1

1	UNITED STATES FEDERAL TRADE COMMISSION
2	and
3	UNITED STATES DEPARTMENT OF JUSTICE
4
5
6	SHERMAN ACT SECTION 2 JOINT HEARING
7	BUSINESS TESTIMONY
8	TUESDAY, FEBRUARY 13, 2007
9
10
11	HELD AT:
12	UNIVERSITY OF CHICAGO
13	GRADUATE SCHOOL OF BUSINESS
14	EXECUTIVE CENTER - 450
15	NORTH CITYFRONT PLAZA DRIVE
16	CHICAGO, ILLINOIS 60611
17	9:30 A.M. TO 4:00 P.M.
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19
20
21
22
23	Reported and Transcribed by:
24	PAMELA A. STAFFORD, CSR, RMR
25

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1	APPEARANCES:
2
3	MODERATORS:
4
5	Morning Session:
6	JAIME TARONJI, JR.
7	Attorney, Policy Studies,
8	Federal Trade Commission
9	and
10	JOSEPH J. MATELIS, II
11	Attorney Advisor, Legal Policy Section
12	Antitrust Division, Department of Justice
13	and
14	WILLIAM COHEN
15	Deputy General Counsel for Policy Studies
16	Federal Trade Commission
17
18
19	PANELISTS:
20
21	Morning Session:
22	David Balto
23	Patrick Sheller
24	Ron Stern
25

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1	APPEARANCES CONTINUED:
2
3	MODERATORS:
4
5	Afternoon Session:
6	JOSEPH J. MATELIS, II
7	Attorney Advisor, Legal Policy Section
8	Antitrust Division, Department of Justice
9	and
10	KAREN GRIMM,
11	Assistant General Counsel for Policy Studies
12	Federal Trade Commission
13
14
15	PANELISTS:
16
17	Afternoon Session:
18	Sean Heather
19	Bruce Sewell
20	Bruce Wark
21
22
23
24
25

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1	REPORT OF PROCEEDINGS
2	FEBRUARY 13, 2007
3	MR. TARONJI: Good morning.
4	I'm Jim Taronji from the Federal Trade
5	Commission. I'm one of the moderators for
6	this morning's session. I'm joined this
7	morning by Bill Cohen, Deputy General Counsel
8	for Policy Studies at the Federal Trade
9	Commission. Our other co-moderator today is
10	Joe Matelis from the Antitrust Division of
11	the U.S. Department of Justice.
12	Before we start today, let me
13	cover a few housekeeping matters. As a
14	courtesy to our speakers, please turn off
15	your cell phones, Blackberries, and other
16	devices, or put them on vibrate. And I will
17	do that myself.
18	Finally, we request that the
19	audience not ask any questions or make
20	comments during the hearings. Thank you.
21	Before introducing our
22	speakers, I would like to first thank the
23	University of Chicago Graduate School of
24	Business for hosting these joint FTC/DOJ
25	hearings to solicit business testimony on

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1	single-firm conduct under Section 2 of the
2	Sherman Act. In particular, I would like to
3	thank Dean Ted Snyder and the staff of
4	the Gleacher Center for offering us their
5	facilities and for making the necessary
6	arrangements for us to hold these
7	hearings.
8	And finally, I would like to
9	thank my FTC and DOJ colleagues as well as
10	the FTC's Midwest regional office who have
11	worked very hard to put together these
12	hearings in the Windy City, in the cold Windy
13	City.
14	We are honored to have
15	assembled a distinguished group of panelists
16	from a number of companies and associations
17	that have agreed to offer their testimony in
18	connection with these hearings. These
19	panelists will provide their perspectives on
20	how companies operate within the complex area
21	of Sherman Section 2 jurisprudence,
22	including for some companies how they
23	navigate not only the U.S. application of
24	antitrust laws to single-firm conduct, but
25	that of the diverse antitrust regimes around

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1	the world.
2	Our panelists this morning
3	are David Balto for the Generic
4	Pharmaceutical Association, Patrick Sheller
5	from Kodak, and Ron Stern from G.E.
6	Our format this morning will
7	be as follows. Each speaker will make a 20-
8	to 25-minute presentation. We will then take
9	a 15-minute break. After the break, we will
10	reconvene and have a moderated discussion
11	with our panelists.
12	These hearings in Chicago are
13	an important component of the joint FTC and
14	Antitrust Division hearings on single-firm
15	conduct under Section 2 of the Sherman Act.
16	They are designed to identify areas where
17	single-firm conduct is causing competitive
18	harm, areas where antitrust enforcement may
19	be chilling desirable activity, and areas
20	where additional guidance would be most
21	valuable.
22	FTC chairman, Deborah Majoras
23	made it clear at the opening session of these
24	hearings that she wanted to hear from
25	businesses, either through their executives

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1	or their legal advisers. As Chairman Majoras
2	said, and I'll paraphrase, we want these
3	panels to discuss business conduct from the
4	market perspective from the ground up. That
5	is, examine why and when firms engage in it,
6	how they do it, and what effect it produces
7	for the firm, for other firms, customers and
8	competitors and for consumers. We want these
9	discussions to include knowledgeable business
10	people or their legal advisers.
11	Over these last eight months
12	we have held hearings on specific types of
13	business conduct, such as predatory pricing,
14	refusals to deal, bundled and loyalty
15	discounts, tying arrangements, exclusive
16	dealing, and misleading and deceptive
17	conduct.
18	Some of these panels have
19	included business executives or their legal
20	advisers. In addition, we've covered some
21	general areas, such as business strategy,
22	business history, and economic empirical
23	studies.
24	The sessions today are
25	designed to further FTC Chairman Majoras's

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1	goal to obtain as much insight and real-world
2	experience as possible from business
3	representatives.
4	This is the second set of
5	hearings that have specifically been devoted
6	to obtaining testimony from company
7	representatives and associations. The first
8	set of business testimony hearings were in
9	Berkeley, California on January 30th, 2007.
10	We look forward to hearing
11	the panelists' comments and to the
12	round-table discussion. I want to thank all
13	of them for agreeing to participate in
14	today's hearings. We know that it takes a
15	lot of time to prepare for these hearings.
16	So again, thank you for your time and
17	efforts.
18	I would now like to turn it
19	over to my colleague and co-moderator Joe
20	Matelis from the Antitrust Division for any
21	remarks he would like to make. Joe.
22	MR. MATELIS: Thank you, Jim.
23	The Department of Justice's Antitrust
24	Division is very pleased to participate in
25	today's hearing. In the single-firm conduct

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1	hearings we have held to date, we have
2	benefitted from the insights of many
3	highly-skilled antitrust attorneys and
4	economists.
5	Today's hearing, as well as
6	the sessions held last month in Berkeley,
7	California, grew out of the belief that we
8	could also learn much about single-firm
9	conduct from businesses. Our panelists today
10	are the people who help devise and implement
11	business plans, aware that their firm's
12	unilateral conduct may be challenged in
13	private or government litigation and by
14	foreign competition authorities. Their
15	companies are also directly affected by the
16	conduct of other firms.
17	Whether you've had occasion
18	to view Section 2 of the Sherman Act as a
19	sword directed at the heart of your business
20	or as a shield protecting you from
21	anticompetitive conduct of others, we look
22	forward to hearing from you today.
23	On behalf of the Antitrust
24	Division, I would also like to take this
25	opportunity to thank the Gleacher Center and

