrine is “exclusive” dealing, the agreement need not be literally exclusive. Courts will often apply exclusive dealing to partial or de facto exclusive dealing agreements, where the contract involves a substantial portion of the other party’s output or requirements.

Continue reading →

Antitrust-Criminal-Investigation-Separate-Attorney-300x200

Author: Jon Cieslak

When a law enforcement or regulatory agency—such as the Department of Justice (DOJ) or the Securities and Exchange Commission (SEC)—investigates potentially illegal business conduct, it may not be targeting just the company under investigation. Oftentimes, authorities are also targeting the company’s employees who engaged in the illegal conduct, and corporate officers and other employees are frequently indicted alongside their employers in antitrust and other cases. See, e.g., United States v. Hsiung, 778 F.3d 738 (9th Cir. 2014). Indeed, in 2015, U.S. Attorney General Sally Yates issued the so-called “Yates Memo” that reaffirmed DOJ’s commitment to seek “accountability from the individuals who perpetrated the wrongdoing.”

While the company typically hires outside counsel with experience defending the potential claims, one area that is sometimes overlooked is whether the employees involved in the investigation need their own lawyers. Employees may think the company’s lawyer represents them as well, but that is rarely the case and employees should be quickly disabused of the notion. Both the Supreme Court in Upjohn v. United States, 449 U.S. 383 (1981), and legal ethics rules compel corporate lawyers to clarify when they do not represent individual employees when conducting internal investigations. See, e.g., Model Rules of Prof’l Conduct R. 1.13(f).

So when does an employee need her own lawyer?

While there is no bright-line rule, considering some key questions can help you make the right decision.

First, is the employee a target of the investigation, or merely a witness? During an investigation, investigators will talk to many potential witnesses in addition to the individuals whom they suspect of illegal conduct. When confident that investigators believe an employee is only a witness to the potentially illegal conduct, the need for separate counsel is significantly reduced.

Second, does the employee face personal consequences as a result of her conduct? Consequences may include criminal penalties such as imprisonment or fines, suspension or loss of professional licenses, personal liability for civil damages awards, or employment consequences such as demotion or termination. While even a small chance of criminal penalties merits separate counsel, as the likelihood of any of these consequences grows, so too does the importance for an employee to have her own lawyer. Keep in mind, too, that individuals involved in some illegal conduct—such as an antitrust conspiracy—can be jointly and severally liable for all the harm caused by the conspiracy, so could face an enormous civil damages award even if their role was minimal. See Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 646 (1981).

Third, was the investigation initiated by a law enforcement or regulatory agency, or is it purely an internal investigation by the company itself? In general, separate counsel is less important in internal investigations. On the other hand, when the government is investigating, separate counsel can benefit both the employee and the company. Not only will the employee’s interests be better protected, separate counsel will also help insulate the company’s lawyers from potential disqualification and allegations of obstruction. Separate counsel is particularly important when an employee will be interviewed directly by law enforcement agents, who are more likely to trust a witness’s independent attorney.

Fourth, and most importantly, does the employee have any actual or potential conflicts of interest with the company and, if so, how severe are they? When both the company and the employee are targets of a government investigation, there will almost always be at least a potential conflict between them. A company usually has substantial incentives to cooperate with a government investigation, such as the potential for amnesty under the DOJ’s Leniency Program and credit for cooperating under the Sentencing Guidelines. To fully cooperate, however, the Yates Memo requires companies to “completely disclose . . . all relevant facts about individual misconduct.” Meanwhile, an employee involved in the conduct may want to seek immunity in exchange for testifying against the company or other individuals. Even less severe conflicts, however, can warrant separate counsel. If an employee disagrees with the company’s view of the facts or feels pressure to testify in a certain way, separate counsel may be needed to protect the employee’s interests.

Continue reading →

Refusal-to-Deal-Aspen-Skiing-300x195

Author: Luis Blanquez

Good news––the answer is yes. The bad news, however, is that antitrust laws only help you in very limited scenarios.

As a general rule, “Businesses are free to choose the parties with whom they deal, as well as the prices, terms, and conditions of that dealing” Pacific Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438, 448 (2009). This means that firms, even those enjoying market power, are not typically required to cooperate with rivals by selling them products that would help them compete. Indeed, antitrust laws do not generally impose limitations on a competitor’s ability to “exercise his own independent discretion as to parties with whom he will deal.” Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 411 (2004).

