1. Has Interbrand Competition Become the Sole, Not Merely the Primary Concern of Antitrust Law in the United States? Presentation by Professor Andrew I. Gavil Howard University School of Law, Washington, D.C. and Visiting Professor, Centre for Competition Policy University of East Anglia, Norwich, UK (May-June, 2010) CCP 6 th Annual Conference 18 June 2010 Copyright Andrew I. Gavil, 2010

2. 2 Outline of the Presentation Challenging the Conventional View of Leegin Challenging the Conventional View of Leegin Leegin implicitly overruled key theory of anticompetitive effect from Sylvania Leegin implicitly overruled key theory of anticompetitive effect from Sylvania Perceived value of intraband competition as a stimulant to interbrand competition diminished Perceived value of intraband competition as a stimulant to interbrand competition diminished RPM three years after Leegin RPM three years after Leegin Less uniformity than one might imagine Less uniformity than one might imagine 1. Overrule Leegin -- bring back per se rule 2. Work within Leegin -- develop a structured rule of reason 3. Fully embrace Leegin -- stop worrying about vertical restraints Some Questions and Speculations about Future Directions Some Questions and Speculations about Future Directions

3. Part I: Challenging the Conventional View of Leegin

4. 4 The Conventional View Leegin reaffirmed and extended Sylvania to vertical intrabrand price restraintsLeegin reaffirmed and extended Sylvania to vertical intrabrand price restraints It: It: ended the disparate treatment of price and non-price restraints… ended the disparate treatment of price and non-price restraints… restored consistency and harmony to the law…. restored consistency and harmony to the law…. and all thanks to well-settled economics! and all thanks to well-settled economics! The Brighton Line The Sylvania Colour TV c. 1966

5. 5 Largely Accurate for Efficiency Sylvania Sylvania Key: Promote Interbrand Competition Key: Promote Interbrand Competition Facilitate entry by attracting dealers willing to invest in service and promotion Facilitate entry by attracting dealers willing to invest in service and promotion Induce retailers to promote, service, and repair existing products Induce retailers to promote, service, and repair existing products Defeat free riding Defeat free riding * Ensure quality & safety to safeguard reputation and reduce liability exposure * Ensure quality & safety to safeguard reputation and reduce liability exposure Leegin Key: Promote Interbrand Competition Facilitate entry by attracting dealers willing to invest in service and promotion Induce retailers to promote, service, and repair existing products Defeat free riding * Promote consumer choice But do theories of anticompetitive effect similarly align?

6. 6 Sylvanias Theory of Anticompetitive Effects – Non-Price Restraints Sylvania, 433 U.S. at 52 n.19: Sylvania, 433 U.S. at 52 n.19: Interbrand competition is the … primary concern of antitrust law.Interbrand competition is the … primary concern of antitrust law. Implication: We permit restraints on intrabrand when they enhance interbrand – Why? Implication: We permit restraints on intrabrand when they enhance interbrand – Why? [W]hen interbrand competition exists … it provides a significant check on the exploitation of intrabrand market power because of the ability of consumers to substitute a different brand of the same product. [W]hen interbrand competition exists … it provides a significant check on the exploitation of intrabrand market power because of the ability of consumers to substitute a different brand of the same product. Converse: Restraints on intrabrand competition are unreasonable if… Converse: Restraints on intrabrand competition are unreasonable if… Interband competition is lacking, i.e., when the supplier has market power Interband competition is lacking, i.e., when the supplier has market power Why? They eliminate the primary source of downward pressure on price (intrabrand competition), without any benefit to interbrand competition. Why? They eliminate the primary source of downward pressure on price (intrabrand competition), without any benefit to interbrand competition. Additional Assumption? Additional Assumption? Intrabrand competition (dealer noise) stimulates interbrand competition Intrabrand competition (dealer noise) stimulates interbrand competition

7. 7 Business Electronics (1988) What is most troubling about the majority's opinion [in Business Electronics] is its failure to attach any weight to the value of intrabrand competition... Not a word in the Sylvania opinion implied that the elimination of intrabrand competition could be justified as reasonable without any evidence of a purpose to improve interbrand competition. What is most troubling about the majority's opinion [in Business Electronics] is its failure to attach any weight to the value of intrabrand competition... Not a word in the Sylvania opinion implied that the elimination of intrabrand competition could be justified as reasonable without any evidence of a purpose to improve interbrand competition. Stevens, J., dissenting

8. 8 Sylvanias Theory of Anticompetitive Effects – RPM Sylvania, 433 U.S. at 51 n.18: Sylvania, 433 U.S. at 51 n.18: RPM is not only designed to, but almost invariably reduces interbrand price competition RPM is not only designed to, but almost invariably reduces interbrand price competition Dampening/softening of competition theory Dampening/softening of competition theory Facilitates cartelizing Facilitates cartelizing

9. 9 Leegins Theory of Anticompetitive Effects for RPM Explicit and Extensive Treatment Explicit and Extensive Treatment Facilitate Collusion Facilitate Collusion Manufacturer Manufacturer Dealer Dealer Facilitate Exclusion Facilitate Exclusion Dominant manufacturer Dominant manufacturer Dominant retailer Dominant retailer Three Relevant Filters: Three Relevant Filters: Widely utilized? (necessary for cartel theory) Widely utilized? (necessary for cartel theory) Dealer initiated? (necessary for either dealer-related theory) Dealer initiated? (necessary for either dealer-related theory) Market Power? (necessary for all theories) Market Power? (necessary for all theories) Note: Sylvanias core theory is not mentioned.