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1	the University of Chicago Graduate School of
2	Business for hosting these hearings. Also on
3	behalf of the Division, I'd like to thank
4	David, Patrick, and Ron for volunteering your
5	time today. We know that these hearings take
6	a lot of effort, especially when traveling to
7	Chicago in February. And we're very grateful
8	for a valuable public service that you're
9	rendering. Finally, I'd also like to thank
10	Jim and Bill and their colleagues at the
11	Federal Trade Commission for all their hard
12	work organizing today's hearing. Thanks.
13	MR. TARONJI: Thank you, Joe.
14	Our first speaker this
15	morning is David Balto. David Balto has
16	practiced antitrust law for over 20 years,
17	both at the Federal Trade Commission and the
18	Antitrust Division. At the FTC he was the
19	attorney adviser to Chairman Pitofsky and
20	assistant director for policy and evaluation
21	in the Bureau of Competition. He helped
22	guide many of the FTC's pharmaceutical and
23	health care enforcement efforts, including
24	challenging patent settlement agreements.
25	David has written extensively

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1	on antitrust and health care competition and
2	is the vice chair of the ABA Antitrust
3	Section Federal Civil Enforcement Committee.
4	He graduated from Northeastern University
5	School of Law and the University of
6	Minnesota. And David is speaking today on
7	behalf of the Generic Pharmaceutical
8	Association. David.
9	MR. BALTO: Thank you, Joe.
10	I want to express my privilege for -- to
11	come here and testify in these hearings. And
12	I want to mention on that that my remarks
13	today are my own and don't necessarily
14	reflect the remarks -- should not necessarily
15	be attributed to the Generic Pharmaceutical
16	Association or any of its members.
17	Let me set out the outlines
18	of my testimony. I want to start off with
19	one indisputable fact, hopefully indisputable
20	fact, the importance of generic competition
21	in the market.
22	I'm then going to try to
23	talk about how pharmaceutical markets are
24	different than other types of markets and why
25	that should make a difference in the analysis

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1	of single-firm conduct.
2	I'm then going to talk about
3	two forms of anticompetitive conduct by
4	branded pharmaceutical companies and how
5	those forms of conduct should be analyzed,
6	and then perhaps close with some suggestions.
7	Let me begin with the indisputable.
8	Generic competition benefits
9	every consumer in the United States. Generic
10	drugs sell for about 70 percent less than
11	branded drugs. They account for 56 percent
12	of all prescriptions and less than 13 percent
13	of all pharmaceutical expenditures.
14	The last time TEO studied
15	this issue in 1994 they found that generic
16	drugs saved consumers between 8 and $10
17	billion a year at a time when generic
18	substitution was vastly lower than it is
19	today.
20	Antitrust enforcement in the
21	generic drug industry is essential. Let me
22	put this into context. Today you can walk
23	out of this hearing room and go to your
24	local pharmacy and buy a generic form of
25	Remeron, Relafen, Buspar, Taxol, Augmentin,

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1	Paxil, Coumadin, and Platinol. For each of
2	these drugs, the branded pharmaceutical firm,
3	a dominant firm attempted to extend its
4	monopoly through some form of alleged
5	exclusionary conduct.
6	In some cases they filed sham
7	petitions before the FDA. In some cases they
8	engaged in sham litigation. In other cases
9	they engaged in inequitable conduct before
10	the Patent and Trademark Office.
11	All together, these drugs
12	accounted for more that $10 billion of
13	purchases by U.S. consumers. And because of
14	enforcement actions taken by the Federal
15	Trade Commission, the state attorneys
16	general, and private antitrust attorneys,
17	these actions were stopped. And today's
18	consumers save billions of dollars because of
19	those enforcement actions.
20	Policing exclusionary conduct
21	by branded pharmaceutical companies could not
22	be a greater priority. In the next four
23	years, over $60 billion of branded
24	pharmaceuticals will go off patent.
25	Unfortunately, the pharmaceutical industry

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1	offers many opportunities for dominant
2	branded firms to manipulate a highly complex
3	regulatory system to secure monopoly profits,
4	not through superior foresight, industry, and
5	innovations, but by finding loopholes to
6	delay competition.
7	Now, let's start off with why
8	pharmaceuticals are different. Now, my
9	colleagues on the panel today are going to
10	talk about the need for simple rules.
11	They're going to talk about the need for
12	going and creating bright-line tests so it
13	will be easier for their business people to
14	do what they're supposed to do, compete in
15	the marketplace. As an antitrust
16	practitioner, I can appreciate their
17	perspective.
18	However, I think that the
19	Commission and the Antitrust Division should
20	be extremely cautious about simple rules for
21	dominant firms. As Justice Scalia has
22	observed, the conduct of a dominant firm is
23	viewed through a special lens. Behavior that
24	might otherwise not be of concern under the
25	antitrust laws can take on exclusionary

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1	connotations when practiced by the
2	monopolist.
3	Now, I think there are four
4	factors in the pharmaceutical industry that
5	should make people cautious about bright-line
6	rules in this industry. First,
7	pharmaceuticals are heavily regulated; and as
8	my testimony sets forward, this provides a
9	remarkable number of opportunities for
10	engaging in what's been called by the FTC
11	cheap exclusion.
12	Second, who is the buyer?
13	Now, knowing who the buyer is is critical to
14	defining markets and determining market power
15	and also oftentimes to determine whether or
16	not certain parties have standing. But in
17	the pharmaceutical industry is the ultimate
18	buyer the consumer, the insurance company,
19	the pharmaceutical benefit manager, the
20	physician who prescribes the drugs, or a
21	combination of all of these?
22	Third, pharmaceuticals have
23	high fixed costs but very low average
24	variable costs. And so when my colleagues
25	today go and talk about bright-line rules for

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1	predatory pricing, those might not apply that
2	well in a setting with that kind of cost
3	structure.
4	Then finally, forms of
5	distribution are complex. Pharmaceuticals
6	are distributed through all these numerous
7	different intermediaries, and not all
8	distribution mechanisms are the same. Maybe
9	in the questioning period we'll go and talk
10	about distribution exclusivity cases where I
11	can address some of these ideas.
12	Now, I want to talk today
13	about two form -- fortunately through a
14	combination of the FTC's and State Attorneys
15	General enforcement actions, the FTC's
16	advocacy to Congress, Congressional
17	legislation, many of the recipe -- the recipe
18	book for anticompetitive conduct by dominant
19	pharmaceutical companies has basically been
20	thrown out. But like all good cooks, the
21	pharmaceutical companies have come up with
22	new forms of anticompetitive conduct, and I
23	wanted to talk about two of them today to
24	illustrate the importance of a couple things,
25	the importance of antitrust enforcement, the