So, most of the time, once your distribution contract expires, your supplier is free to either renew your contract or stop dealing with you. After all, this is what the free market is about: you are free to decide your own commercial strategy in order to make profits and beat your competitors. But this is not always the case, and the recent case from the Seventh Circuit, Viamedia, Inc. v. Comcast Corp., is a very good example of it.

The willingness to forsake short-term profits

Courts have been cautious to recognize an antitrust exception to the general rule that businesses are free to choose the parties with whom they deal, as well as the prices, terms, and conditions of that dealing. The cases below provide a road map to better understand what you would need to succeed.

Aspen Skiing Co. v. Aspen Highlands Skiing Co., 472 U.S. 585 (1985)

The U.S. Supreme Court has stated in the past that even an actual monopolist has no duty to deal with its competitors. A narrow exception to this rule, however, was established in Aspen Skiing. The Court provided some guidance to explain when a monopolist’s refusal to deal becomes contrary to antitrust rules.

In this case, the defendant monopolized the market for downhill skiing services in Aspen (Colorado). Defendant originally agreed to offer a joint lift ticket with plaintiff because it helped attract skiers. But defendant later decided to discontinue the successful joint-ticket program. By doing so, it rejected, for example, selling lift tickets to the plaintiff at full retail price. Defendant’s justifications included several administrative issues such as splitting revenues, suffering brand image injury, and others.

The Court concluded that defendant’s unilateral termination of a voluntary––and thus presumably profitable––course of dealing suggested a willingness to forsake short-term profits to achieve an anticompetitive end: to push plaintiff out of the market and achieve monopoly power to avoid any sort of competition.

Novell, Inc. v. Microsoft Corp 731 F.3d 1064 (10th Cir. 2013)

Microsoft provided independent software vendors access to a pre-release version of Windows 95––the so called “beta” version of the operating system available to all independent software vendors, including Novell––to facilitate their ability to write software for Windows 95. The reasoning behind this was to develop compatible programs while increasing both the utility of the operating system for users and the sales for Microsoft. Later on, however, Microsoft changed its strategy and revoked such access. It decided to give its proprietary applications the “competitive advantage” of “being the first applications useable on Windows 95.” Novell alleged that Microsoft intentionally altered its existing business practice of providing competitors with Windows technical information in order to monopolize the market for operation systems.

Continue reading →

Antitrust-Competition-Coronavirus-300x300

Author: Jarod Bona

The Coronavirus crisis has created an unusual situation for the world, but also for antitrust and competition law. People around the globe are trying to cooperate to solve and move past the crisis, but cooperation among competitors is a touchy subject under antitrust and competition laws.

Of course, cooperation between or among competitors isn’t unheard of, even during non-crisis times. Joint ventures are prevalent and often celebrated, companies will often license their technology to each other, and the existence of certain professional sport leagues, for example, depend entirely upon cooperation among competing and separately owned teams. Indeed, the Department of Justice Antitrust Division and FTC have published guidance (in 2000) on collaborations among competitors.

Human beings everywhere are working together to defeat the Coronavirus and that will require cooperation, sometimes even among and between competitors. It is unlikely that antitrust and competition law will get in the way of that. Indeed, the Antitrust Division of the Department of Justice issued a Business Review Letter confirming that certain competitors can cooperate “to expedite and increase manufacturing, sourcing, and distribution of personal-protective equipment (PPE) and coronavirus-treatment-related medication.”

At the same time, the foundations of antitrust and competition law—the “faith in the value of competition,” as articulated by the US Supreme Court in National Society of Professional Engineers—is the motor that will accelerate us toward solutions.

Private enterprise and the incentives inherent within it have created the foundations and the machinery to “science” our way out of this crisis. Over-coordination through a central planner will detract from that because we would lose the feature of massive a/b testing, or really a/b/c/d/e/etc. testing, that comes from a bottom-up, decentralized approach to creating and distributing resources.

So—at least in my opinion—antitrust and competition law should maintain their role in supporting competition during this crisis (and the FTC agrees with me). But—as is already true of antitrust and competition law—when there is a strong pro-competitive reason for cooperation among competitors, the courts and antitrust agencies can adjust to let that conduct go forward (and they have here).

And once we are past this crisis, I suspect that antitrust and competition law will become an even more popular area of discussion because of the likely greater concentration of markets resulting from government intervention.

In the meantime, here are some articles that our antitrust team has written about antitrust, competition, and the Coronovirus Crisis:

 

 

 

 

Also, Steven Cernak is heavily quoted in this article from MiBiz: Coronavirus price gouging spurs efforts to rein in ‘bad actor’ resellers.