10. 10 The Issue Going Forward Has interbrand competition become the sole, not merely the primary concern of U.S. antitrust law? Has interbrand competition become the sole, not merely the primary concern of U.S. antitrust law? If Leegin silently overruled core theory of Sylvania, then yes. If Leegin silently overruled core theory of Sylvania, then yes. If so, was Leegin correct? Is Sylvanias theory economically sound? If so, was Leegin correct? Is Sylvanias theory economically sound?

11. 11 Intrabrand Competition After Leegin: Two Approaches Single monopoly profit theory as critique of Sylvania Single monopoly profit theory as critique of Sylvania If a mfr has market power, it cannot gain any additional power by limiting intrabrand competition. If a mfr has market power, it cannot gain any additional power by limiting intrabrand competition. Did SCT implicitly endorse? Did SCT implicitly endorse? Flaws? Flaws? Assumes perfect market power Assumes perfect market power Ignores exclusion Ignores exclusion Denigrates value of intrabrand competition as competition Denigrates value of intrabrand competition as competition Dampening Competition Theory Core concept from Sylvania Intrabrand competition is real competition Responsive to consumers Pressure on suppliers Promotes interbrand Mostly ignored by economic writing on vertical restraints Does it fit well with observed behaviour?

12. 12 Does Intrabrand Competition Have Independent Competitive Value? An Illustration Manufacturer/ Supplier Rival Dealers Some Mfr Assumptions: 1.Market power is imperfect (cant simply raise price as predicted by SMP). 2.Cost of vertical integration is prohibitive (so must work with independent dealers). Some Dealer Assumptions: 1. No free-riders. 2. A discounter emerges. 3. Price war erupts. 4.Dealers ALL reduce services/promotion. 5.Sales begin to fall overall.

13. 13 Manufacturers Options The Mfrs Dilemma: My dealers have reduced promotion and my sales are dropping, what can I do? The Mfrs Dilemma: My dealers have reduced promotion and my sales are dropping, what can I do? £$ 2. Increase efficiency and lower prices. (Sylvanias solution) 1.Use RPM to Restore Incentive to Promote (Leegins solution) (Benjamin Klein, Competitive Resale Price Maintenance in the Absence of Free Riding, 76 Antitrust L.J. 431 (2010))

14. 14 Two Options/Two Sets of Priors Option 1: Restraint Option 1: Restraint Restrict intrabrand to enhance interbrand Restrict intrabrand to enhance interbrand Use RPM to Protect Dealer Margin Use RPM to Protect Dealer Margin Dealer will use margin to promote product Dealer will use margin to promote product Interbrand competition will discipline price Interbrand competition will discipline price Mfr and consumer interests are aligned Mfr and consumer interests are aligned Protects supplier autonomy Protects supplier autonomy Option 2: Market Forces Market Establishes Competitive Dealer Margin Noise from dealers provides incentive for dealer and supplier to become more efficient and lower price Dealer is responding to consumer choice and communicating it to supplier Suppliers compete to provide best margin/volume combination Supplier can use non-price restraints and performance- based discounts to secure promotion Limits supplier autonomy

15. 15 Margin Wars & Vertical Restraints Cost of productionCost of distribution = Price to consumers Key Assumption from Sylvania & Leegin: Supplier has interest in minimizing cost of distribution, so adopt rules that promote supplier autonomy. Alternate Assumption: Dealers have competing interest in minimizing cost of production, so adopt rules that promote dealer autonomy. The Antitrust Dilemma? What rule of law will permit lively interaction among suppliers, dealers, and consumers to determine optimal mix? +

16. Part II: Continuing Debate within the U.S. Antitrust Enforcement Community

17. 17 Recollect the Complexity of the U.S. Competition Policy System Who has a voice in the post-Leegin debate? FederalState Congress DOJ Antitrust Division FTCLegislature Antitrust Enforcers (OAGs) Private Sector Defence BarPlaintiffs Bar Academic Commentators Interested Groups (Consumer Organizations & Business Firms) Public Sector

18. 18 Congress; Overruling Leegin S. 148/H.R. 3190 – The Discount Pricing Consumer Protection Act S. 148/H.R. 3190 – The Discount Pricing Consumer Protection Act Findings recount history of Dr. Miles and abandonment in Leegin Findings recount history of Dr. Miles and abandonment in Leegin Amends Sherman Act, §1: Amends Sherman Act, §1: Any contract, combination, conspiracy, or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate this Act.Any contract, combination, conspiracy, or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate this Act. Second attempt since 2007; depth of support not clear Second attempt since 2007; depth of support not clear Would abandon generality and flexibility of Section 1 Would abandon generality and flexibility of Section 1