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1	importance of a balanced rule of reason
2	analysis in looking at exclusionary conduct
3	and staying away from per se bright-line
4	rules. And those two types of conduct are
5	product line extensions and abuse of the
6	regulatory process.
7	Now, let me explain product
8	line extensions. As in any other area, there
9	are changes in products. We all try to
10	improve our products. One of the key things
11	to remember here is that for a generic firm
12	to enter, it is essential for there to be a
13	branded firm that is listed and been approved
14	by the Food and Drug Administration. And the
15	way this process almost invariably works is
16	that the generic firm goes and copies a
17	branded drug. The branded drug goes off
18	patent or the generic firm prevails in patent
19	litigation, and then the generic firm enters.
20	But sometimes the product
21	line extensions can have anticompetitive
22	effects. The FTC recognized this in the
23	merger of Cima and Cephalon. Cephalon made a
24	branded drug that was used to treat pain when
25	you underwent cancer treatments. It was

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1	acquiring Cima which was developing an
2	alternative product. The FTC uncovered in
3	the course of its investigation that part of
4	the reason for the acquisition was a
5	product-switching plan by Cephalon. They
6	planned, once they acquired Cima, to go and
7	take the Cephalon product out of the market,
8	to delist it. And in fact, that would have
9	prevented generic firms from being able to
10	enter the market for this drug.
11	In order to resolve the
12	competitive concerns posed by this merger,
13	the FTC required Cephalon to sponsor generic
14	entry on the form of that drug that it
15	manufactured.
16	Now, if you were to read one
17	case in the area of pharmaceutical antitrust,
18	I suggest you read the case of Abbott versus
19	Teva. Now, this case will remind you of the
20	cartoon in Peanuts where Linus keeps coming
21	up to try to kick the football. And every
22	time Linus goes and tries to kick the
23	football, Lucy picks up the football, and he
24	misses it and falls flat on his back.
25	There's a drug called Tricor

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1	which is used to lower cholesterol. It's am
2	almost billion dollar drug. Impax and Teva
3	were developing a generic alternative. Each
4	time they were poised to enter, the branded
5	pharmaceutical manufacturer made some small
6	change to the product, thus preventing them
7	from being able to enter. The last change
8	was changing the product from a capsule
9	version to a tablet version. The tablet
10	version was supposedly superior because it
11	didn't have to be taken with food.
12	But Abbott didn't just change
13	the product. After the tablet formulation
14	was approved, it stopped selling the Tricor
15	capsules. It bought up all the excess Tricor
16	capsules. And then there's this important
17	register. It's called the National Drug Data
18	File. And the only way you can get a
19	generic drug into the market is if it's
20	listed in the NDDF. And what Abbott did is
21	it listed -- changed the code for Tricor
22	capsules in the National Drug Data File to
23	obsolete.
24	Anyway, so let's go to the
25	litigation. Abbott and Teva sued, along with

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1	a group of buyers of drugs. And the
2	defendants basically say, you know, this is a
3	product improvement. There is no role for
4	antitrust here. There is a per se legal
5	rule. In order to demonstrate a violation,
6	they would have to show that quote: The
7	innovator knew before introducing the
8	improvement into the market that it was
9	absolutely no better than the prior version,
10	and that the only purpose of the innovation
11	was to eliminate the complementary product of
12	a rival. That was the standard articulated
13	by Abbott.
14	And you know, there was case
15	law that supported Abbott's position, though
16	not in the pharmaceutical industry. Now,
17	rather than adopting the rule of a per se
18	legality, the Court went back to the test
19	articulated by the D.C. Circuit in Microsoft
20	which suggests a rule of reason balancing
21	test. And it said the per se rule as
22	proposed by the defendants presupposes an
23	open market where the merits of any new
24	product can be tested by unfettered consumer
25	choice. But here, consumers were not

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1	presented with a choice between the products.
2	Instead, they eliminated that choice by
3	removing the old formulations of the
4	products.
5	Now, I know my colleagues on
6	the panel, their hair is about to stand up
7	at this point because what this Court has
8	basically suggested is that there is a duty
9	to deal. That a dominant firm in some sense
10	has some kind of obligation, a duty to deal,
11	with its rivals. How could that be? Well,
12	let's see what the Court said.
13	It said, A co-monopolist is
14	not free to take certain actions that a
15	company in a competitive or even
16	oligopolistic market may take because there
17	is no market restraint on a monopolist's
18	behavior, harkening back to Justice Scalia's
19	idea that I mentioned before.
20	So in this case where the
21	dominant firm went beyond a simple product
22	innovation, but also created obstacles for
23	the other firms to effectively enter the
24	market, that was a violation.
25	Now, there's a similar case

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1	in the E.U. and in Canada involving Astra Zeneca,
2	the drug Lobec. In this case violations were
3	found in both of those jurisdictions. In
4	that case what happened was as the patents on
5	the drug were expiring, Astra Zeneca filed
6	for additional patents, but these were
7	patents that really weren't used on improving
8	the drug. These were just additional patents
9	to create the additional obstacles. And
10	again, antitrust violations were found.
11	The most interesting case
12	here is a case that was just filed in the
13	past year or so, and it involves the very
14	well-known conversion of the drug Prilosec to
15	Nexium as Prilosec was losing its patent
16	protection. This again involved Astra
17	Zeneca. This is something like a $4
18	billion-a-year drug.
19	In the alleged
20	anticompetitive conduct it was said, up to 18
21	months before Astra Zeneca was about to lose
22	exclusivity it stopped promoting the drug,
23	and instead, started to make negative claims
24	about the drug. Now, I don't know about you
25	or me, but I just don't know when people

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1	start making negative claims about their
2	drugs.
3	More important than just
4	creating Nexium, they also effectively
5	withdrew Prilosec from the market, so it was
6	impossible for managed care organizations to
7	go and sort of continue to contract for
8	Prilosec.
9	And so when generic Prilosec
10	was about to arise, there was no possibility
11	for it to substitute for branded Prilosec.
12	And one of the most
13	interesting issues and maybe something worth
14	discussing later on is the fact, as alleged,
15	that Nexium was no improvement on Prilosec.
16	Let's go on to the issue of
17	petitioning and litigation. You know, one of
18	the most important achievements of the
19	Federal Trade Commission has been the focus
20	on sham petitioning and the use of regulatory
21	processes to create competitive harm.
22	Probably the case in which they've brought
23	the most consumer benefits was the Unocal
24	case in which it attacked sham petitioning by
25	Unocal before the California Resources Board

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1	that costs consumers in California over $500
2	million annually.
3	Sham petitioning is a serious
4	problem. As the FTC's recent staff report on
5	the Noerr-Pennington Doctrine observed: One
6	of the most effective ways for parties to
7	acquire or maintain market power is through
8	the abuse of governmental processes. The
9	cost of the party engaging in such abuse is
10	typically minimal, while the anticompetitive
11	effects resulting from such abuse are often
12	significant and durable.
13	Anticompetitive conduct
14	through regulatory abuse can be especially
15	pernicious if, God forbid, Kodak or GE were
16	to engage in any kind of abusive conduct.
17	If they exploited their dominant power, it
18	would be short lived. Why? Because there are
19	numerous firms poised to go and battle them
20	for that role of king of the hill. But when
21	your job as king of the hill was gained
22	through abuse of the regulatory process, no
23	natural force can displace you. That's why
24	abuse of the regulatory systems is so
25	pernicious.

