News
Litigation
Jun. 22, 2002
States of Flux
On May 7, a panel of experts gathered at Fulbright & Jaworski in Los Angeles to discuss recent developments in antitrust law, including the Microsoft case, the federalism debate and proposed legislation redefining conspiracy, and the impact of those developments on litigation in California.
ROUNTABLE
A. Peter Kezirian Jr.
Former general counsel for the California Department of Corporations (1995-98)Regulating managed care, financial services and securities in California
Donald F. Woods Jr.
Of counsel, Los Angeles' Hennigan Bennett & Dorman
Antitrust and business litigation
Robert H. Lande
Venable Professor of Law, University of Baltimore; senior research fellow, American Antitrust Institute
Antitrust
Joshua D. Lichtman
Associate, Los Angeles' Fulbright & Jaworski
Commercial litigation
Sen. Dick Ackerman
California State Senate, 33rd District (Orange County)
Former member of the California Law Revision Commission
On May 7, a panel of experts gathered at Fulbright & Jaworski in Los Angeles to discuss recent developments in antitrust law, including the Microsoft case, the federalism debate and proposed legislation redefining conspiracy, and the impact of those developments on litigation in California.
Kezirian: Antitrust is an issue that has come and gone, but with the Microsoft issues that have come out recently, I think it's important for us to identify some of those issues in the antitrust, and, more generally, in the competition law that are facing businesses, especially businesses in the technology arena.
One of these that has become most apparent is, What are the issues of federal and state regulation? What changes are happening and what are merging issues that have come out of this, not only the Microsoft decision, but also this post-Microsoft environment.
Ackerman: A little perspective I have: I'm basically sort of a states' rights and local control person. So generally when I look at a topic like this, I want to see it handled, dealt with at the lowest possible level, if you will, either at local level, city, county, state.
So I'm generally reluctant to go to the federal level unless there is a need. I think particularly in the high-tech area, times and issues have changed.
Probably back when a lot of the antitrust original litigation was done, they were really looking at more of a local economy or regional economy, and now, obviously, we're looking at a global economy in many areas, particularly in the high-tech area.
Another thing that comes up is the duplicity of lawsuits. It becomes very costly to have to defend lawsuits in all 50 states. That is going to cost you a lot more than if you just defend one general lawsuit.
I think there is sort of an emergence in the national role, if you look at the tobacco settlement that has gone on, if you look at the Microsoft case, where I think people are looking for a better way to handle these matters.
And a lot of times I think it is going to be with some federal or national - I won't necessarily say pre-emption - but I think many of these cases are better handled at the federal level than the state level.
Particularly in the high-tech area which we have, where things change very, very dramatically and very, very quickly, and these are done on an international scale, I think it makes a lot of sense to probably look at handling a lot of these things in the future at the federal level as opposed to the state level.
Kezirian: Has everyone seen a trend toward more of a global or federalization of these kinds of issues? Is there anyone making the case for state enforcement or the state-by-state approach?
Lande: Sure. I'll be glad to do that. I will certainly concede that the ideal would be, a problem like the Microsoft problem would be handled at the federal level and only the federal level. That would certainly be the ideal.
However, we have a system with disbursal of power. If one part of our system gets out of whack, then another part of our system will take up the slack and make sure that there aren't radical swings from one administration to another, from one year to another, from one era to another.
In the Microsoft case, the state sued at the same time as the federal enforcers sued, and they quite happily played second fiddle for years. That is, they trusted what the federal enforcers were doing. They went along with it. It was sort of a need-to sort of thing.
Then there was a change in administration, and the state tried to go along with it even then. When the federal enforcers, for example, dropped the structural remedies and said, "We no longer want to break up Microsoft," the states went along with it, sort of reluctantly, but sort of for the interest of unity, for the interest of one national approach. "Whether we agree with it or not, we'll defer to the federal enforcers."
But then the federal enforcers came out with the consent order that many of the state enforcers saw as not even close. It was a radical departure from what the previous administration had asked for and was perceived by the state to be a mere slap on the wrist for Microsoft.
So with reluctance and with great turmoil and with a great split in the states, they conferenced among themselves and said, "Yes, federal deference. Yes, it would be best to do it at the federal level, but there still has to be antitrust enforcements.
Congress wanted there to be these antitrust laws enforced. The federal enforcers have abdicated. So, with reluctance, this is a case where we have to break from the feds and do it."
Woods: I just wanted to point out that the state attorney generals over
the last 15 years or more have become a lot more active in the antitrust area. Prior to that, they essentially were nonexistent.
Especially during the Reagan administrations, and now two Bush administrations, NAAG, the National Association of Attorney Generals, has come out with their own policy guidelines.
One of the benefits of having a public enforcement agency at the federal and state level is that they pursue cases with some overriding economic policy in mind. They are trying to make policy, not just cases.
And when the state attorney generals felt that the federal guidelines put out by the Department of Justice were too conservative, they created their own. I think it's a benefit to all markets that we have the republican form of government that allows experimentation at the state level.
Kezirian: In terms of other areas of regulation, I know in securities we've gone from a dual regulator to a single regulator. But it seems in antitrust, we seem to be going the other way, and there seems to be some value in it. Can you elaborate on that a little bit, why this trend seems to be divergent, or what makes antitrust special?
Woods: I don't know if it's divergent. I agree with professor Lande that the states tend to move in when they feel that the federal government isn't doing the job that they think is appropriate, and that's the same in the antitrust area.
When the state attorney generals have had enough political pressure to do something, and they feel that they have the ability to do it - and in certain key states like New York and California they certainly have the ability to do it, and they certainly have large enough markets that it makes sense to act on a state level - they have moved into the void.
But when the federal government is strong, and, for example, when the Clinton administration was vigorously pursuing the Microsoft case, as professor Lande pointed out, the state attorney generals were perfectly happy to go along with federal enforcement. So it's good to have a backup system in the states, and I'm certainly in favor of it and hope they continue to do it.
Kezirian: Josh, do you see the emergence of NAAG and others to have a different point of view than the federal government? Are they complementary or competing enforcements?
Lichtman: I would say, in general, they would be complementary. Certainly it is ... too late in the day to go back to having only federal regulation in this area. The rights of states to be involved in the regulation are too strong under the Sherman Act to go back to federal regulation only. So while it may or may not from a hypothetical standpoint be preferable to have one national law, I just don't think that is, practically, going to happen.
From the standpoint of the state enforcers being competing or complementary, I think in general they would be complementary, except in instances where there is significant political pressure or perhaps a perception of political gain from being more aggressive in the enforcement.
One thing that Don had alluded to was that perhaps for the states it would be only those states where there is significant either consumer-based or public pressure or sufficiently large market, like California or New York, to lead to more aggressive enforcement that could be perceived as competitive.
I think one problem, at least, that I see in the way the states have gone about the Microsoft case is that you also then have a threat of someone like the attorney general of Iowa to be way out in front of what other people are doing in the enforcement.
So perhaps at that level it is competitive and throws open the possibility of the kinds of harm that Sen. Ackerman was talking about where you may get inconsistent enforcement on a national level when it really should be done on a state level.
Kezirian: This is from my point of view in state government: Sometimes there are certain policy issues that are more general welfare than they are business practices. It may be in terms of certain retail sales that won't have as strong of an impact on social welfare as, say, hospital chains in terms of what it has.
Can the federal government be as careful in dealing with some of these business concerns that impact social welfare versus a state, or do states have different interests in terms of evaluating not only antitrust, which I think is kind of narrowly defined, but generally anti-competitive laws which seem to be a little bit broader than general antitrust discussions?
Woods: I can suggest that when you get down to the state level and have 50 different jurisdictions enacting laws, frequently there is no overarching principle or policy that's guiding them.
For example, take the tort of tortious interference with prospective advantage. That is a tort, and you can be held for punitive damages when not a single part of the factors in presenting a prima facie case has anything to do with whether you're increasing or enhancing competition. It's kind of a moralistic, situational type of business tort, and there are a lot of them like that.
While in the antitrust field, the overarching principle that guides the decisions, at least now in the modern era, is consumer welfare and increased competition.