19. 19 DOJ/Antitrust Division: Working Within Leegin Speech by Christine Varney (Oct. 7, 2009) Speech by Christine Varney (Oct. 7, 2009) Leegin as an invitation: Leegin as an invitation: As courts gain experience considering the effects of these restraints by applying the rule of reason over the course of decisions, they can establish the litigation structure to ensure the rule operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses. Courts can, for example, devise rules over time for offering proof, or even presumptions where justified, to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote procompetitive ones. Leegin, 551 U.S. at 898-99. As courts gain experience considering the effects of these restraints by applying the rule of reason over the course of decisions, they can establish the litigation structure to ensure the rule operates to eliminate anticompetitive restraints from the market and to provide more guidance to businesses. Courts can, for example, devise rules over time for offering proof, or even presumptions where justified, to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote procompetitive ones. Leegin, 551 U.S. at 898-99. Reflect some distrust of comprehensive rule of reason? Reflect some distrust of comprehensive rule of reason?

20. 20 DOJ/Antitrust Division contd General Principles General Principles Structured rule of reason Structured rule of reason Euphemism for something less than comprehensive rule of reason Euphemism for something less than comprehensive rule of reason Presumptions and burden shifting Presumptions and burden shifting Sliding scale as in mergers Sliding scale as in mergers Preserves possibility of per se rule Preserves possibility of per se rule Specific Tests for Each Leegin Scenario Collusion Scenarios Exclusion Scenarios Role of three Leegin factors

21. 21 FTC -- A More Complex Picture Overrule or Work Within Leegin? Chairman Leibowitz Chairman Leibowitz January 2007 January 2007 Then Commissioner, he dissents from Leegin Amicus Then Commissioner, he dissents from Leegin Amicus May 2008 May 2008 Votes in favor of Nine West petition Votes in favor of Nine West petition Spring 2009 Spring 2009 As Chairman, supports bill to overrule Leegin at ABA Spring Meeting As Chairman, supports bill to overrule Leegin at ABA Spring Meeting Commission Positions Pre-Leegin Amicus Brief Kovacic & Rosch likely still support Leegin outcome Post-Leegin Nine West Consent Decree Modification New Commissioners Could Determine FTC Position Ramirez & Brill

22. 22 FTC -- A Closer Look at Nine West Petition Granted (4-0) General Principles RPM NOT per se lawful Leegins invitation could mean agencies should explore truncated approaches using three factors RPM could be inherently suspect (Polygram) presumptions and phased inquiries Nine West demonstrated: No market power + RPM initiated by Nine West, …so no likely anticompetitive effect But…NW failed to demonstrate how RPM would increase demand for its products, so monitoring required What was involved? A petition by a shoe mfr to modify a pre- Leegin consent decree that prohibited its use of RPM.

23. 23 A Closer Look at Nine West contd Through the Commissions own enforcement work, research, and external consultations such as workshops, we anticipate further refinements to this analysis, including the further specification of scenarios in which RPM poses potential hazards and those in which it does not. Workshop held in May 2009; no Report yet

24. 24 Basis for Federal Consensus? If Leegin is not overruled by Congress… DOJ/Antitrust DivisionFTC Common Ground: Look for structured/truncated ways to identify bad RPM.

25. 25 The States Courts & Legislation Courts & Legislation Most state antitrust laws expressly or by court decision follow federal law Most state antitrust laws expressly or by court decision follow federal law So far, at least two state courts have decided to follow Leegin So far, at least two state courts have decided to follow Leegin Some states have specific prohibitions of RPM (NY) Some states have specific prohibitions of RPM (NY) Maryland amended law to reject Leegin Maryland amended law to reject Leegin So far the only Leegin repealer So far the only Leegin repealer OAG Enforcement Amicus in Leegin supporting Dr. Miles (37 states) Opposed Nine West Petition (27 states) Cases Filed Since Leegin Herman Miller (NY, IL, MI) Tempur Pedic (NY) Derma-Quest (CA)

26. Some Critical Questions Does SMP theory convincingly dispose of all concerns about loss of intrabrand competition? Does SMP theory convincingly dispose of all concerns about loss of intrabrand competition? Can intrabrand stimulate interbrand competition in some circumstances? Can intrabrand stimulate interbrand competition in some circumstances? How can antitrust rules best calibrate relationship among suppliers, dealers. and consumers? How can antitrust rules best calibrate relationship among suppliers, dealers. and consumers? 26 Manufacturer/ Supplier Dealers Consumers

27. 27 Concluding Thoughts on U.S. If Leegin is not overruled… If Leegin is not overruled… DOJ/FTC will focus on refining test for effects DOJ/FTC will focus on refining test for effects Few cases are likely (never been a high priority) Few cases are likely (never been a high priority) FTC more likely to pursue? FTC more likely to pursue? Will courts be receptive to abbreviated analysis? Will courts be receptive to abbreviated analysis? Regardless of Leegin… Regardless of Leegin… Some states will continue to prosecute Some states will continue to prosecute Will these cases trigger private damages actions? Will these cases trigger private damages actions? Intrabrand competition will remain marginalized Intrabrand competition will remain marginalized