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1	This is especially the case
2	in the pharmaceutical industry. The cases I
3	identified at the beginning of my testimony
4	were cases which were largely based on abuse
5	of the regulatory system.
6	Almost 30 years ago, Judge
7	Bork observed that predation by abuse of
8	governmental procedures, including
9	administrative and judicial processes,
10	presents an increasingly dangerous threat to
11	competition.
12	No statement could be more on
13	point for the anticompetitive conduct in the
14	pharmaceutical industry and the practice of
15	so-called citizen petitions. The FDA, like
16	many regulatory agencies, offers the
17	opportunity for citizens to petition them to
18	raise questions about safety and efficacy and
19	other issues. And that process is obviously
20	well intentioned, but it's abused to an
21	increasingly significant extent.
22	What happens is again, when a
23	generic company is poised to enter the
24	market, the brand company will file a
25	frivolous petition on the eve of FDA

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1	approval. That may be despite the fact that
2	the FDA may have granted a tentative
3	approval, that maybe despite the fact that
4	similar petitions have already been filed.
5	The brand strategy is just simply delay the
6	generic drug from the market. And you can
7	imagine when you're talking about drugs in
8	which the amount of profits amount to 10 to
9	$20 million a day, this could be a very
10	attractive opportunity.
11	The FDA citizen petition
12	process provides significant opportunities for
13	deception. There are no requirements for
14	proof of the accusations made in the
15	petition. No requirements for certification
16	of the accuracy of the information. There
17	are no penalties for inaccurate or improper
18	filings. There are no limits on the number
19	of filings that may be filed. Some petitions
20	contain little or no evidence or rely on
21	obsolete, irrelevant, or erroneous
22	information.
23	The FDA has even noted the
24	fact that they've seen several examples of
25	citizen petitions seemingly designed to delay

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1	the approval of generic approval.
2	So let's look at the numbers.
3	You know, if I wanted to make it to Wrigley
4	Field this spring, if I wanted to join the
5	Cubs for spring training, I'd want to have a
6	pretty good batting average. Otherwise, they
7	wouldn't look at me.
8	What's the batting average on
9	citizen petitions? Since the Medicare
10	Monitorization Act was passed in 2003, there
11	have been 45 citizen petitions filed
12	challenging the conduct trying to delay the
13	entry of generic drugs. 45. 21 of these
14	have been resolved. One has been resolved in
15	the favor of the petitioner. One. 20 have
16	been denied.
17	Now, if I'm batting at .05
18	percent, I'm not going to get much of a
19	try-out at Wrigley Field this spring. None
20	of the last-minute -- many of these petitions
21	were filed within the four-month period prior
22	-- half of them were filed in the four-month
23	prior period to the entry of the drug. Did
24	any of those succeed? None. Not one.
25	Well, how much do they delay

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1	things? Those late-filed petitions delayed
2	things an average of ten months. And in one
3	case, the amount of delay cost consumers an
4	estimated $7 million a year.
5	Is this a small problem?
6	No. According to the statistics of the FDA,
7	there's been a 50 percent increase in the
8	number of citizen petitions they have
9	received. And there are about 170 citizen
10	petitions pending compared to only 90 in
11	1999.
12	Now, one of the most
13	illuminating observations of the FTC report
14	on the Noerr-Pennington Doctrine was its
15	observation about how serial sham litigation
16	conduct should be analyzed. I think the FTC
17	should go and apply the ideas that it has
18	and the expertise it's developed, both in
19	that report and in its enforcement action in
20	Unocal to give a very serious look at the
21	citizen petition process. Let me conclude.
22	Antitrust plays a vital role
23	in maintaining rivalry as the lone star of
24	the marketplace. Competition is critically
25	important where many of the factors

29

1	identified earlier can forestall competition.
2	The FTC, State Attorneys
3	General, and private antitrust lawyers have
4	played an important role in protecting
5	pharmaceutical markets from artificial
6	barriers to competition, and I hope these
7	hearings keep Section 2 as a robust statute
8	so that it can continue to be used to
9	protect the interest of consumers and
10	competitors in this vital market. Thank you.
11	(Applause)
12	MR. TARONJI: Thank you,
13	David. Our next speaker is Patrick Sheller.
14	Patrick is the chief compliance officer for
15	Eastman Kodak Company. In that capacity he
16	is responsible for Kodak's code of conduct
17	and internal investigations.
18	Prior to his current
19	assignment, Patrick held a variety of
20	business positions and was Kodak's chief
21	antitrust counsel and also was involved in
22	legal matters in Europe.
23	Prior to Kodak he was in
24	private practice with a law firm that is now
25	known as McKenna, Long & Aldridge, and is a

30

1	former Federal Trade Commission attorney,
2	having worked in the Bureau of Competition
3	and as attorney adviser to Chairman Daniel
4	Oliver. He is a graduate of St. Lawrence
5	University and the Albany Law School at Union
6	University. Patrick.
7	MR. SHELLER: I want to
8	thank the Department of Justice and the FTC
9	for the opportunity to speak to you today.
10	It's an important time in antitrust
11	law for our economy, and it's a particularly
12	important time for Kodak. I suspect one
13	of the reasons we were invited to participate
14	in these hearings is Kodak's well documented
15	experience with the Section 2 enforcement
16	which began in 1921 when an investigation by
17	the Department of Justice was settled through
18	a consent decree which prohibited Kodak, among
19	other things, from selling a fighting
20	brand of consumer film, also known as
21	private-label film.
22	In 1954 we settled an
23	investigation with the Department of Justice.
24	This matter involved alleged tying of consumer
25	color negative film with photo processing

31

1	services. Under this consent decree we
2	were prohibited from selling these two
3	items under a single price.
4	In 1979 our luck turned a
5	bit. We benefitted from a primarily favorable
6	ruling by the Second Circuit in the Berkey
7	Photo case where one of our competitors
8	challenged Kodak's introduction of the 110
9	photographic system that included a camera,
10	specially formatted film, and a new photo
11	processing service.
12	One of the key rulings in
13	that case was that a monopolist has no
14	obligation to predisclose new products to a
15	competitor. And, to the extent that a
16	monopolist engages in truthful advertising,
17	that conduct does not offend Section 2.
18	In 1991 our luck turned in
19	the other direction again with the Supreme
20	Court's decision in the ITS v. Kodak
21	case. This was an action brought by
22	independent service organizations that were
23	competing against Kodak in the service of
24	photocopiers and micrographics units. It
25	was in the ITS case that the court established

32

1	the so-called single-brand derivative
2	aftermarket; the notion being that once a
3	customer chooses to purchase an expensive
4	item of capital equipment, they're now locked
5	into that particular brand or manufacturer.
6	Whether or not that manufacturer has
7	market power in the primary market for
8	photocopiers, for example, was determined to
9	be irrelevant to the Supreme Court. The ITS
10	case went back to the trial court on remand,
11	and I'll speak more to the trial in a minute.
12	In 1994 Kodak challenged some
13	aspects of the 1921 and 1954 consent decrees.
14	We were successful in overturning the private
15	label restriction and the prohibition on
16	linking film with photo finishing sales,
17	primarily because we were able to demonstrate
18	to the District Court and to the Second Circuit
19	that market conditions had changed
20	significantly.
21	By 1994, Kodak was
22	competing on a global basis with a number of
23	foreign suppliers as opposed to the market
24	conditions that existed when these consent
25	decrees were entered into.