So you end up with the tension between enforcing an antitrust law where you're looking to increase consumer welfare and increase competition, and you have a state tort law that doesn't even consider that, except maybe by way of an affirmative defense.
So it's good to have the states, and they can experiment with these different laws and try different approaches, but frequently it leads to inconsistent policy results.
Kezirian: Sen. Ackerman, when posed with the possibility of inconsistent policy results, are the Legislature and the government set up in such a way where you can work out these kinds of inconsistencies when looking to prepare a draft legislation?
Ackerman: Not always. One of the problems we have is having uniform laws between the states. We're all aware there is a Uniform Commercial Code, which most states have, although some states take different variations with it.
To the extent you have inconsistencies in major areas like warranties or forms or disclosures - and realize that most of our companies now, not just in high tech but in many areas, are dealing with all 50 states, are dealing nationally and internationally - to the extent you have to have 50 different forms, 50 different rules, 50 different procedures for all the different states, I think it makes our businesses less competitive.
I think the question is, when should the feds or when should the Congress step in and say, "We need to have a uniform law to make our business competitive on it at an international level," and when can we just let the states do what they want?
I don't see a lot of working to try and iron out a lot of these things between major states like New York and California, other than the work done on uniform codes. There is a lot of work done on that, but I'm not convinced, just seeing what's going on in California, a lot of states feel, "We are a big state. We can do what we want. And if they want to do business in our state, they have to do it our way." Not to get shortsighted on it, but sometimes we have to look at the larger picture.
Lande: I would just like to add a couple of comments. I think the courts do a wonderful job coordinating things implicitly. If the state gets too far out of line in an antitrust area, the court won't let them get away with it. They will slap them down real hard and real fast.
Second, there is a lot of coordination done from state to state and between the state and the federal workers. There is a working group, the NAAG working group, that keeps the states coordinating with one another. They have wonderful relationships with the federal enforcer. Talk to anyone, and they have never been better. You can talk to people at the federal level, at the state level; they communicate wonderfully.
Finally, there are going to be times when the state enforcers are closer to the ground and just have a better sense of what is really going on than the federal enforcers. The hospital area that you brought up earlier might be one of those areas where Big Brother in Washington maybe doesn't quite understand the local concerns as well as the state people. The state attorney generals seem to have a better record in the hospital merger area than do the federal enforcers, so that might vary from industry to industry.
Kezirian: I want to pick up the point about coordination. Yes, there may be more coordination than ever before, but let's step into the shoes of our clients on this one, where you have not only public enforcement through either federal or state level, but if we look at private enforcement, is there a lot of comfort in that there's coordination on the public level if these policy cleavages still exist and are open to private plaintiffs in terms of what they can bring?
And what kind of advice or what kind of structure can a client take on or a corporation when embarking on making what would be deemed taking advantage of an intelligent business opportunity but is now posing more in a growing realm of risk, and risks that we may not all be able to identify?
Woods: The public enforcement agencies do tend to try to create a consistent, uniform, well-designed policy, while private enforcement by individual firms are seeking their self-interest. And private plaintiffs' attorneys are seeking their clients' best interest and their own interest. So frequently there are examples of abuse in bringing cases and maintaining cases. And the failure to self-limit among the private bar has always been the biggest criticism of private enforcement of the antitrust laws and a lot of other laws.
But a lot of noted commentators like Judge Posner have said that they think the day of private enforcement is becoming more and more appropriate.
First of all, they comment that criminal enforcement of the antitrust laws is too much and has a lot of disadvantages, which I won't go into, but the days of self-abuse and a lot of random antitrust complaints is coming up less and less because the judges are more educated about antitrust. The science of economics is better understood by the practitioners and by the judges and by the legislators, so it's easier to identify poor cases or poorly taken cases than it has been in the past, and they are quickly being thrown out.
With the guidelines that the public agencies have adopted with certain safe harbors for vertical conduct and safe harbors on mergers, the abuse of the private bar has been reduced substantially. In fact, nowadays, it's hard to find an attorney who will take a plaintiff's contingency case, certainly in the vertical area.
So the disadvantages that have been used or commented upon in the past have been minimized, and there are a lot of advantages to private enforcement. Because if you have a private action, you start out with a team of prosecutors who already know the industry; they know exactly what the conduct is that they are upset about; they know exactly how it affects their business, and they start out years ahead of public investigators and public enforcers, who have to learn the industry, meet the witnesses, learn how everything functions and then prosecute it.
The other big advantage of private enforcement is that the remedy, the damages, go to the victims. In public enforcement, you either have criminal fines or criminal imprisonment, or you have some kind of structural remedy which might be too little too late, as suggested by the appellate court in the Microsoft case. So there are a lot of us who feel private enforcement in the antitrust area is really good and is better.
Kezirian: And that enforcement should be both on the state and federal level for private enforcement?
Woods: Sure.
Lichtman: There are certainly a couple of structural issues that would be posed by increased private enforcement, either at a state or federal level, the first of which goes directly back to whether you're going to have state law versus federal law covering these issues. Certainly when you've got both state and federal law to deal with and private actions, there's a multiplicity of lawsuits that can be brought in various forums.
From a standpoint of representing defendants in these kinds of cases, more often, certainly, there's a desire to be in federal court, which you don't have as often with the state law causes of action. In federal court you're going to find, hopefully, better judges who can devote more time to these sensitive issues.
One thing that Don mentioned, too, is that these kinds of cases are complicated, and they are better resolved the more educated the judiciary can be. If you've got the cases going into federal court, there's a better chance that that's going to happen. Also, those judges tend to be less concerned about the narrow political issues. And in these kinds of cases, political issues are quite significant where you've got claims of consumer harm or damage to local interests or local businesses where the defendant may be a larger national company.
So from that standpoint, from defending these cases, it's certainly preferable to be in federal court, which means federal law rather than state law.
The other aspect to that is, once you've got different states' laws, it's almost impossible to circumscribe your conduct to each state's law to make sure you're in compliance with that.
The other issue with private action is, there is a significant question about the defendant's due process rights and the ability to obtain a judgment that is res judicata, especially in a case that is brought by one competitor out of a number of competitors in the particular industry; leaving aside another issue of whether the end-use consumer would have a right to bring a lawsuit and whether or not as a defendant you could obtain a judgment that would be binding on those people, so that's a significant issue in these kinds of cases.
Lande: Actually, I'm going to have to respectfully disagree with you. I don't believe the substantive differences in the antitrust area matter very much from state to state, with some exceptions we can come up with. There are great differences in terms of class action certification from state to state. Those differences are tremendous. But rarely is it the case that conduct is illegal in California and legal in New York, and illegal under the federal approach and legal under the approach of many different states. With exceptions, that is very rarely the case.
The vast majority of private cases in this area - the vast, vast majority - are follow-on cases to federal cartel actions. That is, firms are caught fixing prices, rigging bids; the feds prosecute them; they are found guilty; they are usually sentenced to jail. Then there is a slew of follow-on cases, every conceivable class you can imagine, 10, sometimes even 100 different class actions, sometimes in every state in the country.
So we are not really questioning whether the underlying conduct was illegal. It's, what about the class action certification rules for various classes in various sections of the country? I agree with the previous speaker that the federal judges, in particular, are doing a wonderful job of throwing out bogus cases.
Are there more abuses in the interests? Sure. There are cases we all know of where private class action attorneys will sell out their class in order to get large fees. We can point to anecdotes on both sides where there are abuses. But still, remember, most of these are old-fashioned, garden-variety cartel cases where we all agree that the conduct was anti-competitive.
Lichtman: Just as a response to that, a couple of the areas where there, at least from a California standpoint, could be some substantive issues that would play into this involve the California unfair competition statute, which vastly expands the kind of lawsuits that can be brought for basically anything, and also the more stringent requirements for antitrust injury in federal law than is really required under some forms of state law.
