Many successful American businesses have been accused of anti-competitive practices. Drawing on 50 years of experience with U.S. antitrust laws, attorney and author Edwin S. Rockefeller sheds light on why lawmakers, bureaucrats, academics, and journalists use arbitrary and irrational laws and enforcement mechanisms to punish capitalists rather than promote competition. The Antitrust Religion argues that everything most people know about antitrust is wrong. The orthodox view is that antitrust was created to protect competition. But Rockefeller's account is strikingly different. He argues that antitrust in practice has often benefited, not the public, but specific businesses that wanted to take down their competitors. In cases ranging from early antitrust targets like Standard Oil to the more recent IBM and Microsoft cases, he reveals why some companies are punished for being winners in the market. Rockefeller vividly shows how antitrust has been transformed into a quasi-religious faith. He explains that this antitrust religion relies on economic theories that bestow a veneer of objectivity and credibility on law enforcement practices that actually rely on hunch and whim. On issues such as mergers and price fixing, Rockefeller thoroughly examines arbitrary antitrust laws that lead to ill-informed juries and bureaucratic abuse. He concludes that those laws also create a perverse incentive for entrepreneurs to hold down sales volume and avoid improvements in price, quality, and service. Otherwise, such entrepreneurs could become the next targets of the antitrust priests. The Antitrust Religion will greatly assist business professionals, journalists, policymakers, professors, judges, and all others interested in government regulation of business in understanding how our antitrust laws actually work.

THE Antitrust Religion

By EDWIN S. ROCKEFELLER

CATO INSTITUTE

Copyright © 2007 Cato Institute
All right reserved.
ISBN: 978-1-933995-09-0

Contents

Acknowledgment.............................................ixIntroduction...............................................11. What Is "Antitrust"?....................................32. The Antitrust Community.................................153. From "Trust-Busting" to the Present.....................274. The Magic of "Market Power".............................395. Monopolization..........................................476. Mergers.................................................637. "Tying" and "Exclusive" Dealing.........................758. Price Fixing............................................879. In Conclusion...........................................99Notes......................................................105Index......................................................119

Chapter One

What Is "Antitrust"?

Quasi-religious Faith Distinct from the Antitrust Statutes

Section 4 of the Clayton Act of 1914 provides that any person "injured in his business or property by reason of anything forbidden in the antitrust laws" may sue for three times his damages plus costs and "a reasonable attorney's fee." Section 1 of the Clayton Act defines the term "antitrust laws" as including the Sherman Act of 1890 and the Clayton Act. These are referred to in this book as "the antitrust statutes." Definitions are important for making sense of the subject. The antitrust literature provides little help. Most of it perpetuates confusion. Consider the following example from a basic textbook used at the Harvard Law School:

Antitrust law implicitly but clearly takes a particular stance toward the economic problems to which it applies. On one hand, its very enactment indicates that Congress rejected the belief that market forces are sufficiently strong, self-correcting, and well-directed to guarantee the results that perfect competition would bring. On the other hand, antitrust's domain is intrinsically limited.

What are the authors talking about? Antitrust law? Antitrust? The antitrust statutes? Do they recognize any difference among those three terms? There are two antitrust statutes, the Sherman Act and the Clayton Act, adopted by Congress and found in the U.S. Code. You can look them up. The quoted passage does not refer to those statutes but begins with the undefined term "antitrust law," which implies a coherent set of rules that "takes a particular stance." The student is told that enactment of "antitrust law" shows that Congress rejected a belief that the market is self-correcting. But Congress did not enact "antitrust law." It enacted two antitrust statutes, one in 1890 and another in 1914. What beliefs Congress entertained or rejected at either of those times is debatable.

Next the student is introduced to an additional undefined term-"antitrust." "Antitrust" has a "domain." Authors Phillip Areeda and Louis Kaplow began with an imagined concept of "antitrust law" and then shifted to a discussion of "antitrust," something different from "antitrust law" and even more distant from the antitrust statutes. Antitrust has an existence outside of the antitrust statutes. Antitrust not only exists but also does things. It is a formidable actor. The professors describe it thus:

Antitrust supplements or, perhaps, defines the rules of the game by which competition takes place. It thus assumes that market forces-guided by the limitations imposed by antitrust law-will produce good results or at least better results than any of the alternatives that largely abandon reliance on market forces. Therefore, the perfect competition model can be viewed as a central target, the results of which antitrust seeks, but the conditions for which antitrust does not take for granted. Antitrust thus looks to perfect competition for guidance, but the analysis inevitably emphasizes the myriad and complex imperfections of actual markets.

Antitrust "supplements" or "defines." The professors are not sure which. Antitrust "assumes" things. Antitrust "seeks results" but "does not take things for granted." Antitrust "looks to perfect competition for guidance" to supplement the guidance that it has received from antitrust law's limitations. Having extracted from the antitrust statutes an imagined concept of "antitrust law" and having pulled out of that hat a rabbit called "antitrust," the professors conclude by telling us what "the analysis" emphasizes. The student might wonder: where did "the analysis" come from? The antitrust statutes? Antitrust law? Antitrust? Whose analysis is it? Why is it "the" analysis?