33

1	Finally, in 1996 the
2	Ninth Circuit heard Kodak's appeal
3	of the jury verdict in the ITS case. The
4	jury found that we had engaged in an unlawful
5	refusal to deal by refusing to provide
6	patented and copyrighted parts and copyrighted
7	diagnostic software and manuals to ISO's.
8	The key ruling in that case,
9	for purposes of my remarks today, was
10	that an IP owner faces restrictions on its
11	ability to refuse to deal with ISOs by refusing
12	to license its IP.
13	The Ninth Circuit picked up
14	on the First Circuit's decision in the Data
15	General case in holding that there is a
16	presumption in favor of an IP owner, that
17	it has a legitimate business justification
18	for refusing to deal with a rival. But that
19	presumption can be overcome by evidence that
20	the IP owner had an anticompetitive intent. The
21	9th circuit's ruling essentially opens the door
22	to ISO's to come up with evidence in the form of
23	internal documents showing that the IP owner
24	was trying to keep out competition through
25	its decision to refuse to deal.

34

1	Now, the history of Kodak's
2	experience with Section 2 parallels in many
3	ways the evolution of our company, our
4	technology, and our business model.
5	Beginning in the 1880's and through the
6	70's, the focus of our business was on
7	consumables. We primarily sold film
8	products, paper products, and chemicals.
9	We engaged in the sort of razor/razor blade
10	model of selling cameras in order to generate
11	more film sales.
12	The company began to
13	diversify its portfolio in the late 60's to
14	1970's, and we began to offer more expensive
15	items of capital equipment such as
16	photocopiers, micrographics equipment, and
17	graphic arts equipment. And in this sense
18	our business model began to change to
19	offering hardware plus aftermarket service.
20	It was in this context that the ITS case
21	arose.
22	We are now in the process of
23	a monumental shift in the business model of
24	our company as we try to become a digital
25	company as opposed to an analog technology player.

35

1	The focus of our business going forward is
2	going to be on selling solutions. Solution
3	selling is very common in the digital world
4	where companies will bundle a portfolio of
5	offerings that include hardware, software,
6	consumables, consulting services, and
7	aftermarket service into a single price to
8	sell to customers who demand an end-to-end
9	solution.
10	Our sales focus going forward
11	will be on digital products such as photo
12	printer kiosks, image centers. We announced
13	last week the introduction of a new line of
14	consumer ink-jet printers, which means Kodak will
15	now be competing in a new market. We will also
16	offer Digital cameras, media ink, and so forth.
17	Elements of the old
18	business models still remain at Kodak. We
19	will continue to sell film. But our focus
20	will be on solution sales, and there will be
21	be a real emphasis within the company on the
22	ability to sell in this environment.
23	We face a number of
24	challenges as we try to participate in the
25	digital world. Some critical success

36

1	factors to our new digital model are, first
2	of all, that we rapidly innovate and
3	develop new technology to commercialize
4	new products. Digital companies constantly
5	introduce new versions of their products.
6	We have to keep pace in this fast-moving
7	environment. And in that sense, intellectual
8	property has become increasingly important to
9	Kodak.
10	We need to be able to
11	protect our research and development
12	investments, wherever possible, through patents
13	and copyrights, and we need to be able to
14	protect these assets in a way that doesn't
15	offend the antitrust laws.
16	One of our key strategies
17	going forward is to monetize our intellectual
18	properties. Kodak has, for the last
19	several years, entered into numerous
20	licensing agreements with other digital
21	players in the industry, and we need to be
22	able to go about that licensing activity
23	without fear of antitrust concerns, as
24	I'll talk about in a few minutes.
25	And finally, as I mentioned,

37

1	solution selling is critical to our success
2	in the digital world. A good example is
3	our graphic communications business which
4	sells graphic solutions to printing firms.
5	These solutions include software, work-flow
6	software, hardware, consumables, consulting
7	services, and aftermarket service.
8	So what are some of the
9	Section 2 impediments to our success in this
10	new digital world? First of all, we
11	would encourage the antitrust agencies and
12	the courts to recognize the importance of
13	market changes. As we saw with our attempt
14	to overturn the 1921 and 1954 consent
15	decrees, we were forced to litigate with the
16	Department of Justice over the issue of
17	whether Kodak was competing in a worldwide
18	market versus a domestic market.
19	And to the extent that
20	further challenges arise to our practices in
21	the film environment, we would encourage the
22	agencies and the courts to recognize the
23	substantial influence of digital technologies
24	on markets that were previously dominated
25	by film.

38

1	As we saw literally overnight
2	earlier in this decade, our film business
3	began to decline dramatically in the year
4	2001. We initially thought it was a result
5	of reduced demand following the 9/11 attacks,
6	but the market never came back. It was because
7	many customers had decided to convert from film
8	to digital. And many customers that make this
9	conversion never come back to film.
10	Another impediment to our
11	success in the digital world relates to the
12	antitrust line between tying and bundling. This
13	line is becoming increasingly blurred as a
14	result of the LePage's and other decisions, which
15	I'll speak to more in a few minutes.
16	Finally, obstacles to our
17	ability to monetize our intellectual property
18	investments exist in the form of cases like the
19	Ninth Circuit's decision in the ITS case and
20	precedents in the European Union such as
21	the McGill case and the INS Health case where
22	the Commission required compulsory licensing
23	licensing by intellectual property owners.
24	Let me first turn to the
25	LePage's decision and the uncertainty that

39

1	case has left companies like Kodak with. While
2	the Third Circuit had an opportunity to
3	clarify the application of Section 2 in the
4	area of bundled discounts, in our view it
5	squandered that opportunity by deciding the
6	case on its narrow set of facts. The court
7	ruled said that 3M's practice of bundling its
8	branded Scotch tape with both private-label
9	3M tape and with other 3M products caused
10	injury to its competitor, LePage's, and
11	therefore offended Section 2.
12	The only parameters that
13	we are able to draw from the LePage's decision
14	in terms of an alleged monopolist's ability
15	to engage in pricing activities are, first of
16	all, that single-product volume discounts are
17	permissible. The court made that clear. But
18	what's at risk following the 3M/LePage's
19	decision, are discounts linking products
20	across multiple markets where an alleged
21	dominant product is involved, and also
22	discounts linking a dominant product
23	with others across a single product
24	line, such as the linking branded and
25	private-label tape. We are left with

