© Hogan & Hartson LLP. All rights reserved. The Evolving Standards For Defining “Exclusionary Conduct” in the United States Philip C. Larson November 28,

© Hogan & Hartson LLP. All rights reserved.

The Evolving StandardsFor Defining “Exclusionary

Conduct”in the United States

Philip C. LarsonNovember 28, 2007

Brussels


THE STANDARDS FOR EVALUATING THE CONDUCT OF SINGLE DOMINANT FIRMS IN THE U.S.

• Sherman Act § 2 covers both attempted and actual monopolization

• Actual monopolization

o Monopoly power

– Power to control price and exclude competition

– Usually require >70-75% market share

o Willful acquisition or maintenance of that power (“as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident”)

• Attempted monopolization

o “Dangerous probability” of monopoly power (usually >50% market share)

o Specific intent to monopolize

• Both also require something more – “exclusionary conduct”


WHY IS “EXCLUSIONARY CONDUCT” SO IMPORTANT?• All competitive conduct designed to gain at the expense of rivals

• US antitrust laws

o Generally allow even a monopolist to exercise or exploit lawfully acquired market power

– E.g., allows “monopoly pricing”

– Incentive and reward for superior performance and innovation

– Allows fair but aggressive competition

o Protects competition, not competitors

– Encourage efficiency

– Avoid protecting less efficient rivals

o Prohibits only “antitrust injury”

• Need a way to define conduct that goes beyond fair but aggressive competition

• No settled definition in precedent to date


U.S. COURTS AND AGENCIES HAVE CONSIDERED A NUMBER OF APPROACHES TO DEFINE WHEN CONDUCT IS “EXCLUSIONARY”

• “Profit sacrifice” test – departure from profit-maximizing behavior (but what time frame relevant?)

• “No economic sense” test – conduct makes no economic sense except as a way of eliminating competition

• “Less efficient rival” test – conduct can’t be exclusionary unless would eliminate equally or more efficient rival

• “Balancing” test – balance efficiency or other benefits of conduct against effects on consumers and rivals

• Also use “cheap or naked exclusion“ analysis

o Can be low cost or no cost conduct

o Fraud or deception in standards making is example


THE NEED FOR AN APPROPRIATE STANDARDIS PARTICULARLY ACUTE REGARDING PRICE COMPETITION

• Don’t want to use antitrust laws to prevent the very competition they are intended to promote

o Short-term and long-term effects of discounts may vary

o Discounts almost always beneficial to customers/consumers in short term

o But what about long-term?

• Has led increasingly toward cost-based or other accounting test

• We’ll focus briefly today on several forms of price competition by single firm with substantial market power or monopoly power


PREDATORY PRICING/BUYING

• Most vivid example of cost-based approach

• Predatory pricing (Brooke Group) – requires

o Pricing “below cost” (probably average variable cost)

o Expectation of recoupment

• Predatory buying (Weyerhaeuser) – requires

o Excess payment for input

o “Below cost” sales of output

o Expectation of recoupment


BUNDLING• Offering a discount where two or more products purchased together

o May promote both purchasing and selling efficiencies and other benefits

o Question is long-term effects when monopoly product is part of the bundle

• LePage’s v. 3M (3d Cir. 2003) – non-cost-based test

o Prohibited bundling that foreclosed part of market to a competitor that did not manufacture equally broad array of products so couldn’t make comparable offer

o Rejected argument that bundling can’t be anti-competitive if price is “above cost”

o Focused on customers’ inability to give up the benefits of the bundle

o No focus on whether competitors are as efficient as the bundling firm

• PeaceHealth (9th Cir. 2007)

o Adopted cost-based test

o Bundling not unlawful unless “bundler” is selling product(s) on which “bundler” competes with plaintiff below average variable cost if entire discount attributed to such product(s)

o Supreme Court may ultimately adopt this position (also recommended by Antitrust Modernization Commission)

o Left open possible tying claim


COST/PRICE SQUEEZE• May occur in two situations

o Dominant supplier (e.g., utility) sells same product at wholesale and at “retail” (to end users) in competition with wholesale customers

o Dominant supplier of product in “upstream” market competes in “downstream” market with customers who must incorporate that product as a necessary input in “downstream” market

• Allegation is that dominant supplier can make it impossible for “downstream” competitors to compete by imposing too high a price in “upstream” market and offering too low a price in “downstream” market

• At least two “accounting-based” approaches

o “Transfer price” analysis – could dominant firm have made money in “downstream” market if it had paid the same price for “upstream” input as it charged competitors?

o “Comparative rate of return” analysis – how do dominant firm’s margins in the “upstream” and “downstream” markets compare?

• No consensus yet on what approaches should apply or what impact they will have


EXCLUSIVITY/LOYALTY DISCOUNTS

• Also subject to Sherman Act § 1 regarding agreements in restraint of trade

• Analysis less cost-based and focuses on

o Supplier’s market share/market power

o Percentage of market “foreclosed” by the pricing policy

o Impact of pricing policy on competitors’ access to key customers or distribution channels

o Duration of arrangement


CONCLUSION

• No consensus on how to define “exclusionary conduct”

• Even where cost-based or “accounting” tests may be applied, courts will continue to disagree on how to define “exclusionary conduct”

• Non-pricing conduct (e.g., refusals to deal) may be even more difficult to evaluate


Baltimore

Beijing

Berlin

Boulder

Brussels

Caracas

Colorado Springs

Denver

Geneva

Hong Kong

London

Los Angeles

Miami

Moscow

Munich

New York

Northern Virginia

Paris

Shanghai

Tokyo

Warsaw

Washington, DC

www.hhlaw.com

For more information onHogan & Hartson, please visit us at

Documents

© Hogan & Hartson LLP. All rights reserved. The Evolving Standards For Defining “Exclusionary Conduct” in the United States Philip C. Larson November 28,