Antitrust is not defined in any of the provisions of the antitrust statutes. It can't be translated into foreign languages. Antitrust was not enacted. It is not a coherent set of rules. You can't look it up. Experts are required to interpret it. Much of it is in the eye of the professor. In their casebook, Eleanor Fox and Lawrence Sullivan write of "the central concern of antitrust" and its "several goals" and that "antitrust regulates economic structure and economic conduct through law." They also tell us when a court decision is "a defeat for antitrust." Timothy J. Muris, while chairman of the Federal Trade Commission, observed that there is much to do "to assure that antitrust avoids the mistakes of its past."

Antitrust can't be amended, reformed, or repealed. It is an intuitive mix of law, economics, and politics; a mystical collection of aspirations, beliefs, suspicions, presumptions, and predictions. Antitrust is a quasi-religious faith independent of the provisions of the antitrust statutes.

Antitrust has many doctrines that are analyzed endlessly in lectures, seminars, articles, and court opinions. The antitrust faith is based on four elements that are seldom mentioned but will be discussed in subsequent chapters of this book. They are as follows: (1) a belief in the legend of Standard Oil, (2) fear of corporate consolidation, (3) a belief in the magic of "market power," and (4) faith that government can protect us from those evils.

Vague Statutes-Unaccountable Discretion

The antitrust statutes give to those in positions of power wide discretion to interfere with commercial activity and freedom of contract. Three provisions illustrate the point, two from the Sherman Act of 1890 and one from the Clayton Act of 1914.

Section 1 of the Sherman Act designated as a federal crime "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations." That declaration of Congress would have outlawed any contract in interstate commerce, because every contract restrains some trade. (If I contract to sell you a wristwatch, I am restrained from selling the watch to someone else. You, in turn, are restrained from buying another product with the money that you paid to me.) To avoid that truism, the judiciary invented the so-called rule of reason, amending the prohibition by Congress of every contract in restraint of trade to prohibit only those contracts found by the courts to "unreasonably" restrain trade. As a result, unless the restraint is one that the Supreme Court has presumed to be unreasonable-such as the so-called per se offenses discussed later-it may be impossible to tell whether a contract is unlawful without a lengthy trial. Justice Louis Brandeis suggested that the trial should proceed along the following lines:

The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the Court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the Court to interpret facts and to predict consequences.

In other words, everything is relevant but nothing is determinative. An absolute prohibition by the legislature was turned into a delegation of discretion to jurors and judges to approve or disapprove contracts after a lengthy inquiry as to whether or not they restrain trade "unreasonably."

Section 2 of the Sherman Act made it a crime "to monopolize" or "attempt to monopolize" any part of the trade or commerce among the several states or with foreign nations. No one knows what those words mean. Over the past century, judges and commentators, such as Areeda and Kaplow, have developed a vocabulary for talking about the subject, but no meaningful rules have emerged. Court declarations perpetuate ambiguity. According to the Supreme Court:

The offense of monopoly under section 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the 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.

In 1918 Justice Brandeis attempted to distinguish between contracts that promote competition and those that suppress or destroy competition but was unable to do so. Similarly, in 1966 the Court sought to differentiate between willful acquisition of monopoly power and being an effective competitor but was unable to state any rule for doing so. The result has been to leave to judges, juries, and officials at the Justice Department and FTC power to make arbitrary decisions on a subjective basis.

Most government activity under the antitrust statutes finds its support in section 7 of the Clayton Act, which prohibits corporate acquisitions "where ... the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." Yet we have no workable definition of what constitutes "competition" and no way to measure it. Applying section 7, the Supreme Court under Chief Justice Earl Warren essentially declared all corporate mergers unlawful. Expressing concern with industrial "concentration" and desiring to protect "small business" from more efficient competitors, the Court during the 1960s decided every case in the government's favor. First came the Brown Shoe case, which involved the acquisition by Brown (primarily a shoe manufacturer) of Kinney (primarily a shoe retailer). The Court held the merger illegal under section 7 in two ways: first, as a horizontal merger and, second, as a vertical merger. Both companies made shoes. Brown made roughly 4.0 percent and Kinney made roughly 0.5 percent of the nation's shoes. Merger of the two manufacturers, said to be "horizontal" because it involved two companies directly competing with each other, was found illegal. The Court also held the merger of Brown and Kinney illegal as a "vertical" merger-i.e., one involving two companies that had a supplier-customer relationship-because Brown, selling 4.0 percent of the nation's shoes, merged with Kinney, a retailer that accounted for 1.2 percent of U.S. retail shoe sales. The vertical merger of the supplier Brown with its customer Kinney was said to "foreclose" a share of the retail market otherwise open to manufacturer-competitors of Brown.

