Antitrust & Competition Advisory - US and EU Authorities Signal Tougher Antitrust Enforcement

In nearly simultaneous actions, the US Department of Justice, Antitrust Division and its European counterpart, the European Commission’s DG Competition, have both signaled tougher antitrust enforcement, particularly regarding the conduct of companies with strong market power.  These recent developments highlight the need for companies to consider carefully what actions they take to remain competitive during economically challenging times.

“Change” Comes to the US Antitrust Division

On Monday, May 11, 2009, the newly-appointed Assistant Attorney General in charge of antitrust, Christine Varney, announced an abrupt reversal of the Antitrust Division’s policies for enforcing Section 2 of the Sherman Act against companies that have or may soon have a “monopoly.”  Under the previous administration of George W. Bush, the Antitrust Division had been criticized for lax enforcement of Section 2, notably bringing no new court cases in the span of eight years and, early during the administration’s tenure, declining to continue aggressively the Clinton administration’s case against Microsoft.  In the final months of the Bush administration the Antitrust Division also issued a Report on Section 2 enforcement.

The report came after extensive hearings jointly sponsored by the Division and the other federal agency enforcing US antitrust laws, the Federal Trade Commission, but it expressed only the views of the Division.  After extensively discussing cases and economic learning, the report announced standards that the Division would apply henceforth when considering whether a company had abused its monopoly power to the detriment of competition and consumers.  Criticized by some, including the FTC, which pointedly declined to join it, the report in effect adopted relaxed standards in order to avoid chilling economically efficient and innovative conduct by single firms faced with uncertainty about the competitive effects of their business decisions.

After taking charge in late April, Ms. Varney wasted little time—less than one month—to show everyone that “change” has come to the Antitrust Division by officially withdrawing the Bush administration’s Section 2 Report.  The accompanying press release called the action “a shift in philosophy and the clearest way to let everyone know that the Antitrust Division will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers.”

That same day and the day thereafter, Ms. Varney gave nearly identical speeches, first to a consumer-activist group and then the US Chamber of Commerce, explaining her new “philosophy.”  In these speeches, she invoked a legendarily tough enforcer, Thurman Arnold, who rooted out cartels that arose during the 1920s and the Great Depression, and emphasized the need for tough antitrust enforcement to protect consumers during the present economic crisis.  She explained that the Section 2 Report needed to be withdrawn because it had overstated the need to preserve economic efficiency and advocated “extreme hesitancy in the face of potential abuses by monopoly firms.”  Implicitly rejecting testimony by many during the hearings that it is hard for companies and courts to identify illegal conduct, she said that a handful of Supreme Court cases provide “tried and true standards that set forth clear limitations on how monopoly firms are permitted to behave.”  She also touched on enforcement against price-fixing cartels and merger enforcement, again emphasizing strong enforcement policies.  In the area of cartels, she announced a new initiative to train US procurement officials how to identify and prevent price fixing when spending the billions of new “fiscal stimulus” money intended to help the US economy.  Regarding mergers, she said she hoped “to explore vertical theories and other new areas of civil enforcement, such as those arising in high-tech and Internet-based markets.”

It remains to be seen, however, whether the Division’s new pro-enforcement “philosophy” will stand up in the federal courts, which have tended to accept the very kinds of economic and policy arguments underpinning the now withdrawn Section 2 Report.  In any event, it is clear that companies of all sizes will now be operating with greater uncertainty about whether and how Sherman Act Section 2 applies.

The More Things Change, the More They Remain the Same in the European Union

On Wednesday, May 13, 2009, the European Commission, the European Union’s antitrust watchdog, also demonstrated its tough stance towards companies with a strong market position, announcing its final decision that chip manufacturer Intel Corp. had abused its dominant position by entering into effectively exclusive contracts with computer chip purchasers.  The Commission imposed an administrative fine of 1.06 billion euros ($1.45 billion), the highest fine it has ever imposed on a single company for antitrust violations in the EU.  The fine represents 4.15% of Intel’s worldwide turnover in 2008 and is twice the amount imposed by the Commission against Microsoft in 2004 for tying and refusal to deal abuses.  To underscore the point, the European Commissioner in charge of competition law, Neelie Kroes, borrowed an Intel tag-line to say that her “vision for tomorrow” for Intel was for it to “obey the law.”

The Commission’s detailed explanation (spanning over 500 pages) has not yet been published, but the announcement included an overview that reveals much about the Commission’s thinking.  According to the Commission, at the heart of its case were rebates and direct payments that Intel made to computer manufacturers on condition that they bought substantially all of their chip requirements from Intel.  Intel also made direct payments to the same computer manufacturers in return for their halting or delaying the launch of specific products containing Advanced Micro Devices (“AMD”) chips or for limiting the sales channels for these products.

The Commission found that the conditional rebates fostered harmful exclusivity because computer manufacturers opting to source products from Intel’s (only) rival AMD, even for a small portion of their annual requirements, would have to forego a significant rebate on the large volume of chips that they needed to purchase from Intel in any event.  To compete against Intel’s rebate, AMD would need to offer prices low enough to compensate the customer for the lost conditional rebates on all the Intel purchases.  Those prices, the Commission found, would have to fall below AMD’s costs of production.  In effect, AMD could only win sales if it was willing to lose money.  The other payments to kill, delay or shunt AMD-based computers into less attractive sales channels, the Commission found, had the potential effect of preventing products from entering the market despite meeting some consumer demand.  Overall, the result was to deprive computer manufacturers of the ability to switch to AMD.  In turn, AMD was impaired in its ability to innovate and compete on the merits, which led to reduced choice for consumers.

The Intel decision is the first abuse of dominance decision after the European Commission adopted its Guidance on exclusionary conduct in December 2008 (the “Guidance”).  Although the Guidelines did not apply to the Intel case, the Commission contends that the Intel decision is consistent with it.  Under the Guidance, exclusive dealing by a dominant company is likely to harm competition if it causes prices to fall below the dominant firm’s long-run average incremental costs, i.e., relatively close to average total costs.  Comparing against the dominant firm’s costs (or those of an equally efficient competitor) is important, to avoid penalizing big companies for developing lower-cost production methods.  In the Intel case, however, it seems that the Commission compared against the costs of AMD, not Intel.  The Commission’s announcement mentions that Intel and customers viewed AMD as a viable competitor able to improve its product range over time, but it does not explain or even assert that AMD was equally efficient to Intel in manufacturing the competing chips.  Intel has already indicated that it will appeal the Commission’s decision to the Court of First Instance in Luxembourg, which will probably not rule for another two or three years.

*          *          *

In light of these recent developments, there is no question that companies now face antitrust regulators, both in Europe and the United States, eager to root out what they perceive as abuses of dominant market positions.  The EU’s Intel decision and record-breaking fine show what can be at stake.  The Antitrust Division’s withdrawal of the Section 2 report may also augur a move toward the European Commission’s views regarding single-firm conduct.  European Commissioner Kroes clearly would welcome such a move, as she reportedly greeted news of the withdrawal by stating, “The more competition authorities join us in our competition philosophy, the better it is.”  In this regard, it is interesting to note that now only the European Commission has written Guidelines describing how to analyze single-firm conduct.  It is also interesting to note that the US Federal Trade Commission has been conducting its own investigation of complaints against Intel and, according to Ms. Kroes, has been communicating closely with the European Commission.  We may soon have more guidance from the FTC in a second Intel decision.

For More Information, Please Contact:

Kenneth Ewing, kewing@steptoe.com, +1 202 429 6264
Yves Botteman, ybotteman@steptoe.com, +32 2 626 05 00