Those two areas would pose, I think, some substantive differences, and in particular the unfair competition statute, which, unlike federal law, here in California, at least, allows anybody to sue in a representative action on behalf of the public for anything with no guarantee, unless the defendant takes the lead in getting the case certified as a class action, that there will be a binding res judicata effect of even a judgment in favor of the defendant. Those do pose some significant risks. I'm not sure they are antitrust-specific, but they can play into cases that involve antitrust-type allegations.
Kezirian: It goes to the broadening of antitrust and anti-competition. There are some anti-competition laws that are broader than antitrust. In thinking of those contexts, professor Lande, would you still think that states are much more aligned than one would think, even if you look at a broader antitrust point of view?
Lande: I guess I would still stick with my conclusions that the vast majority of the cases we're talking about are for old-fashioned, garden-variety price fixing. I actually had a little bit of experience with a pricing case under the California law. And that law is very different from the substantive law that is in effect in most parts of the country. There are differences, no question.
In fact, I'm pretty sure that when I made my original comment, I said, "Yes, there are some exceptions," and I was thinking of California's Cartwright Act as an example. There are substantive differences, no question. But I still stick with my original claim that mostly what we're talking about is follow-up suits to old-fashioned cartel. Those are the easiest cases for most plaintiff lawyers to bring, and that's what we most tend to see.
Kezirian: If you're seeing increased activity in the technology sector, where timing is so important, do you still think that private actions in the technology sector - because those seem to be moments in time more than permanent advantages or the attempt to obtain a permanent or long-lasting advantage - does that change anybody's opinion on private enforcement?
Ackerman: I think the private enforcement and the private actions are still important, but realizing that both at the national level and the state level, those decisions are made many times, not solely, but partially on a political basis. The private action is probably not made on a political basis but made on an economic basis.
But the question that I think Peter started out with is, How are you going to advise your client in one of these matters when you have one private action filed? Then you may have two, three, four in California; then you may pick up a couple in New York. What do you do? How do you try to get this type of thing consolidated, or should we?
My general feeling is we should either get them consolidated if they are all in one state, or if multiple states are involved, get it consolidated on a federal level to try and avoid inconsistent judgments and try to get some uniformity so you can advise your client on what to do.
Lande: I would agree with that. Consolidation is wonderful. But often you do have separate state policy for class certification, and I tend to believe that those separate state policies ought to be given deference.
Kezirian: I think some of that, separate classifications for certification, also the private actions, brings us to the point that has been the age-old question of antitrust: Is antitrust there to protect consumers, or is it there to protect competition?
Is the bias in Legislature more for the protection of competition versus the protection of consumers? And has the balance shifted, in your point of view as an experienced legislator up in Sacramento?
Ackerman: I would think it is more pro-consumer as opposed to competitor. But using the Microsoft case as an example, I think it's harder to make an argument that consumers were hurt by the actions of Microsoft, and I think it's driven more, as I see it, from competitors who didn't like what was going on.
I think many times you have to look at the intent of the company. Are they inclusive in their other products? Is there an actual cost to the consumer? But generally, I would say California is probably looking at it more from a consumer level.
Lande: I really don't think that the California Microsoft case was done to protect competitors. I understand that Microsoft is trying to support that allegation, to make that allegation, because once you make that allegation, then the case becomes extremely suspicious. But I really don't think that's the intent of the California attorney general.
That is, no one says, at least to my knowledge, that the motivation on the part of the Department of Justice is to protect Microsoft, even though Microsoft gave huge campaign contributions to the Bush administration, but we all agree that that is just their philosophy.
But yet, sometimes people make that allegation about the California attorney general in the other states, and I just don't see evidence for that. They have their view of the best way to protect competition. We may agree or disagree, but I think we should give them the same deference that we give to the federal enforcers.
Kezirian: Going to an issue on competition and protection of consumers, are they mutually exclusive? Can you increase competition and also protect consumers, or do sometimes those interests diverge?
Lande: May I phrase it in terms of protecting competitors and consumers?
Kezirian: Sure.
Lande: Do the interests of competitors and consumers diverge in the interest? Yes, all the time. No question about it. In the Microsoft case, what is good for Sun, Oracle, AOL may or may not be in the best interest of consumers. No question about it.
I think we have to step back and say, you look at each proposal, whether by Microsoft, whether by the state of California and the other state attorney generals, and you have to ask, "Are these driven by someone's view as to what is in the interest of consumers, or is the state of California taking orders from Sun and Oracle and doing what is good for California companies, California competitors?"
I have never seen any evidence that the California attorney general's office is doing anything other than what it believes is in the interest of consumers.
Now, maybe they are right; maybe they are wrong, but to say that the one is suspicious because they get campaign contributions, then why wouldn't we say, "Well, then the interests of the Department of Justice, which got Microsoft campaign contributions, is suspicious"? I personally believe that the head of the antitrust division does what he does because he believes that's what is good for America, and I think that's what the California attorney general's office is doing. And we may disagree with that, of course.
Ackerman: I don't know how campaign contributions got into this thing, but you have to show damage to the consumer. You have to show some type of action that creates actual damage to the consumer. I'm not an expert in how much software costs. A lot of stuff I've read, particularly in the Microsoft cases, a lot of things they were charging were reasonable. In fact, they may even be below market.
If you're looking at what kind of line you're going to have, whether you are going to look at whether there is actual or significant damage to the consumer, or if you're actually trying to protect the competitors, I think that's a definite bright line.
Woods: I think the Supreme Court has clearly stated in a number of decisions that it is the protection of consumers that is the overarching policy now of the antitrust laws.
However, the courts also have to enforce various legislation, and a lot of legislation that is enacted by state and federal legislatures is by definition anti-competitive. Farm subsidies clearly is not a pro-competitive legislation, and the courts would have to enforce those laws. The recent subsidies that the Bush administration has applied to various imports to retaliate for conduct that they feel is occurring and hurting our companies overseas are arguably certainly not competitive. The Robinson-Patman Act, which was an enactment that modern economists would say is not necessarily pro-competitive certainly in all situations, and yet it is to be applied in all situations.
These are acts that are not pro-competitive, and yet the courts have to enforce them. Enforcing antitrust law through the judiciary, I think, is better in terms of getting an overall general policy than enacting individual little laws in every state and different laws from era to era on the federal level, because they tend to be inconsistent.
Lande: I will answer Sen. Ackerman's question. I mean, he was raising the question, is Microsoft charging "too much" for its software? There were roughly a hundred follow-up suits, all of which were alleging that, due to Microsoft's illegal actions, Microsoft software charges too much. Therefore, they want, on behalf of consumers, a good deal of that money back. And those cases will be tried by the courts, and we will find out at some point how they come out.
One thing you have to remember about the Microsoft case though, it's not only about the price of software. It's about innovation. Now, different sides disagree strongly with the best way to get the optimal level of innovation in this industry, but everybody agrees that securing more and better products in the computer industry is much more important than whether a particular piece of software sells for $49.
Kezirian: Picking up on innovation, I'll let Josh chime in, and maybe Josh can address this. Is the question of innovation pro-consumer or pro-competition?
Lichtman: That leads right into it. Certainly in reading the Microsoft decision, someone, I think, from professor Lande's standpoint would argue it is both pro-consumer and pro-competition, in the sense that at least a significant basis for the Microsoft decision is, we're going to ignore whether prices went down in the short term.
The issue here is there were or could have been better products on the market that the public wanted but couldn't get because of the anti-competitive conduct. And in a sense, it precluded a whole slew of innovation that reasonably would have led to better products or at least a broader range of products that would have been acceptable to consumers, which they have been deprived of because of the anti-competitive conduct.
That aspect of the case is, I suppose, a little bit harder to understand for consumers today. Those of us who simply at a consumer level have gone through the past 10 years of seeing computers get easier to use, generally better in quality and cheaper all at the same time would say, "I don't understand how we've been harmed."
It does take, to some degree, a sort of leap of faith in accepting as a factual finding that there would have been better and more innovative products than Microsoft has developed in the market but for the anti-competitive conduct. I think at that level, if you accept that that is true as a factual matter, it is not that hard to reconcile protection of consumers with protection of competitors.