Finally, we recommend that read the blog series from our friends at Truth on the Market entitled “The Law, Economics, and Policy of the Covid-19 Pandemic.” Lots of outstanding work by very smart people.

The other part of this, of course, is the economy. With stay-at-home orders throughout the country, there is a lot less commerce happening.

Continue reading →

Joint-Ventures-Antitrust-300x102

Author: Steven Cernak

On March 24, 2020, the FTC and DOJ Antitrust Division issued a joint statement regarding their approach to coordination among competitors during the current health crisis. The agencies announced a streamlining of the usual lengthy Advisory Opinion or Business Review Letter processes for potentially problematic joint efforts of competitors. The statement also confirmed that the antitrust laws had not been suspended and, for instance, price fixing would still be prosecuted.

More importantly, however, the agencies reminded businesses that many kinds of joint ventures of competitors have long been allowed, even encouraged, under the antitrust laws. That message might have been lost in the blizzard of reports and client alerts focusing on the changes to the processes to judge only the riskiest joint efforts. Especially in economic crises, businesses should consider if certain joint ventures with others in their industry, including competitors, might be good for both the businesses and their customers. As explained below, the U.S. auto industry has been using such joint ventures for decades.

Joint Ventures

The term “joint venture” can cover any collaborative activity where separate firms pool resources to advance some common objective.  When that joint activity among competitors is likely to lead to faster introduction of a new product, lower costs, or some other benefits to be passed on to customers, antitrust law will balance those benefits with any loss of competition.  Two specific types of joint ventures—research & development and production—have received particular antitrust encouragement. Below, lessons from both types are explored using examples from the auto industry.

Research & Development Joint Ventures

The FTC and DOJ have described joint R&D as “efficiency-enhancing integration of economic activity” and, generally, pro-competitive. Getting scientists and engineers from competing firms to share data, test results, and best practices on basic areas that each company can then build on to create or improve competitive products can save money and reduce time to market.

GM, Ford and then-Chrysler started doing joint R&D on battery technology and other basic building blocks of motor vehicles in 1990. In 1992, all these efforts were put under the umbrella of the United States Council for Automotive Research or USCAR.  Through USCAR and other joint efforts, these fierce competitors cooperate on technologies like advanced powertrains, manufacturing and materials, and various types of energy storage and then compete on their applications in their vehicles.

Similarly, GM and Ford shared design responsibilities for advanced 9- and 10-speed transmissions. After the cooperating on design, each company then manufactured the transmissions and competed on the vehicles that used them.

Production Joint Ventures

In 1983, GM and Toyota formed a production-only joint venture, NUMMI, to produce vehicles for each parent that were then marketed separately. In 1984, the FTC barely approved the joint venture and insisted on an Order imposing reporting requirements and limits on communication.  By 1993, the FTC had grown comfortable with NUMMI’s operation and so unanimously voted to vacate the Order as no longer necessary given changed conditions.

NUMMI’s success in navigating through antitrust concerns led to other production joint ventures in the industry including a Ford-Mazda one for vehicles, a Chrysler-Mitsubishi-Hyundai joint venture on engines, and a GM-Chrysler joint venture on manual transmissions. None of them were as controversial or received the same level of antitrust scrutiny as NUMMI.

The National Cooperative Research and Production Act

At about that same time as NUMMI’s formation, Congress was clarifying the antitrust laws to ensure that certain cooperative efforts that could benefit consumers were not inappropriately stifled by the antitrust laws. In 1984, the National Cooperative Research Act confirmed that most R&D joint ventures would be judged under the rule of reason. To further encourage such pro-competitive cooperation, the law also allowed the parties to file a very short notice describing the joint venture with the FTC and DOJ. Once such a notice is published in the Federal Register, any antitrust liability for the joint venture and its parents is limited to actual, not treble, damages and attorney fees. In 1993, the law was expanded to cover certain joint production ventures and standard development organizations and retitled the National Cooperative Research and Production Act or NCRPA.

Continue reading →

Certificate-of-Need-Laws-Antitrust-300x216

Authors: Aaron Gott and Jarod Bona

The United States is in lockdown to “flatten the curve” of COVID-19 cases because our hospital system has even less capacity to handle a surge of cases than Italy—where overload has led physicians to have to make tough decisions about which patients deserve treatment priority. New York, the U.S. epicenter of the coronavirus, is expected to reach capacity in a matter of days and some hospitals have already exceeded their intensive-care capacity.