Four years later, in the Von's Grocery case, the Court concluded that section 7 prohibited the merger of two grocery chains because the merger would result in ownership by a single firm of 1.4 percent of the grocery stores in the Los Angeles metropolitan area, accounting for 7.5 percent of the area's grocery sales.

Mergers neither horizontal nor vertical-where the merged firms were not competing and did not have a supplier-customer relationship-were given the sinister-sounding name of "conglomerate" mergers. The Court upheld government action to prevent conglomerate mergers on theories that they raise "barriers to entry," eliminate "potential competition," or create opportunities for "reciprocal dealing." Mergers that created "competitive advantages" were condemned for doing so. Economic efficiency created through merger not only didn't serve as a defense but also became a basis for a conclusion of illegality.

By the late 1960s the operative question became not whether a merger was illegal but whether the government would oppose it. In 1968 the Justice Department published Merger Guidelines that were more permissive than Supreme Court rulings such as those in the Brown Shoe case. The result has been to transfer to government attorneys the arbitrary power to decide whether or not a merger will be allowed or prohibited, guided only by an irrational fear of corporate consolidation. Moreover, since 1976 all corporate mergers above a certain size have had to be reported to the government in advance. According to the Commentary on the Horizontal Merger Guidelines published by the FTC and the Justice Department, "For more than 95% of the transactions reported ... the Agencies promptly determine ... that a substantial lessening of competition is unlikely." During fiscal 2005, notices of 1,695 proposed mergers were filed. The FTC challenged 14, and the Justice Department challenged 4, a total of 18 out of 1,695, or 1.06 percent. There is no way to tell which mergers will be allowed and which will not. The process will be examined in more detail in Chapter 6.

No Clear Rules-Arbitrary Decisions

Lacking any coherent, ascertainable rules in the written antitrust statutes, judges and other government officials make arbitrary decisions using antitrust doctrines based on a faith not easily overcome by reason, logic, or empirical data. There is no need to explain decisions not made. A contract, a "monopoly," or a merger permitted requires no explanation. Most corporate mergers reviewed by the government are cleared without question or explanation. Only attacks call for justification. If the decisionmaker wishes to disapprove, the language of antitrust is there to justify the disapproval. Metaphorical labels such as "the market" are used as though they are factual descriptions. Antitrust doctrine containing a prohibition is recited. The disapproval has been rationalized.

The success of Microsoft Corp. came at the expense of some of Microsoft's competitors-losers in the marketplace who sought government action against a winner. Interest was first aroused at the FTC, where two commissioners favored action, two favored doing nothing, and the fifth declined to participate. The assistant attorney general at the time was an activist new to the job. She took over the matter and persuaded Microsoft to make some changes in its method of doing business. That agreement was presented to a district court for adoption as a consent decree without any findings of fact. The district judge to whom the case was assigned had read some books about computers. On the basis of such reading he rejected the decree as inadequate. A reviewing court of appeals said it was the job of the attorney general, not a district judge, to decide the adequacy of such decrees. The appeals court sent the matter back to a different district judge. That judge later denied a contempt petition, issued a preliminary injunction, and referred the case to a special master, a decision reversed by the court of appeals. Meanwhile, the Justice Department began an entirely new, somewhat broader, proceeding that resulted in a district court's issuance of 400 or so "findings of fact" and then a memorandum and order, in which the judge confessed an inability to determine what to do because of divergent opinions about the future. He concluded that "plaintiffs won the case, and for that reason alone have some entitlement to a remedy of their choice," including breaking up the defendant. That remedy should be adopted, he said, because it was urged by government officials "in conjunction with multiple consultants," and such officials are expected to act in the public interest, whereas the defendant is not. That order was vacated by the court of appeals. The court recited prevailing doctrines of market definition and power, which contain assumptions about a future that no one can know but could be applied to the Microsoft case because of the phraseology of the district judge's findings of "fact." Assisted by some notions about "short term" and "long term" and some fine distinctions between "procompetitive" and "anticompetitive" conduct, the Court labeled Microsoft, like the legendary Standard Oil, a monopolizer and as such prohibited by section 2 of the Sherman Act. The Justice Department abandoned any further attempt to break up the company but did insist on several regulatory restrictions to protect complaining competitors.

Futility of Reform

Attempts at reform or repeal of the antitrust statutes are futile as long as faith in Antitrust with a capital "A" is preserved. Provisions of the antitrust statutes contain words without definition, but, except when amended by Congress, at least the words are fixed. One can look them up and write them down. Antitrust, the mystique, is a different matter. One cannot look it up. Joel Klein, while serving as assistant attorney general in charge of the Justice Department's antitrust division, described the antitrust laws as "common law statutes." He said to a meeting of antitrust lawyers, "You know, so much of litigation in the Supreme Court, or whatever, will be on what exactly are the words of the statute. But in antitrust it really is much more dynamic."

(Continues...)

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