Author: Jarod Bona
Selling a product or service when there is little to no competition is a great way to get rich. An economist might call some of those profits “monopoly rents.” With less or no competition, the amount supplied usually diminishes and the price goes up. The purchasers in this scenario lose and the supplier wins.
That is why companies, individuals and governments (yes, governments) violate the antitrust laws—it is good money.
Let’s say you run a municipality and money is tight. You could raise taxes, but that is a hassle because people hate taxes (understandably). You don’t want to cut spending or services because that might make re-election more difficult and will anger the lobbyists. You could spend your money more efficiently, but—oh yeah—you are part of the government. That probably won’t work.
Discouraged, you pack up and fly to the next convention of municipal bureaucrats in a sunny, expensive location. Probably somewhere in California. After a day or two of panels on replacing intersections with roundabouts and other riveting ideas, you are starting to perk up. Maybe it is the sun. Or maybe it is the conversation you just had with another municipal leader from a different state.
You were complaining about your budget at the municipal-budget support group session and this municipal leader from, let’s say, Virginia, told you about a brilliant money-making scheme for your municipality.
With a new-found energy, you fly back home and begin to implement it.
Here’s the brilliant idea: You leverage your government power to force a monopoly for the municipality. So the municipality will go into business, but doesn’t have to compete like every other business. You get the monopoly rents (money, money, money). The citizens who have to purchase your product or service—maybe garbage collection—lose because they will have to pay more. But it doesn’t look like a tax, even though it is really a hidden tax.
How many citizens will draw out supply and demand curves and loudly protest when they see that their “consumer surplus” is changed into “monopoly rents” for you? Only the economists and antitrust attorneys would do that and you’ve already convinced them to move away long ago.
This is fiction, of course. You probably don’t really run a municipality and you hopefully haven’t implemented an anticompetitive scheme to enrich your government entity.
But this happens all the time. Bona Law receives many calls from businesses that want to compete, but get shoved out of a market because a government entity wants to enrich itself. In practice, what often happens is a local government entity will pick a private-entity partner to implement the business with the product or service and the public and private entities will split the monopoly rents, to the detriment of the taxpayers and potential competitors.
This is a consistent problem and as you read the narrative, you can see why: It is a great way to get rich. Municipalities need money and will often use their regulatory power to assure that their market participation (or partner) remains free from competition.
But can the local government get away with this corrupt, hidden tax that hurts competition and enlarges their own coffers?
Well, it depends.
Unfortunately, they get away with it all too often.
The federal antitrust laws do, fortunately, apply to local government entities, but they have a limited exemption called the state-action immunity. We’ve written about that a lot, so I won’t go into the details here. But, in some limited circumstances, courts will allow them to effectively steal money by removing competition from markets in which they compete.
Can you tell what side we take in these cases?
Anyway, there is an easier solution. And you can help.
A few years ago, in a case called FTC v. Phoebe Putney Health Systems, Inc., the US Supreme Court addressed an argument by the National Federation of Independent Business, as amicus, requesting the Court to apply what is called the market-participant exception to state-action immunity. That exception states that a government entity that is acting as a market-participant or commercial player in a market should not have the right to invoke state-action immunity from antitrust liability. If they are competing in a market, they should have to play by the same rules as the other competitors. And that includes following the antitrust laws.
This exception has come up before, but the US Supreme Court declined to decide the question because it wasn’t raised by the parties below. The FTC, the plaintiff in the action, should have raised it, as it was on point. But the FTC didn’t and the Court left it open. And the Circuits haven’t resolved it yet themselves. There is a split about whether it can apply. I think that the US Supreme Court will eventually decide the issue. But in the meantime, municipalities are abusing their power to enrich themselves to the detriment of competition and consumers.
If you want to read that amicus brief from the National Federation of Independent Business, you can read it here. I am quite familiar with it because I wrote it. As a follow up, I co-authored an article with Luke Wake on the market-participant exception, which you can read here. You might also enjoy our article on applying the antitrust laws to anticompetitive state and local government conduct.
We are constantly on the look-out for cases that provide us with an opportunity to test this exception in the courts and hopefully eventually obtain US Supreme Court guidance on it, so if you have something, let us know. If you are an attorney, we can help you on appeal or during litigation.
In the meantime, we strongly recommend that Congress pass legislation that would make the market-participant exception to state-action immunity from antitrust liability part of federal law. You might suggest that. Send them this article.