40

1	no coherent standard with which to
2	evaluate bundled pricing under the
3	LePage's decision.
4	We would submit there were
5	better alternative paths that the Third
6	Circuit could have taken in evaluating the
7	case against 3M. The Eighth Circuit's
8	decision in Concord Boat applied the Brooke
9	Group decision by the Supreme Court to find
10	that as long as single-product discounts are
11	above cost, they should not be considered
12	exclusionary under Section 2.
13	It would have also been helpful
14	if the court had given some thought to the
15	Ortho Diagnostic's Systems case by the Southern
16	District of New York where the court articulated
17	its analysis of the alleged bundling by asking
18	whether an equally efficient competitor to the
19	monopolist could profitably match the bundled
20	price the in the market. That would have
21	been an arguably more rational test to apply.
22	While we could previously
23	rely on the very clear distinction between
24	tying on the one hand where a monopolist
25	tries to force the purchase of a second

41

1	non-monopoly product, we now have to deal with a
2	precedent that articulates no coherent standard
3	such that bundled discounts now come under scrutiny.
4	As I said before, bundling is very important to our
5	ability to offer solution sales.
6	Turning to the issue of IP
7	rights, as I mentioned, a very importantbr>
8	strategy of Kodak going forward is our ability
9	to monetize our IP portfolio. The Ninth
10	Circuit's decision in the ITS case has had a
11	a chilling effect on that activity. There thebr>
12	Court held that although there is a presumption in
13	favor of an IP owner's right to refuse to license
14	a competitor, that presumption can be overcome by
15	evidence of bad intent. And that evidence can
16	take the form of internal company documents.
17	We think that the Federal Circuit,
18	which considered very similar facts in the Xerox v.
19	CSU case got the issue right when it held that in
20	the absence of tying, fraud or sham litigation,
21	it's not appropriate to inquire into the IP owner's
22	subjective motivations for asserting a statutory right
23	to exclude. The Xerox court held that the same
24	rationale would apply to asserting copyright
25	protection as the basis for a refusal to deal.

42

1	As a result, we have a
2	clear split among the circuits that has
3	created a great deal of uncertainty on the
4	part of the IP owners and companies that
5	provide aftermarket service.
6	Where does the uncertainty
7	in these two areas leave Kodak and other
8	companies? First, if we're successful with our
9	digital strategy, and we're able to achieve a
10	leading market position in some of the new
11	digital markets where we participate, our ability
12	to offer competitive bundled pricing could be
13	constrained by the LePage's decision. As I
14	said, bundled pricing is really the essence
15	of solution selling.
16	Second, notwithstanding a
17	lack of market power in the primary equipment
18	markets in which we compete, we still face
19	potential challenges by ISO's that can allege that
20	Kodak dominates a single brand aftermarket
21	for a particular line of equipment. Such ISOs
22	will try to require us to license or sell our
23	valuable intellectual property.
24	Let me offer a few examples
25	of the dilemmas these ambiguities can create,

43

1	and these are hypothetical examples. First,
2	sell a line of photo kiosks that you may have
3	seen at a number of retailers. A question
4	arises as to whether Kodak can offer retailers
5	bundled discounts on the kiosks, our paper
6	that runs through these kiosks and the
7	aftermarket service. Could we also include
8	digital cameras in that bundle when we sell
9	to retailers? Could Kodak refuse to license
10	our valuable diagnostic software on these
11	photo kiosks to an ISO that wishes to compete
12	with us?
13	Turning to our intellectual
14	property strategy. We are in the process of
15	entering into licensing agreements with a
16	number of companies that we believe have
17	infringed our patent portfolio in the digital
18	camera area. The question arises whether,
19	in approaching a particular company we
20	believe violates our patents, can we refuse
21	to license the companies' rights in our patents
22	simply because they are competitors. And does
23	that situation get any worse because we've got
24	an internal document suggesting that a reason
25	for refusing the license was to gain an upper

44

1	hand in the marketplace.
2	Could we, in licensing to
3	other digital camera sellers, bundle Kodak
4	software that allows customers to view their
5	images on a PC?
6	We offer an on-line photo
7	service where you can upload your photos and
8	order prints or order prints on different items
9	like T-shirts and coffee mugs. This is called
10	the Kodak Easy Share Gallery. The question arises
11	whether in the event we were to gain a leading
12	market position with our Kodak Photo Gallery,
13	we could say to our customers who agree to
14	store a fixed number of images on our site
15	that they will get a discount on their
16	prints?
17	And finally with respect to
18	our graphics business, which I mentioned is
19	very much focused trying to meet the end to
20	end work-flow demands of our customers, are
21	there antitrust concerns with our selling
22	graphic communications equipment, software,
23	consumables, consulting services, and
24	aftermarket services as a bundle? Should it
25	make a difference that our customers demand

45

1	such solution sales?
2	These are some of the issues
3	that we grapple with in light of the
4	uncertainty under Section 2 that I've
5	outlined, and I'll look forward to further
6	discussion on these and other issues when we
7	get to the questioning period.
8	(Applause)
9	MR. TARONJI: Thank you,
10	Patrick. Our next speaker is Ron Stern.
11	Ron is the vice president and senior
12	competition counsel for the General Electric
13	Company. Ron received his AB from Brown
14	University and his law degree from Harvard.
15	He clerked for Judge Harold
16	Leventhal of the U.S. Court of Appeals for
17	the D.C. Circuit and for Justice Potter
18	Stewart of the U.S. Supreme Court. He was
19	in private practice with Hughes, Hubbard &
20	Reid and was a partner with Arnold & Porter.
21	In addition, he was the
22	special assistant to the Assistant Attorney
23	General for the Criminal Division of the U.S.
24	Department of Justice. Ron.
25	MR. STERN: I'd like to

46

1	begin by thanking the Antitrust Division and
2	the Federal Trust Commission for holding
3	these hearings and for providing me and
4	others with the opportunity to address
5	important issues relating to the application
6	of the antitrust laws to single-firm conduct.
7	In particular, I would like
8	to thank the staff at both agencies who have
9	organized these hearings and put in the hard
10	work required to make them a success.
11	I also want to make clear at
12	the outset that the views and opinions that I
13	am providing today and that are in the
14	written slides are my own personal views and
15	not those of the General Electric Company or
16	of other General Electric officials.
17	Let me begin with an
18	overview. I want to agree with the heads
19	of the two agencies that are hosting these
20	hearings, the Assistant Attorney General and
21	the Chairman of the Federal Trade Commission,
22	that it is important to have clear,
23	administrable, and objective rules. This is
24	a key requirement, something that's really at
25	the heart of these hearings.

47

1	It's important for business
2	to avoid chilling procompetitive conduct.
3	It's also important for consumers. It's
4	important to help avoid inadvertent
5	violations and disputes and investigations
6	that end up wasting company time and
7	resources as well as the time and resources
8	of the agencies.
9	And finally, it's important
10	to reduce the cost of developing and
11	implementing business plans to foster
12	competition in the marketplace.
13	Now increasingly, as the
14	economy globalizes, it's not sufficient that
15	the U.S. rules are clear. The rules adopted
16	by other jurisdictions will, of course, affect
17	U.S. commerce. And I do not believe that it
18	is surprising or coincidental that the United
19	States, European Commission, and the
20	International Competition Network, an
21	organization formed by, I believe, more than
22	100 competition authorities around the world,
23	are all addressing the issue of competition
24	standards for single-firm conduct at this
25	time.