Kezirian: In the last 10 years, we've seen a broadening of what is anti-competitive law, and we've seen kind of the concept of stakeholders appear in the discussion of acquisitions. You see stakeholders in grocery store mergers in what are small communities and small shops. You see stakeholders in terms of employees and their impact with mergers and consolidations. What is the impact of the stakeholder concepts?
And the stakeholders were probably most first introduced by the state attorney generals. How has that changed the pro-competition versus pro-consumer balancing act that we seem to focus on in the antitrust area?
Woods: I would say that to the extent that you have competitors pushing the enforcement agencies to bring antitrust actions, like Netscape, for example, to the extent you have employees groups, like an Enron, who are pushing for enforcement, labor unions pushing for enforcement, that, I would say as a general overstatement, probably historically has resulted in inconsistent and poor decisions in terms of an overall antitrust policy because you end up looking at how those particular isolated special interests are affected, rather than applying a uniform policy to each factual situation.
If you're guided by consumer welfare as your bottom line in all antitrust or any type of unfair, anti-competitive activity, you should result in the same result from case to case, and that seems to be the goal. I mean, that is historically what people want. If you benefit the consumers, you will benefit everybody. It will flow through the entire economy. And if you try to concentrate on that group as your identifiable group rather than any special interest group, you'll reach better results.
Kezirian: By focusing enforcement on the public agencies in Washington, D.C., does that insulate the public enforcer from these special interests, or do you think it makes them more vulnerable to the special interests, Don?
Woods: Well, I think it makes them vulnerable to the special interest groups, especially in terms of contributions and in terms of votes. I mean, labor unions may not make big contributions, but they have lots of votes, and it does affect. And I think it's undeniable that antitrust enforcement on the federal level has been influenced by what administration is in power.
Lande: I worked at the Federal Trade Commission for many years, and the first question you ask when someone comes in is, who is this person, and how are they trying to manipulate you to serve their interests as opposed to the public interest? Everyone does that. It's their job to do it. It's their job for their stockholders.
So as an enforcer, you get really good at separating the wheat from the chaff. That is, you get suspicious of absolutely everybody who comes in with a complaint. The first thing you do is, you raise your eyebrow and say, "How is this person trying to use me?" So whenever a Netscape comes in, on the one hand you want information from them, on the other hand you couldn't be more suspicious of their motive.
Every day people are trying to manipulate you. Let us give these people some credit. They get pretty good at it. They know when people are pushing their own interests. So verify what they say. And, in fact, if you didn't go out and try and solicit information from people in the industry, you wouldn't be doing your job. So I don't think it's that easy to manipulate the enforcers.
Kezirian: Do you think it's easier to manipulate a state enforcer or a federal enforcer?
Lande: I think it would depend on which enforcer.
Kezirian: Fair enough. We've talked about the present; we've talked a little bit about the past. I think we can talk a little bit about the future. Everyone has mentioned at one time or another that the Cartwright Act in California is a little bit different from every place else in the United States. Right now we have pending legislation, Senate Bill 1814, that would radically differentiate the Cartwright Bill. Does anyone want to comment on the efforts of the current Legislature or at least the proposed legislation on that at this time?
Ackerman: I would. First note that this legislation is sponsored by the attorney general and the trial attorneys. Basically, it would redefine conspiracy for action which the traditional definition would require two or more persons. This would, in essence, require one person. It does that by redefining what a parent subsidiary or affiliate relationship is.
So if you were a wholly owned subsidiary, you may have many of those, and you did some violation that might be violative of the act, it would not require you and another company. They could file suit against you on a one-company basis. In the research that I had done, I think there were very few states that had gone this far. In fact, there was a federal decision, which was the Copperwell decision, took this up as an interpretation of the Sherman Act that said, no, there has to be two different individuals, two different companies. So this would definitely be a change in California law, and it could impact other states considering to do the same thing.
Kezirian: If this law were to come into existence, could you possibly be in violation of this new provision but be in compliance with the state antitrust laws?
Ackerman: You probably could.
Lichtman: Well, you could. And, in fact, it's drafted in a way that is so broad, I think it's not a completely supportable interpretation of the drafting, but it could be interpreted to be so broad as to cover divisions within the same company or even separate employees within the same company as constituting a sufficient conspiracy for purposes of an antitrust violation under Section 1 of the Sherman Act or the correlating section of the Cartwright Act, which poses tremendous problems, obviously, for businesses trying to get some certainty as to whether their conduct is going to be actionable.
There are at least two other aspects of the bill that would seem noteworthy. First, on the monopolization side, this bill, if enacted, would create a cause of action for even indirect victims of the alleged monopolization.
One thing that professor Lande had talked about was the fairly severe antitrust standing requirements under federal law. This would essentially do away with any antitrust standing requirement to bring a state law monopolization claim, which could certainly lead to numerous new lawsuits on behalf of "consumers" for the kinds of things that up until now they have not been able to sue for.
The other thing that is noteworthy about this is it all purports to be declarative of existing law, which means it is applied retroactively and again poses significant risks.
Kezirian: Don, you're shaking your head.
Woods: Well, the monopolization enactment would clearly be different from the Cartwright Act. And it's very clear that California antitrust law differs from federal antitrust law, and that under the federal Sherman Act, you have Section 1 that applies to multifirm coordinated activity, and Section 2 applies to single-firm activity. And in California, the Cartwright Act only applies to multifirm activity. There is absolutely no provision for single-firm anti-competitive activity.
And I think adoption of a monopolization offense in the State of California would rationalize the state antitrust law with the federal law, and I think there would be an improvement over what we have now.
And I also think it would make unnecessary the artificial construct of defining a trust to include related entities. Both the federal law and the state law have a tremendous gap in that they don't cover single-firm anti-competitive activity until, on the federal level, it reaches near monopoly and, on the state level, it doesn't cover it at all.
So I think what the attorney general is doing, with this enactment of a new definition of what two firms are, is he is attempting to reach single-firm activity by defining one firm as two. And we wouldn't need it if we adopted the monopolization provision, and then we could reach single-firm activity. It's another whole question whether you want to reach single-firm conduct before it gets to the near monopoly level. But no jurisdiction I know of has attempted to do that.
Kezirian: Out in California we often think we are on the cutting edge, but professor Lande, are you seeing other types of states take similar types of action as in this proposed legislation?
Lande: I'm afraid I haven't read the proposed legislation. Insofar as it has indirect purchaser provisions, then certainly there are many other states that have indirect purchaser provisions. But insofar as it contains a redefinition of conspiracy - and I want to emphasize I haven't read it - I'm not aware of any other state that has done that.
Kezirian: Any comments or final thoughts?
Woods: I'll just comment on the Microsoft decision itself. I believe that in high-tech industries, which are common here in California and even here in Southern California, the decision made some helpful comments in that it says that in terms of remedies, structural-type remedies, like breaking up a company or conduct-type remedies, such as breaking up what's alleged to be a tie-in, really may not be appropriate in industries that are changing so rapidly that, by the time you reach decision, the conduct you're trying to enjoin is moot because you have new products and the industry has changed incredibly in a short period of time.
Also, I think the decision points out that old per se rules in dynamically changing industries probably don't make a lot of sense, and there were a lot of comments by the court in that area. And I think that's the wave of the future in high tech industries, that you really have to judge the specific conduct and the circumstances in the market in which you find it, and you can't make the old, per se, easy, formalistic type of responses as an attorney.
Ackerman: One of the interesting things that we didn't get to, which I had spent a little time researching, was whether or not we should have different rules for high tech and high-tech industry. And my general answer would be no.
The reason: If you just look at some of the statistics on some of these market holds - Lotus had 70 percent of the market in 1984 operating systems, a few years later, they had 15 percent of it; in 1995, Netscape had 90 percent of the market in certain kinds of systems, and a few years lat er, Microsoft had 90 percent.
What I really found interesting, in the San Francisco Chronicle article today, IBM, who 25 years ago we all thought was going to control the industry forever, they went down to secondary, third and way down the list. IBM just passed up Oracle yesterday in the database market, having 34 percent of the market.