Hundreds of thousands of people may die directly as a result of inadequate hospital capacity in the United States, which is at its lowest in decades. In fact, the U.S. had nearly 8 hospital beds per 1,000 people in 1970, a number that has steadily declined to 2.9 per 1000 people today. Our elected officials have issued orders and recommendations that have our economy screeching to a halt, while Congress is considering unprecedented economic relief measures in the trillions of dollars to soften the fallout.

What put us in this position? There are many reasons. But one major culprit that is at least partially to blame for our current predicament has been nearly 50 years in the making: state certificate of public need laws (often called CON laws) that artificially limit the supply of hospital beds and medical equipment.

In 1974, Congress passed the National Health Planning Resources Development Act, which encouraged states to enact certificate-of-need laws for medical capital investment. Nearly every state enacted them. State bureaucrats, rather than the free market, would thereafter determine whether we “need” more ICU capacity, more testing labs, and more equipment like ventilators. The idea behind CON laws, proven wrong long before COVID-19, is that allowing states to control supply would reduce runaway healthcare costs and improve access to care.

Here is how a CON law generally works: it is illegal (often with criminal consequences) to build any kind of medical facility or make a capital medical equipment purchase without first obtaining a certificate allowing you to do so from the state health agency. It can cost millions of dollars and take several years to get one, if you can get one at all. In some states, your competitors have a right to object to the issuance of the certificate. In the worst states, monopolist and oligopolist hospital systems prevent competition because they have such a stranglehold on state bureaucrats and processes that most would-be competitors don’t even bother trying to get a certificate of need.

New York, by the way, is one of those states that still has a draconian certificate of need law on its books. New York requires a certificate of need for the “establishment, construction, renovation and major medical equipment acquisitions of health care facilities.” Any project that would add new hospital and/or ICU beds would require a certificate of need, and it is likely that adding new ICU-grade ventilators would also require a certificate of need because they individually cost tens of thousands of dollars.

New York has just 3,200 ICU beds but expects it will need between 18,600 and 37,200 to handle the expected wave of hospitalizations.

As antitrust and competition lawyers, certificate of need laws long have been on our minds. They are terrible, immoral policies even in the best of times.

We’re not alone in this thinking: even Congress quickly saw the error of its ways. In 1984, recognizing that the program was a failure, Congress repealed the provisions that encouraged certificate of need laws. Some states repealed their CON laws in the years since, but 35 states still have them on the books, largely because monopolist and oligopolist healthcare systems don’t like competition, and they have lobbying strangleholds over many state legislatures.

For years, the U.S. Department of Justice Antitrust Division and the Federal Trade Commission have jointly pleaded for states to repeal their anticompetitive certificate of need laws (and criticism of CONs features prominently in their comprehensive guide on improving competition in healthcare). Yet states still have them, and courts have often refused to strike them down under the U.S. Constitution despite their disastrous effect on interstate commerce.

One example is Colon Health Centers v. Hazel, a case by our friends at the Institute of Justice challenging the constitutionality of Virginia’s parochial certificate-of-need law under the dormant Commerce Clause. The plaintiffs in that case sought to open state-of-the-art clinics with MRI machines and CT scanners that would improve and cheapen certain types of cancer screenings, but they could not do so without first risking millions of dollars in a certificate of need process that was likely to be contested by existing providers, eventually resulting in denial.

We filed an amicus brief on behalf of law and economics scholars in that case to argue that states’ claims of cost-controlling benefits of CON laws are unsupported by empirical evidence. Nevertheless, the Fourth Circuit upheld the law on summary judgment, finding that the putative benefits of the law were not speculative (even in the face of evidence showing no such benefit), and that those benefits outweighed the effect the law has on interstate commerce.

That case may have been decidedly differently if it were heard today.

Now, in the face of an unprecedented pandemic and an economy that has come screeching to a halt as a result of shelter-in-place orders and social distancing recommendations—put in place primarily to “flatten the curve” and avoid the overload our inadequately supply of healthcare facilities—these laws have proven not just ineffective, but completely unconscionable.

More importantly, CON laws could now prevent us from quickly building up temporary medical infrastructure to deal with the surge of cases. We cannot rely on government alone to rise to the occasion with military resources; CON laws must get out of the way so that private enterprise can help fill in the gaps.

Continue reading →

Contact Information