48

1	In a global economy this is
2	a global issue, not just a United States
3	issue; and that's important, particularly for
4	companies such as mine, that operate in a
5	number of global markets.
6	What I'd like to do today is
7	walk through from a counseling perspective
8	which is a perspective, I see every day,
9	and look at areas that could be clarified in
10	Section 2.
11	First, the issue is what kind
12	of rule governs. Is your conduct unilateral,
13	single-firm conduct, or is it multi-firm
14	conduct? Is it something that Section 1 governs
15	or Article 81 in Europe?
16	Or is it something that
17	Section 2 governs as single-firm conduct or
18	Article 82 in Europe?
19	The next issue is whether
20	there is a threshold solution or a threshold
21	screen that makes you comfortable that the
22	conduct doesn't violate the law? And one
23	important screen under the U.S. law is the
24	requirement of monopoly power.
25	If you can be sure that your

49

1	company isn't in that kind of position, it
2	doesn't control market prices, then you don't
3	have to worry about the nature of the conduct
4	and whether the conduct meets or doesn't meet
5	any of the different rules that have been
6	talked about during these hearings and are
7	being discussed today.
8	If the threshold isn't met,
9	then you have to look at the conduct and
10	decide whether the conduct is exclusionary or
11	not. And oftentimes what you're looking for
12	are clear rules that will guide you to allow
13	you to tell your client that they can safely
14	pursue X type of conduct because that's in a
15	safe harbor or that's clearly not a problem.
16	And then why are we going
17	through this entire exercise? Well, we're
18	going through the exercise basically because
19	there are risks and costs if you end up in a
20	gray area that someone thinks violates the
21	requirements.
22	There is the potential for
23	government enforcement actions and
24	investigations, and in the U.S. for private
25	treble damage action. And there are a host

50

1	of potential consequences, from injunctive
2	relief to fines, not in the U.S., but in
3	some jurisdictions, to treble damage awards,
4	legal fees, and the like.
5	So what I'd like to do is
6	continue to walk through the issues. One
7	issue that reinforces the concern that I'd
8	just like to touch upon is the fact that
9	jury instructions in the Section 2 area are
10	often particularly problematic. I've just
11	set some examples up on the screen, but
12	basically they involve very general types of
13	words. Is the conduct wrongful? Did one
14	buy more logs than were necessary or pay a
15	higher price than was necessary? Did the
16	firm engage in competition on the merits?
17	Whatever, again, a jury believes that means.
18	All of these things reinforce
19	the risk, particularly in the U.S.
20	environment, of treble damages and attorneys'
21	fees and large litigation costs. You
22	basically want to counsel to be in a safe zone
23	to avoid having to worry about jury
24	instructions.
25	So then back to the

51

1	beginning. Do you know whether you're in the
2	single-firm conduct area? We obviously have
3	the Copperweld decision and clear law that if
4	you're a company and you're dealing with a
5	wholly-owned subsidiary, you're one entity,
6	and you know that you can't violate Sherman Act
7	Section 1 by having an agreement in restraint of
8	trade because you don't have two parties. You
9	just have one.
10	The problem is under
11	Copperweld the application is unclear. The
12	law in the lower courts is divided as to
13	where the line is when you're dealing with
14	non-wholly-owned subsidiaries.
15	And one important thing that
16	the government could do is reinstate the
17	guidance that existed in 1988 with the
18	antitrust enforcement guidelines for
19	international operations. I've included
20	that in the slides.
21	And the clear guidance that
22	was given then, I think, would be important
23	to reinstate it, is that whenever you have
24	more than 50 percent of the voting securities
25	of a company owned by its parent or its

52

1	sister company, that whole family of
2	companies is one economic entity and is
3	subject only to Section 2, the single-firm
4	conduct section, and not Section 1. That's
5	one area in which I think clarity could be
6	added.
7	Now, if we move beyond, the
8	next issue is trying to identify whether your
9	company in the particular situation that
10	you're facing is subject to Section 2. And
11	the first element of Section 2 is having
12	monopoly power. The second element relates to
13	the conduct. Is there a willful acquisition
14	or maintenance of that power which is often
15	referred to as engaging in exclusionary
16	conduct.
17	Now, under United States law
18	there is a pretty helpful screen. You have
19	to have the power to control market price.
20	And in bidding markets, it's clear that if
21	there are other credible competitors, you
22	generally don't have the power to control
23	market prices, even if you have a very large
24	share.
25	The case law gives some very

53

1	helpful general rules of thumb. If you have
2	more than a 70 percent share, you have to
3	look at all of the other factors, but you at
4	least know that you're in a danger zone.
5	If you have less than a 50
6	percent share under the U.S. case law, it's
7	very unlikely that you have to worry about
8	whether your conduct could be categorized as
9	exclusionary.
10	Some people point to the fact
11	that attempted monopolization can occur at a
12	lower market share threshold, but you have
13	the very important counseling hook in the
14	element of attempted monopolization which is
15	the requirement of a dangerous probability of
16	achieving monopoly power, which brings you
17	right back to the monopoly power test.
18	So the key is, and I think
19	that's been very helpful, even for successful
20	firms, and certainly my company has a number
21	of successful businesses, that most
22	successful firms simply do not meet the
23	monopoly power test under U.S. law. And that
24	is helpful in counseling. But there are two
25	important howevers that I want to talk

54

1	about.
2	The first is the issue that's
3	been discussed that Patrick talked about, the
4	treatment of aftermarkets. And the second
5	are non-U.S. issues, that there are lower
6	dominance thresholds outside the U.S. And
7	indeed, there is the curious concept of
8	collective dominance, at least curious to a
9	U.S. antitrust lawyer outside the U.S., so
10	let me turn to those.
11	First I'd like to turn to
12	aftermarkets. As Patrick mentioned, this
13	comes from the Kodak case. There the
14	Supreme Court held that there was the
15	potential, not that it was always the case,
16	but the potential for there to be a single
17	brand parts and service market, even where
18	the company had a modest percentage and had
19	no monopoly power in the interband equipment
20	market. Here, Kodak had less than 25
21	percent, clearly in the safe harbor of the
22	interband photocopier market. Photocopiers
23	are often referred to as Xerox machines, not
24	Kodak machines. That's for a reason. They
25	didn't have market power. But they had a

55

1	very large share of an intrabrand parts and
2	service market for Kodak copiers.
3	Now, post-Kodak, there have
4	been a number of court cases interpreting
5	Kodak, and they have limited Kodak's
6	application in most circuits to a situation
7	in which there has been a change of policy
8	with respect to aftermarket sales of parts or
9	service. That however has not been uniform.
10	The Ninth Circuit is sort of an outlier.
11	All in all, what this does,
12	I believe, is create very significant
13	problems. All suppliers of capital goods are
14	exposed today to the notion of having to
15	worry about whether or not they fall under
16	Section 2 when they deal with parts and
17	services for the products that they sell.
18	And somewhat ironically, if
19	you have a modest market share, you're one of
20	the also-rans in the interbrand equipment
21	market, you may have a higher share of your
22	single-brand parts and service market for the
23	very simple reason that third parties tend to
24	focus on the most successful installed base
25	products to develop non-OEM parts and non-OEM