So I think judges particularly have to keep that in mind when they are doing antitrust cases in this type of industry; that what happened on the date the suit was filed may be completely different by the time the matter gets heard before the judge.
A. Peter Kezirian Jr.
Former general counsel for the California Department of Corporations (1995-98)Regulating managed care, financial services and securities in California
Donald F. Woods Jr.
Of counsel, Los Angeles' Hennigan Bennett & Dorman
Antitrust and business litigation
Robert H. Lande
Venable Professor of Law, University of Baltimore; senior research fellow, American Antitrust Institute
Antitrust
Joshua D. Lichtman
Associate, Los Angeles' Fulbright & Jaworski
Commercial litigation
Sen. Dick Ackerman
California State Senate, 33rd District (Orange County)
Former member of the California Law Revision Commission
On May 7, a panel of experts gathered at Fulbright & Jaworski in Los Angeles to discuss recent developments in antitrust law, including the Microsoft case, the federalism debate and proposed legislation redefining conspiracy, and the impact of those developments on litigation in California.
Kezirian: Antitrust is an issue that has come and gone, but with the Microsoft issues that have come out recently, I think it's important for us to identify some of those issues in the antitrust, and, more generally, in the competition law that are facing businesses, especially businesses in the technology arena.
One of these that has become most apparent is, What are the issues of federal and state regulation? What changes are happening and what are merging issues that have come out of this, not only the Microsoft decision, but also this post-Microsoft environment.
Ackerman: A little perspective I have: I'm basically sort of a states' rights and local control person. So generally when I look at a topic like this, I want to see it handled, dealt with at the lowest possible level, if you will, either at local level, city, county, state.
So I'm generally reluctant to go to the federal level unless there is a need. I think particularly in the high-tech area, times and issues have changed.
Probably back when a lot of the antitrust original litigation was done, they were really looking at more of a local economy or regional economy, and now, obviously, we're looking at a global economy in many areas, particularly in the high-tech area.
Another thing that comes up is the duplicity of lawsuits. It becomes very costly to have to defend lawsuits in all 50 states. That is going to cost you a lot more than if you just defend one general lawsuit.
I think there is sort of an emergence in the national role, if you look at the tobacco settlement that has gone on, if you look at the Microsoft case, where I think people are looking for a better way to handle these matters.
And a lot of times I think it is going to be with some federal or national - I won't necessarily say pre-emption - but I think many of these cases are better handled at the federal level than the state level.
Particularly in the high-tech area which we have, where things change very, very dramatically and very, very quickly, and these are done on an international scale, I think it makes a lot of sense to probably look at handling a lot of these things in the future at the federal level as opposed to the state level.
Kezirian: Has everyone seen a trend toward more of a global or federalization of these kinds of issues? Is there anyone making the case for state enforcement or the state-by-state approach?
Lande: Sure. I'll be glad to do that. I will certainly concede that the ideal would be, a problem like the Microsoft problem would be handled at the federal level and only the federal level. That would certainly be the ideal.
However, we have a system with disbursal of power. If one part of our system gets out of whack, then another part of our system will take up the slack and make sure that there aren't radical swings from one administration to another, from one year to another, from one era to another.
In the Microsoft case, the state sued at the same time as the federal enforcers sued, and they quite happily played second fiddle for years. That is, they trusted what the federal enforcers were doing. They went along with it. It was sort of a need-to sort of thing.
Then there was a change in administration, and the state tried to go along with it even then. When the federal enforcers, for example, dropped the structural remedies and said, "We no longer want to break up Microsoft," the states went along with it, sort of reluctantly, but sort of for the interest of unity, for the interest of one national approach. "Whether we agree with it or not, we'll defer to the federal enforcers."
But then the federal enforcers came out with the consent order that many of the state enforcers saw as not even close. It was a radical departure from what the previous administration had asked for and was perceived by the state to be a mere slap on the wrist for Microsoft.
So with reluctance and with great turmoil and with a great split in the states, they conferenced among themselves and said, "Yes, federal deference. Yes, it would be best to do it at the federal level, but there still has to be antitrust enforcements.
Congress wanted there to be these antitrust laws enforced. The federal enforcers have abdicated. So, with reluctance, this is a case where we have to break from the feds and do it."
Woods: I just wanted to point out that the state attorney generals over
the last 15 years or more have become a lot more active in the antitrust area. Prior to that, they essentially were nonexistent.
Especially during the Reagan administrations, and now two Bush administrations, NAAG, the National Association of Attorney Generals, has come out with their own policy guidelines.
One of the benefits of having a public enforcement agency at the federal and state level is that they pursue cases with some overriding economic policy in mind. They are trying to make policy, not just cases.
And when the state attorney generals felt that the federal guidelines put out by the Department of Justice were too conservative, they created their own. I think it's a benefit to all markets that we have the republican form of government that allows experimentation at the state level.
Kezirian: In terms of other areas of regulation, I know in securities we've gone from a dual regulator to a single regulator. But it seems in antitrust, we seem to be going the other way, and there seems to be some value in it. Can you elaborate on that a little bit, why this trend seems to be divergent, or what makes antitrust special?
Woods: I don't know if it's divergent. I agree with professor Lande that the states tend to move in when they feel that the federal government isn't doing the job that they think is appropriate, and that's the same in the antitrust area.
When the state attorney generals have had enough political pressure to do something, and they feel that they have the ability to do it - and in certain key states like New York and California they certainly have the ability to do it, and they certainly have large enough markets that it makes sense to act on a state level - they have moved into the void.
But when the federal government is strong, and, for example, when the Clinton administration was vigorously pursuing the Microsoft case, as professor Lande pointed out, the state attorney generals were perfectly happy to go along with federal enforcement. So it's good to have a backup system in the states, and I'm certainly in favor of it and hope they continue to do it.
Kezirian: Josh, do you see the emergence of NAAG and others to have a different point of view than the federal government? Are they complementary or competing enforcements?
Lichtman: I would say, in general, they would be complementary. Certainly it is ... too late in the day to go back to having only federal regulation in this area. The rights of states to be involved in the regulation are too strong under the Sherman Act to go back to federal regulation only. So while it may or may not from a hypothetical standpoint be preferable to have one national law, I just don't think that is, practically, going to happen.
From the standpoint of the state enforcers being competing or complementary, I think in general they would be complementary, except in instances where there is significant political pressure or perhaps a perception of political gain from being more aggressive in the enforcement.
One thing that Don had alluded to was that perhaps for the states it would be only those states where there is significant either consumer-based or public pressure or sufficiently large market, like California or New York, to lead to more aggressive enforcement that could be perceived as competitive.
I think one problem, at least, that I see in the way the states have gone about the Microsoft case is that you also then have a threat of someone like the attorney general of Iowa to be way out in front of what other people are doing in the enforcement.
So perhaps at that level it is competitive and throws open the possibility of the kinds of harm that Sen. Ackerman was talking about where you may get inconsistent enforcement on a national level when it really should be done on a state level.
Kezirian: This is from my point of view in state government: Sometimes there are certain policy issues that are more general welfare than they are business practices. It may be in terms of certain retail sales that won't have as strong of an impact on social welfare as, say, hospital chains in terms of what it has.
Can the federal government be as careful in dealing with some of these business concerns that impact social welfare versus a state, or do states have different interests in terms of evaluating not only antitrust, which I think is kind of narrowly defined, but generally anti-competitive laws which seem to be a little bit broader than general antitrust discussions?
Woods: I can suggest that when you get down to the state level and have 50 different jurisdictions enacting laws, frequently there is no overarching principle or policy that's guiding them.
For example, take the tort of tortious interference with prospective advantage. That is a tort, and you can be held for punitive damages when not a single part of the factors in presenting a prima facie case has anything to do with whether you're increasing or enhancing competition. It's kind of a moralistic, situational type of business tort, and there are a lot of them like that.
While in the antitrust field, the overarching principle that guides the decisions, at least now in the modern era, is consumer welfare and increased competition.
So you end up with the tension between enforcing an antitrust law where you're looking to increase consumer welfare and increase competition, and you have a state tort law that doesn't even consider that, except maybe by way of an affirmative defense.
