FILL ME IN…
Last fall the House Judiciary Antitrust Subcommittee released a long-anticipated report outlining a series of recommendations intended to rewrite our country’s antitrust laws. The majority staff report, while initially intended to focus on four tech companies, makes a series of erroneous policy conclusions that if implemented would wield government control over the entire U.S. economy, hampering growth, and innovation to the detriment of consumers.
As part of the report’s recommendations, it proposes any number of ways to force companies to work cooperatively or to look out for its competitors. In this post, we look at the recommendation the report makes regarding “essential facilities” and refusals to deal.
The staff report recommends:
“[T]hat Congress consider revitalizing the “essential facilities” doctrine, or the legal requirement that dominant firms provide access to their infrastructural services or facilities on a nondiscriminatory basis. To clarify the law, Congress should consider overriding judicial decisions that have treated unfavorably essential facilities- and refusal to deal-based theories of harm.”
This recommendation is among the most extreme of all the recommendations in the House majority staff report as it holds the potential to undermine fundamental property rights protection. If a change to our antitrust laws along these lines were adopted, incentives to invest or innovate would be crushed. Why build a factory only to be told that you must let your competitor build its product on an assembly line that might not be fully utilized? If you have a distribution network for your products, why not also be required to distribute those of your competition? Why invest in next generation technology or in unlocking new drugs to treat disease, if your patent right is deemed under the antitrust laws to be an “essential facility?”
HOW DOES U.S. ANTITRUST LAW TREAT REFUSALS TO DEAL?
Antitrust law has long recognized that it is not its place to have the government get involved in the decision a private business makes or impede its ability to freely decide with whom it conducts business. In fact, antitrust is more concerned with companies that are eager to work with other business and collaborate as collaboration among business can lead to companies no longer competing and ultimately to cartel concerns.
Therefore, it is antithetical for antitrust to force collaboration in the market. Companies may be less likely to undertake the costly and risky research and development that leads to an invention if the inventor’s reward for its efforts is reduced by having to share its invention. This is why patents grant exclusive rights and do not require that they be shared. Conversely, if businesses know they can easily gain access to the facilities or technology of other firms, then they have less incentive to innovate and more incentive instead to free-ride on the research and innovative work of others.
Antitrust has identified one, limited exception to the general rule that there is no “duty to deal.” The exception requires evidence that: (1) the firm has monopoly power; (2) the firm terminated a prior, voluntary and profitable course of dealing; (3) the only conceivable rationale or purpose is to sacrifice short-term benefits in order to obtain higher profits in the long run; and (4) the refusal involves products that the firm already sells in the existing market to other similarly situated customers.
This four-part test is very well thought out. Each step builds on the previous to ensure that that a company first decided to enter into an arrangement, only to exit or change the terms of the deal for anti-competitive reasons, leaving the other firm without alternative options in the market.
However, those that want to change the law want to force certain companies to assist its competitors over the interests of innovation and consumers.
WHAT IS THE “ESSENTIAL FACILITIES” DOCTRINE?
The “essential facilities” doctrine specifies that the owner of an “essential” facility must share that facility with rivals. The U.S. Supreme Court has made clear that it treats essential facilities claims with great skepticism, stating that courts should be very cautious in recognizing exceptions to the general rule that even monopolists may choose with whom they deal. While firm’s competitors may desire to use a particular facility or technology, there are few situations, if any, in which access to a particular facility or technology is necessary in order to compete in a market.
Indeed, those who advocate forced sharing of an “essential” facility often underestimated the ability of a determined rival to compete around the facility, with resulting benefits to consumers. This is particularly true with respect to fast moving technologies, where technological and market developments can present multiple opportunities to work around a competitor’s facility or technology.
WHY THIS MATTERS…
As the Supreme Court has explained, there are significant dangers of forcing companies to share their innovations or facilities with rivals. These include: (1) compelling firms to share the source of their advantage risks lessening incentives “for the monopolist, the rival, or both to invest in those economically beneficial facilities”; (2) “enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing—a role for which they are ill-suited”; and (3) “compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion.”
The agencies that enforce antitrust law have long recognized these concerns, stating that refusals to deal will rarely, if ever, violate antitrust laws. In fact, U.S. enforcers have been called upon to push back on “essential facilities” type thinking in foreign countries where antitrust agency action in those countries has been threatened against U.S. companies to turn over intellectual property to its domestic competitors.
Antitrust recognizes its not the responsibility of antitrust law to “force sharing” in the market. The exact opposite approach taken by the U.S. Supreme Court and the antitrust agencies is economically sound and protects incentives to invest in the research and development that is often essential for innovation. The staff report’s approach would significantly reduce these incentives, thereby harming competition and consumers.
For more on antitrust, check out other posts here.