Since the passage of the Sherman Antitrust Act in 1890, government efforts to support free-market competition and prevent the creation of monopolies have served as the twin pillars of antitrust policy in the United States.
Yet in practice, many businesses find it difficult to establish a clear line of demarcation between these two poles. The differences between beneficial competitive conduct and anticompetitive conduct are often slight and prone to interpretation.
Economic and market forces may also have adverse effects on what is otherwise considered fair competition. For example, the current financial crisis has led the U.S. Federal Reserve to force the changeover of Goldman, Sachs & Co. and Morgan Stanley from an investment-banking model to a commercial-banking model. As a result, midsized and boutique investment banks may now find themselves possessing a significantly larger share of the market -- which could raise concerns over anticompetitive practices.
To provide clarity, the U.S. Department of Justice convened a series of hearings focused on Section 2 of the Sherman Act, which prohibits single-firm conduct that undermines the competitive process and enables a firm to obtain or maintain monopoly power. In September, the DOJ issued its report, synthesizing the views expressed at the hearings and offering sound, clear policy on standards for analyzing single-firm conduct under Section 2. Major clarifications include the following:
Emphasis on competitive conduct. Perhaps the most important shift in DOJ policy is its move away from the focus on the existence of monopolies and monopoly power toward a more effective definition of conduct that is either prohibited (e.g., exclusionary, predatory, anticompetitive) or permissible (e.g., legitimate, competitive). In other words, rather than disallowing the mere possession or exercise of monopoly power, Section 2 prohibits the acquisition or maintenance of monopoly power through conduct harmful to consumers or the competitive process.
Meaning and definition of monopoly power. This change of focus from monopolies to anticompetitive practices is a direct result of the problematic nature of determining what constitutes both a "market" and, by extension, a dominant share of that market. While the report does suggest some criteria for determining whether monopoly power exists, it suggests these factors alone are insufficient to determine the existence of prohibited conduct.
Plaintiff bears burden of proof. The report clearly states that the plaintiff has the initial burden of establishing that challenged conduct harms the competitive process. The defendant must be provided with the opportunity to offer a pro-competitive justification.
Traditional conduct tests may be prone to error. In the past, five general tests have been used to determine the existence of a harmful monopoly: effects balancing, profit sacrifice, no economic sense, equally efficient competitor and disproportionality. The Department of Justice believes only the test of disproportionality represents the combination of effectiveness and administrability necessary to demonstrate anticompetitive liability.
Clarification of specific, prohibited conduct. The report further explores a range of business practices that can be analyzed to determine whether specific conduct harms or benefits competition and consumers. The DOJ recommends that claims of such practices be studied on their own and within the broader competitive context before determining potential liability.
Effective remedies. The DOJ suggests that equitable remedies to anticompetitive behavior should terminate a defendant's unlawful conduct, prevent its recurrence and re-establish the opportunity for competition without imposing undue costs on the court or the parties involved. Remedies should also avoid creating a chilling effect on legitimate competition or undermining incentives for business investment.
By reframing antitrust policy in terms of conduct rather than the mere existence of an actual or potential monopoly, the DOJ has provided businesses with clear guidance as they consider specific marketing initiatives and negotiate potential mergers and acquisitions.
William C. McMurrey is a partner in the corporate and securities, litigation, internal investigations and white-collar criminal defense practices at Bracewell & Giuliani LLP.