So it's good to have the states, and they can experiment with these different laws and try different approaches, but frequently it leads to inconsistent policy results.
Kezirian: Sen. Ackerman, when posed with the possibility of inconsistent policy results, are the Legislature and the government set up in such a way where you can work out these kinds of inconsistencies when looking to prepare a draft legislation?
Ackerman: Not always. One of the problems we have is having uniform laws between the states. We're all aware there is a Uniform Commercial Code, which most states have, although some states take different variations with it.
To the extent you have inconsistencies in major areas like warranties or forms or disclosures - and realize that most of our companies now, not just in high tech but in many areas, are dealing with all 50 states, are dealing nationally and internationally - to the extent you have to have 50 different forms, 50 different rules, 50 different procedures for all the different states, I think it makes our businesses less competitive.
I think the question is, when should the feds or when should the Congress step in and say, "We need to have a uniform law to make our business competitive on it at an international level," and when can we just let the states do what they want?
I don't see a lot of working to try and iron out a lot of these things between major states like New York and California, other than the work done on uniform codes. There is a lot of work done on that, but I'm not convinced, just seeing what's going on in California, a lot of states feel, "We are a big state. We can do what we want. And if they want to do business in our state, they have to do it our way." Not to get shortsighted on it, but sometimes we have to look at the larger picture.
Lande: I would just like to add a couple of comments. I think the courts do a wonderful job coordinating things implicitly. If the state gets too far out of line in an antitrust area, the court won't let them get away with it. They will slap them down real hard and real fast.
Second, there is a lot of coordination done from state to state and between the state and the federal workers. There is a working group, the NAAG working group, that keeps the states coordinating with one another. They have wonderful relationships with the federal enforcer. Talk to anyone, and they have never been better. You can talk to people at the federal level, at the state level; they communicate wonderfully.
Finally, there are going to be times when the state enforcers are closer to the ground and just have a better sense of what is really going on than the federal enforcers. The hospital area that you brought up earlier might be one of those areas where Big Brother in Washington maybe doesn't quite understand the local concerns as well as the state people. The state attorney generals seem to have a better record in the hospital merger area than do the federal enforcers, so that might vary from industry to industry.
Kezirian: I want to pick up the point about coordination. Yes, there may be more coordination than ever before, but let's step into the shoes of our clients on this one, where you have not only public enforcement through either federal or state level, but if we look at private enforcement, is there a lot of comfort in that there's coordination on the public level if these policy cleavages still exist and are open to private plaintiffs in terms of what they can bring?
And what kind of advice or what kind of structure can a client take on or a corporation when embarking on making what would be deemed taking advantage of an intelligent business opportunity but is now posing more in a growing realm of risk, and risks that we may not all be able to identify?
Woods: The public enforcement agencies do tend to try to create a consistent, uniform, well-designed policy, while private enforcement by individual firms are seeking their self-interest. And private plaintiffs' attorneys are seeking their clients' best interest and their own interest. So frequently there are examples of abuse in bringing cases and maintaining cases. And the failure to self-limit among the private bar has always been the biggest criticism of private enforcement of the antitrust laws and a lot of other laws.
But a lot of noted commentators like Judge Posner have said that they think the day of private enforcement is becoming more and more appropriate.
First of all, they comment that criminal enforcement of the antitrust laws is too much and has a lot of disadvantages, which I won't go into, but the days of self-abuse and a lot of random antitrust complaints is coming up less and less because the judges are more educated about antitrust. The science of economics is better understood by the practitioners and by the judges and by the legislators, so it's easier to identify poor cases or poorly taken cases than it has been in the past, and they are quickly being thrown out.
With the guidelines that the public agencies have adopted with certain safe harbors for vertical conduct and safe harbors on mergers, the abuse of the private bar has been reduced substantially. In fact, nowadays, it's hard to find an attorney who will take a plaintiff's contingency case, certainly in the vertical area.
So the disadvantages that have been used or commented upon in the past have been minimized, and there are a lot of advantages to private enforcement. Because if you have a private action, you start out with a team of prosecutors who already know the industry; they know exactly what the conduct is that they are upset about; they know exactly how it affects their business, and they start out years ahead of public investigators and public enforcers, who have to learn the industry, meet the witnesses, learn how everything functions and then prosecute it.
The other big advantage of private enforcement is that the remedy, the damages, go to the victims. In public enforcement, you either have criminal fines or criminal imprisonment, or you have some kind of structural remedy which might be too little too late, as suggested by the appellate court in the Microsoft case. So there are a lot of us who feel private enforcement in the antitrust area is really good and is better.
Kezirian: And that enforcement should be both on the state and federal level for private enforcement?
Woods: Sure.
Lichtman: There are certainly a couple of structural issues that would be posed by increased private enforcement, either at a state or federal level, the first of which goes directly back to whether you're going to have state law versus federal law covering these issues. Certainly when you've got both state and federal law to deal with and private actions, there's a multiplicity of lawsuits that can be brought in various forums.
From a standpoint of representing defendants in these kinds of cases, more often, certainly, there's a desire to be in federal court, which you don't have as often with the state law causes of action. In federal court you're going to find, hopefully, better judges who can devote more time to these sensitive issues.
One thing that Don mentioned, too, is that these kinds of cases are complicated, and they are better resolved the more educated the judiciary can be. If you've got the cases going into federal court, there's a better chance that that's going to happen. Also, those judges tend to be less concerned about the narrow political issues. And in these kinds of cases, political issues are quite significant where you've got claims of consumer harm or damage to local interests or local businesses where the defendant may be a larger national company.
So from that standpoint, from defending these cases, it's certainly preferable to be in federal court, which means federal law rather than state law.
The other aspect to that is, once you've got different states' laws, it's almost impossible to circumscribe your conduct to each state's law to make sure you're in compliance with that.
The other issue with private action is, there is a significant question about the defendant's due process rights and the ability to obtain a judgment that is res judicata, especially in a case that is brought by one competitor out of a number of competitors in the particular industry; leaving aside another issue of whether the end-use consumer would have a right to bring a lawsuit and whether or not as a defendant you could obtain a judgment that would be binding on those people, so that's a significant issue in these kinds of cases.
Lande: Actually, I'm going to have to respectfully disagree with you. I don't believe the substantive differences in the antitrust area matter very much from state to state, with some exceptions we can come up with. There are great differences in terms of class action certification from state to state. Those differences are tremendous. But rarely is it the case that conduct is illegal in California and legal in New York, and illegal under the federal approach and legal under the approach of many different states. With exceptions, that is very rarely the case.
The vast majority of private cases in this area - the vast, vast majority - are follow-on cases to federal cartel actions. That is, firms are caught fixing prices, rigging bids; the feds prosecute them; they are found guilty; they are usually sentenced to jail. Then there is a slew of follow-on cases, every conceivable class you can imagine, 10, sometimes even 100 different class actions, sometimes in every state in the country.
So we are not really questioning whether the underlying conduct was illegal. It's, what about the class action certification rules for various classes in various sections of the country? I agree with the previous speaker that the federal judges, in particular, are doing a wonderful job of throwing out bogus cases.
Are there more abuses in the interests? Sure. There are cases we all know of where private class action attorneys will sell out their class in order to get large fees. We can point to anecdotes on both sides where there are abuses. But still, remember, most of these are old-fashioned, garden-variety cartel cases where we all agree that the conduct was anti-competitive.
Lichtman: Just as a response to that, a couple of the areas where there, at least from a California standpoint, could be some substantive issues that would play into this involve the California unfair competition statute, which vastly expands the kind of lawsuits that can be brought for basically anything, and also the more stringent requirements for antitrust injury in federal law than is really required under some forms of state law.
Those two areas would pose, I think, some substantive differences, and in particular the unfair competition statute, which, unlike federal law, here in California, at least, allows anybody to sue in a representative action on behalf of the public for anything with no guarantee, unless the defendant takes the lead in getting the case certified as a class action, that there will be a binding res judicata effect of even a judgment in favor of the defendant. Those do pose some significant risks. I'm not sure they are antitrust-specific, but they can play into cases that involve antitrust-type allegations.