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1	services.
2	So the competitor with ten
3	percent in the interbrand equipment market
4	may be more likely to have a monopoly sharebr>
5	of a single-brand aftermarket than the
6	leading firm in the interbrand equipment
7	market.
8	So this is a problem and
9	it's a problem because it chills conduct. If
10	you're going to counsel, what it does is it
11	really counsels you to adopt restrictive
12	approaches from the outset and not change
13	them. Because if you do that, you really
14	don't have to worry about having a problem inbr>
15	this area.
16	I think the outcome is an
17	incorrect one. It has been heavily
18	criticized by a number of esteemed
19	economists, many of which have either been
20	former heads of the economic part of the
21	antitrust division or the current head.
22	Professor Carlton, Professor Shapiro,
23	Professor Klein, and Professor Hovenkamp have
24	all criticized the Kodak decision with respect
25	to aftermarkets and suggested that it is

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1	unnecessary and unsound.
2	And the Department of Justice
3	thought it was unsound in its amicus brief in
4	Kodak.
5	So I think what should be
6	clarified here is this notion of single-brand
7	aftermarkets. That concept from Kodak
8	should be overturned. The government should
9	give guidance, and should file amicus
10	briefs in courts to try to clarify
11	the law in this area.
12	The same thing should happen
13	in Europe. I have referenced comments by the
14	International Chamber of Commerce that are on
15	the DG Competition website with respect to
16	the Article 82 discussion paper which give
17	further reasons why there shouldn't be
18	single-brand aftermarkets.
19	Let's then turn to the issue
20	of monopoly power outside of the U.S. Here,
21	the International Competition Network has a
22	unilateral conduct working group, and it has
23	a draft report in-progress for its next
24	convention in Moscow. And what it has
25	found by surveying competition authorities

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1	around the world is that generally, the
2	presumption of dominance, which is essentially
3	the non-U.S. equivalent of monopoly power, is
4	set at a 33 percent to 50 percent level.
5	Now, that's below what is essentially the
6	U.S. safe harbor level.
7	And what it does, of course,
8	in a global marketplace is tend to expose a
9	much larger number of leading firms to the
10	potential that you have to worry about
11	whether your conduct is going to be
12	characterized in these regimes as abusive, or
13	if you use the United States approach, as
14	exclusionary.
15	Now, there's one good thing.
16	There's also a trend towards taking a
17	behavioral approach, which is looking at the
18	ability to set market prices, the same
19	approach taken under Section 2 in the U.S.,
20	rather than a purely structural presumption
21	based on market shares.
22	I'd like to turn to another
23	problem that I think is one that should be
24	addressed. It's not a huge problem today,
25	but it's the concept of collective dominance.

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1	The European Commission Article 82 discussion
2	paper talks about the fact that there can be
3	collective dominance simply in a
4	oligopolistic situation. You don't have to
5	have an agreement with your competitors as
6	long as a small number of firms control a
7	large combined share of the marketplace.
8	Then they can act in a way that supposedly
9	would abuse their collective dominant
10	position.
11	My sense is that this has
12	never been applied, as far as I know, but it
13	raises a real counseling concern. What are
14	you supposed to do if your rival raises
15	price? If all the other rivals in an
16	oligopoly do what they often do, and that is
17	match the price increase, have you then
18	committed and abouse of collective dominance?
19	If you have a policy of
20	having exclusive distributors and other
21	firms follow that policy because it's
22	efficient, have you violated collective
23	dominance? It's very hard to figure out how
24	to counsel. This is something that again,
25	isn't a real-world problem today, but I think

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1	should be one that is nipped in the bud so
2	it doesn't become a real-world problem
3	tomorrow.
4	And then secondly, there's a
5	separate issue in the draft anti-monopoly law
6	in China in which a firm that isn't a
7	leading firm, and that's true of course in
8	the collective dominant situation. If you're
9	not the leading firm in the marketplace,
10	generally you don't have to worry about
11	unilateral conduct.
12	But if either an oligopoly
13	situation presents a problem or under the
14	draft law in China, if two firms have
15	two-thirds of the market or three firms have
16	three quarters of the market, and you're the
17	second-ranked firm or the third-ranked firm in
18	that situation, as long as you have more than a
19	10 percent share, it appears that all of the
20	firms are treated as dominant and subject to
21	the listed abuses.
22	This law hasn't been adopted.
23	It hasn't been interpreted. It's not clearbr>
24	what this means, but it's out there and it
25	poses a potential risk that it seems to me

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1	the U.S. authorities ought to address and I
2	know in fact are addressing.
3	Let me turn to some of the
4	issues of conduct. The first one I'd like
5	to talk about are refusals to deal. And it
6	seems to me that this is an area in which
7	there is a real opportunity for clarity.
8	My colleague Mark Whitener
9	testified in the July 18 hearings on refusal
10	to deal and covered this at some length, I just
11	want to hit the high points. I'll refer you
12	to his testimony.
13	Basically, the law appears to
14	have evolved that an unconditional refusal to
15	deal, and from that I distinguish one that is
16	conditioned on taking a second product, which
17	is often referred to as tying, or a
18	conditional refusal to deal which says you
19	will deal with me, and you won't buy from
20	anyone else, usually called exclusive
21	dealing. Those things ought to be dealt
22	with, in my view an exclusive dealing or
23	tying. But if it's simply an
24	unconditional refusal to deal, I decline to
25	sell you the product, in those sorts of

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1	situations it seems to me there should be a
2	per se lawful rule.
3	Now what the case law has
4	evolved in the Trinko decision is a notion
5	that the Aspen Skiing case is the outer
6	limits. And the Aspen Skiing case involved
7	a refusal to continue to deal after there
8	had been a voluntary cooperation with the
9	plaintiff.
10	And the problem that that
11	approach creates is obviously it causes people
12	to be incentivized not to deal in the first
13	place. The concern would be if that's the law,
14	you would never have had the all-mountain pass
15	in Aspen in the first place because the party
16	with the three mountains would have known not
17	to enter into the cooperation because it
18	could have been accused of violating Section
19	2 should it have wanted to reverse course
20	later.
21	This creates perverse
22	incentives, and there is of course the
23	entractible problem of remedies. Courts
24	simply aren't set up to deal with the
25	situation of how does one decide what the

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1	terms should be, what the pricing should be.
2	This is another reason why if there's a
3	problem in this area, there should be
4	legislation and essentially a utility
5	commission set up. The antitrust laws and
6	the court shouldn't be handling this.
7	The same thing, I think, is
8	true of the essential facilities doctrine,
9	which is just another way of dealing with
10	unilateral refusals to deal. That doctrine
11	has been questioned by the Supreme Court, but
12	it seems to me the law could be clarified in
13	this area because the Court simply didn't
14	address it.
15	Let me then turn to another
16	area that's already been talked about a lot
17	today, and that is the area of bundled
18	discounts. It seems to me that although in
19	the afternoon session I know we're going to
20	hear a bit to the contrary, that unlike
21	predatory pricing, where there's some pretty
22	good and clear guidance about not pricing
23	below a measure of cost and the need for
24	recoupment, that in the bundled discounts, the
25	mixed bundling area, at the moment there is a