Kezirian: It goes to the broadening of antitrust and anti-competition. There are some anti-competition laws that are broader than antitrust. In thinking of those contexts, professor Lande, would you still think that states are much more aligned than one would think, even if you look at a broader antitrust point of view?
Lande: I guess I would still stick with my conclusions that the vast majority of the cases we're talking about are for old-fashioned, garden-variety price fixing. I actually had a little bit of experience with a pricing case under the California law. And that law is very different from the substantive law that is in effect in most parts of the country. There are differences, no question.
In fact, I'm pretty sure that when I made my original comment, I said, "Yes, there are some exceptions," and I was thinking of California's Cartwright Act as an example. There are substantive differences, no question. But I still stick with my original claim that mostly what we're talking about is follow-up suits to old-fashioned cartel. Those are the easiest cases for most plaintiff lawyers to bring, and that's what we most tend to see.
Kezirian: If you're seeing increased activity in the technology sector, where timing is so important, do you still think that private actions in the technology sector - because those seem to be moments in time more than permanent advantages or the attempt to obtain a permanent or long-lasting advantage - does that change anybody's opinion on private enforcement?
Ackerman: I think the private enforcement and the private actions are still important, but realizing that both at the national level and the state level, those decisions are made many times, not solely, but partially on a political basis. The private action is probably not made on a political basis but made on an economic basis.
But the question that I think Peter started out with is, How are you going to advise your client in one of these matters when you have one private action filed? Then you may have two, three, four in California; then you may pick up a couple in New York. What do you do? How do you try to get this type of thing consolidated, or should we?
My general feeling is we should either get them consolidated if they are all in one state, or if multiple states are involved, get it consolidated on a federal level to try and avoid inconsistent judgments and try to get some uniformity so you can advise your client on what to do.
Lande: I would agree with that. Consolidation is wonderful. But often you do have separate state policy for class certification, and I tend to believe that those separate state policies ought to be given deference.
Kezirian: I think some of that, separate classifications for certification, also the private actions, brings us to the point that has been the age-old question of antitrust: Is antitrust there to protect consumers, or is it there to protect competition?
Is the bias in Legislature more for the protection of competition versus the protection of consumers? And has the balance shifted, in your point of view as an experienced legislator up in Sacramento?
Ackerman: I would think it is more pro-consumer as opposed to competitor. But using the Microsoft case as an example, I think it's harder to make an argument that consumers were hurt by the actions of Microsoft, and I think it's driven more, as I see it, from competitors who didn't like what was going on.
I think many times you have to look at the intent of the company. Are they inclusive in their other products? Is there an actual cost to the consumer? But generally, I would say California is probably looking at it more from a consumer level.
Lande: I really don't think that the California Microsoft case was done to protect competitors. I understand that Microsoft is trying to support that allegation, to make that allegation, because once you make that allegation, then the case becomes extremely suspicious. But I really don't think that's the intent of the California attorney general.
That is, no one says, at least to my knowledge, that the motivation on the part of the Department of Justice is to protect Microsoft, even though Microsoft gave huge campaign contributions to the Bush administration, but we all agree that that is just their philosophy.
But yet, sometimes people make that allegation about the California attorney general in the other states, and I just don't see evidence for that. They have their view of the best way to protect competition. We may agree or disagree, but I think we should give them the same deference that we give to the federal enforcers.
Kezirian: Going to an issue on competition and protection of consumers, are they mutually exclusive? Can you increase competition and also protect consumers, or do sometimes those interests diverge?
Lande: May I phrase it in terms of protecting competitors and consumers?
Kezirian: Sure.
Lande: Do the interests of competitors and consumers diverge in the interest? Yes, all the time. No question about it. In the Microsoft case, what is good for Sun, Oracle, AOL may or may not be in the best interest of consumers. No question about it.
I think we have to step back and say, you look at each proposal, whether by Microsoft, whether by the state of California and the other state attorney generals, and you have to ask, "Are these driven by someone's view as to what is in the interest of consumers, or is the state of California taking orders from Sun and Oracle and doing what is good for California companies, California competitors?"
I have never seen any evidence that the California attorney general's office is doing anything other than what it believes is in the interest of consumers.
Now, maybe they are right; maybe they are wrong, but to say that the one is suspicious because they get campaign contributions, then why wouldn't we say, "Well, then the interests of the Department of Justice, which got Microsoft campaign contributions, is suspicious"? I personally believe that the head of the antitrust division does what he does because he believes that's what is good for America, and I think that's what the California attorney general's office is doing. And we may disagree with that, of course.
Ackerman: I don't know how campaign contributions got into this thing, but you have to show damage to the consumer. You have to show some type of action that creates actual damage to the consumer. I'm not an expert in how much software costs. A lot of stuff I've read, particularly in the Microsoft cases, a lot of things they were charging were reasonable. In fact, they may even be below market.
If you're looking at what kind of line you're going to have, whether you are going to look at whether there is actual or significant damage to the consumer, or if you're actually trying to protect the competitors, I think that's a definite bright line.
Woods: I think the Supreme Court has clearly stated in a number of decisions that it is the protection of consumers that is the overarching policy now of the antitrust laws.
However, the courts also have to enforce various legislation, and a lot of legislation that is enacted by state and federal legislatures is by definition anti-competitive. Farm subsidies clearly is not a pro-competitive legislation, and the courts would have to enforce those laws. The recent subsidies that the Bush administration has applied to various imports to retaliate for conduct that they feel is occurring and hurting our companies overseas are arguably certainly not competitive. The Robinson-Patman Act, which was an enactment that modern economists would say is not necessarily pro-competitive certainly in all situations, and yet it is to be applied in all situations.
These are acts that are not pro-competitive, and yet the courts have to enforce them. Enforcing antitrust law through the judiciary, I think, is better in terms of getting an overall general policy than enacting individual little laws in every state and different laws from era to era on the federal level, because they tend to be inconsistent.
Lande: I will answer Sen. Ackerman's question. I mean, he was raising the question, is Microsoft charging "too much" for its software? There were roughly a hundred follow-up suits, all of which were alleging that, due to Microsoft's illegal actions, Microsoft software charges too much. Therefore, they want, on behalf of consumers, a good deal of that money back. And those cases will be tried by the courts, and we will find out at some point how they come out.
One thing you have to remember about the Microsoft case though, it's not only about the price of software. It's about innovation. Now, different sides disagree strongly with the best way to get the optimal level of innovation in this industry, but everybody agrees that securing more and better products in the computer industry is much more important than whether a particular piece of software sells for $49.
Kezirian: Picking up on innovation, I'll let Josh chime in, and maybe Josh can address this. Is the question of innovation pro-consumer or pro-competition?
Lichtman: That leads right into it. Certainly in reading the Microsoft decision, someone, I think, from professor Lande's standpoint would argue it is both pro-consumer and pro-competition, in the sense that at least a significant basis for the Microsoft decision is, we're going to ignore whether prices went down in the short term.
The issue here is there were or could have been better products on the market that the public wanted but couldn't get because of the anti-competitive conduct. And in a sense, it precluded a whole slew of innovation that reasonably would have led to better products or at least a broader range of products that would have been acceptable to consumers, which they have been deprived of because of the anti-competitive conduct.
That aspect of the case is, I suppose, a little bit harder to understand for consumers today. Those of us who simply at a consumer level have gone through the past 10 years of seeing computers get easier to use, generally better in quality and cheaper all at the same time would say, "I don't understand how we've been harmed."
It does take, to some degree, a sort of leap of faith in accepting as a factual finding that there would have been better and more innovative products than Microsoft has developed in the market but for the anti-competitive conduct. I think at that level, if you accept that that is true as a factual matter, it is not that hard to reconcile protection of consumers with protection of competitors.
Kezirian: In the last 10 years, we've seen a broadening of what is anti-competitive law, and we've seen kind of the concept of stakeholders appear in the discussion of acquisitions. You see stakeholders in grocery store mergers in what are small communities and small shops. You see stakeholders in terms of employees and their impact with mergers and consolidations. What is the impact of the stakeholder concepts?
And the stakeholders were probably most first introduced by the state attorney generals. How has that changed the pro-competition versus pro-consumer balancing act that we seem to focus on in the antitrust area?
Woods: I would say that to the extent that you have competitors pushing the enforcement agencies to bring antitrust actions, like Netscape, for example, to the extent you have employees groups, like an Enron, who are pushing for enforcement, labor unions pushing for enforcement, that, I would say as a general overstatement, probably historically has resulted in inconsistent and poor decisions in terms of an overall antitrust policy because you end up looking at how those particular isolated special interests are affected, rather than applying a uniform policy to each factual situation.
If you're guided by consumer welfare as your bottom line in all antitrust or any type of unfair, anti-competitive activity, you should result in the same result from case to case, and that seems to be the goal. I mean, that is historically what people want. If you benefit the consumers, you will benefit everybody. It will flow through the entire economy. And if you try to concentrate on that group as your identifiable group rather than any special interest group, you'll reach better results.
Kezirian: By focusing enforcement on the public agencies in Washington, D.C., does that insulate the public enforcer from these special interests, or do you think it makes them more vulnerable to the special interests, Don?
Woods: Well, I think it makes them vulnerable to the special interest groups, especially in terms of contributions and in terms of votes. I mean, labor unions may not make big contributions, but they have lots of votes, and it does affect. And I think it's undeniable that antitrust enforcement on the federal level has been influenced by what administration is in power.
Lande: I worked at the Federal Trade Commission for many years, and the first question you ask when someone comes in is, who is this person, and how are they trying to manipulate you to serve their interests as opposed to the public interest? Everyone does that. It's their job to do it. It's their job for their stockholders.
So as an enforcer, you get really good at separating the wheat from the chaff. That is, you get suspicious of absolutely everybody who comes in with a complaint. The first thing you do is, you raise your eyebrow and say, "How is this person trying to use me?" So whenever a Netscape comes in, on the one hand you want information from them, on the other hand you couldn't be more suspicious of their motive.
Every day people are trying to manipulate you. Let us give these people some credit. They get pretty good at it. They know when people are pushing their own interests. So verify what they say. And, in fact, if you didn't go out and try and solicit information from people in the industry, you wouldn't be doing your job. So I don't think it's that easy to manipulate the enforcers.
Kezirian: Do you think it's easier to manipulate a state enforcer or a federal enforcer?
Lande: I think it would depend on which enforcer.
Kezirian: Fair enough. We've talked about the present; we've talked a little bit about the past. I think we can talk a little bit about the future. Everyone has mentioned at one time or another that the Cartwright Act in California is a little bit different from every place else in the United States. Right now we have pending legislation, Senate Bill 1814, that would radically differentiate the Cartwright Bill. Does anyone want to comment on the efforts of the current Legislature or at least the proposed legislation on that at this time?
Ackerman: I would. First note that this legislation is sponsored by the attorney general and the trial attorneys. Basically, it would redefine conspiracy for action which the traditional definition would require two or more persons. This would, in essence, require one person. It does that by redefining what a parent subsidiary or affiliate relationship is.
So if you were a wholly owned subsidiary, you may have many of those, and you did some violation that might be violative of the act, it would not require you and another company. They could file suit against you on a one-company basis. In the research that I had done, I think there were very few states that had gone this far. In fact, there was a federal decision, which was the Copperwell decision, took this up as an interpretation of the Sherman Act that said, no, there has to be two different individuals, two different companies. So this would definitely be a change in California law, and it could impact other states considering to do the same thing.
Kezirian: If this law were to come into existence, could you possibly be in violation of this new provision but be in compliance with the state antitrust laws?
Ackerman: You probably could.
Lichtman: Well, you could. And, in fact, it's drafted in a way that is so broad, I think it's not a completely supportable interpretation of the drafting, but it could be interpreted to be so broad as to cover divisions within the same company or even separate employees within the same company as constituting a sufficient conspiracy for purposes of an antitrust violation under Section 1 of the Sherman Act or the correlating section of the Cartwright Act, which poses tremendous problems, obviously, for businesses trying to get some certainty as to whether their conduct is going to be actionable.
There are at least two other aspects of the bill that would seem noteworthy. First, on the monopolization side, this bill, if enacted, would create a cause of action for even indirect victims of the alleged monopolization.
One thing that professor Lande had talked about was the fairly severe antitrust standing requirements under federal law. This would essentially do away with any antitrust standing requirement to bring a state law monopolization claim, which could certainly lead to numerous new lawsuits on behalf of "consumers" for the kinds of things that up until now they have not been able to sue for.
The other thing that is noteworthy about this is it all purports to be declarative of existing law, which means it is applied retroactively and again poses significant risks.
Kezirian: Don, you're shaking your head.
Woods: Well, the monopolization enactment would clearly be different from the Cartwright Act. And it's very clear that California antitrust law differs from federal antitrust law, and that under the federal Sherman Act, you have Section 1 that applies to multifirm coordinated activity, and Section 2 applies to single-firm activity. And in California, the Cartwright Act only applies to multifirm activity. There is absolutely no provision for single-firm anti-competitive activity.
And I think adoption of a monopolization offense in the State of California would rationalize the state antitrust law with the federal law, and I think there would be an improvement over what we have now.
And I also think it would make unnecessary the artificial construct of defining a trust to include related entities. Both the federal law and the state law have a tremendous gap in that they don't cover single-firm anti-competitive activity until, on the federal level, it reaches near monopoly and, on the state level, it doesn't cover it at all.
So I think what the attorney general is doing, with this enactment of a new definition of what two firms are, is he is attempting to reach single-firm activity by defining one firm as two. And we wouldn't need it if we adopted the monopolization provision, and then we could reach single-firm activity. It's another whole question whether you want to reach single-firm conduct before it gets to the near monopoly level. But no jurisdiction I know of has attempted to do that.
Kezirian: Out in California we often think we are on the cutting edge, but professor Lande, are you seeing other types of states take similar types of action as in this proposed legislation?
Lande: I'm afraid I haven't read the proposed legislation. Insofar as it has indirect purchaser provisions, then certainly there are many other states that have indirect purchaser provisions. But insofar as it contains a redefinition of conspiracy - and I want to emphasize I haven't read it - I'm not aware of any other state that has done that.
Kezirian: Any comments or final thoughts?
Woods: I'll just comment on the Microsoft decision itself. I believe that in high-tech industries, which are common here in California and even here in Southern California, the decision made some helpful comments in that it says that in terms of remedies, structural-type remedies, like breaking up a company or conduct-type remedies, such as breaking up what's alleged to be a tie-in, really may not be appropriate in industries that are changing so rapidly that, by the time you reach decision, the conduct you're trying to enjoin is moot because you have new products and the industry has changed incredibly in a short period of time.
Also, I think the decision points out that old per se rules in dynamically changing industries probably don't make a lot of sense, and there were a lot of comments by the court in that area. And I think that's the wave of the future in high tech industries, that you really have to judge the specific conduct and the circumstances in the market in which you find it, and you can't make the old, per se, easy, formalistic type of responses as an attorney.
Ackerman: One of the interesting things that we didn't get to, which I had spent a little time researching, was whether or not we should have different rules for high tech and high-tech industry. And my general answer would be no.
The reason: If you just look at some of the statistics on some of these market holds - Lotus had 70 percent of the market in 1984 operating systems, a few years later, they had 15 percent of it; in 1995, Netscape had 90 percent of the market in certain kinds of systems, and a few years lat er, Microsoft had 90 percent.
What I really found interesting, in the San Francisco Chronicle article today, IBM, who 25 years ago we all thought was going to control the industry forever, they went down to secondary, third and way down the list. IBM just passed up Oracle yesterday in the database market, having 34 percent of the market.
So I think judges particularly have to keep that in mind when they are doing antitrust cases in this type of industry; that what happened on the date the suit was filed may be completely different by the time the matter gets heard before the judge.
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