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— Judgment Call —
Change. President Obama promised to change the way the government operates, and he has already taken the first step regarding antitrust enforcement. During the campaign, Obama put a spotlight on the Justice Department's antitrust division. He sharply criticized Bush administration antitrust enforcement, contending the administration had "what may be the weakest record of antitrust enforcement of any administration in the last half century." In particular, he focused on the Bush administration's record on merger reviews and the DOJ's failure to bring a single monopolization case in seven years. He vowed to "reinvigorate antitrust enforcement" and "step up review of merger activity." Obama's recent appointment of a Clinton-administration antitrust veteran, Christine Varney, to head the DOJ antitrust division is the first step in fulfilling his vow.
If Varney's record as an enforcer is any indication, companies appearing before the DOJ in merger reviews or other antitrust investigations will likely face more aggressive antitrust enforcement than during the past eight years. Varney, who served as a commissioner at the Federal Trade Commission during the Clinton administration, will likely bring change to the DOJ in both merger and nonmerger antitrust enforcement. Varney's appointment may signal a resurgence of a doctrine developed in the Clinton administration but largely abandoned during the Bush administration -- innovation market analysis. This will mean more aggressive review of mergers in innovation-intensive industries. Varney was on the leading edge of the development of this type of merger analysis. While she was at the FTC, the FTC and the Justice Department issued guidelines that formally recognized the concept of innovation markets -- markets consisting of research and development directed toward particular goods or services. The agencies thereby defined a means to evaluate the competitive effects of merging competing research and development efforts, even if the product of the research and development may be years off. The idea is that preserving competing research and development efforts can spur innovation. Prior merger enforcement focused only on existing products or products that were likely to enter the market in a short time frame. Merging parties often argued that consolidating research and development was a source of efficiencies that enabled the combined firm to expand research and development efforts. Varney defended this new development as necessary for the antitrust agencies to "understand all of the dimensions of competition among firms" and to thereby protect innovation, which is vital to "advancing consumer welfare." She also joined in several decisions applying innovation market analysis to require that merging parties make divestitures to protect innovation. In 1994, for instance, the commission used innovation market analysis in reviewing the acquisition of American Cyanamid by American Home Products, which were two of three companies conducting research to develop a certain vaccine. The commission required the parties to license Cyanamid's vaccine research to ensure that the merger did not reduce innovation. Similarly, Varney joined the majority in using innovation market analysis to impose compulsory licensing in Ciba-Geigy and Sandoz, brushing aside objections that the licensing scheme was based on the much-maligned "essential facilities" doctrine and would put the commission in the role of price regulator. Varney's appointment also may signal a return to a more aggressive stance on vertical mergers, especially in high-tech industries. A focus on vertical merger issues marked the Clinton administration, but the Bush administration soon changed that focus. While at the FTC, Varney repeatedly defended the commission's vertical merger enforcement efforts, emphasizing in speeches that vertical mergers may create entry barriers, raise rivals' costs, and facilitate collusion. Although she recognized that there is "a great deal of theoretical controversy about the effects of vertical mergers," Varney argued that antitrust enforcers have "the tools" to separate those vertical mergers that are likely to cause anticompetitive effects from those that are not. Varney's views on vertical issues are evident in several decisions involving high-tech industry transactions. For example, in the Silicon Graphics Inc. case, which involved integration in the entertainment graphics workstation and software markets, Varney joined a 3-2 commission decision that relied on vertical foreclosure theory to require the merging parties to maintain an open architecture and publish their applications programming interfaces. Similarly, in Cadence Design Systems Inc., Varney joined the majority in applying vertical merger theory to an acquisition in the market for software for the design of integrated circuits. The majority found that Cadence's acquisition, of the firm that developed the most advanced version of a particular software tool to be used with Cadence's dominant layout software, could raise entry barriers. The commission, therefore, required Cadence to allow other tool developers continued access to interface protocols for its layout software. Varney also joined the majority in the commission's challenge to Time Warner Inc.'s acquisition of Turner and TCI, which highlighted vertical merger analysis. Varney may also step up DOJ review of vertical restraints, such as resale price maintenance, or RPM, minimum advertised price policies, and exclusive dealing. The Clinton administration brought a number of actions challenging these types of restraints. But Bush administration antitrust enforcers broke with their predecessors, and challenges to these types of restraints have been few and far between in the past eight years. Varney may change that. During her tenure at the FTC, Varney advocated greater enforcement against vertical restraints. In a speech before the American Bar Association in early 1995, she explained her thoughts on resale price maintenance cases: "Our enforcement agenda today is that resale price maintenance agreements are unlawful per se and the commission will enforce the law in this area." This was a clear change from Reagan administration antitrust enforcement. Even though the Supreme Court had long held RPM to be per se unlawful, the Reagan administration enforcers did not challenge these types of restraints. In fact, they did not bring a single pure vertical restraint challenge. True to her word, Varney joined in several important RPM challenges, including cases that expanded the scope of the per se rule in RPM cases. In a case against American Cyanamid, Varney joined the majority in inferring the existence of a per se illegal RPM agreement despite the fact that the defendants had never announced resale prices nor sought a commitment from distributors to sell at or above a certain price level. In a case against Reebok, Varney joined the Commission in condemning an RPM policy, enjoining Reebok from using "structured terminations" to effect RPM even though such terminations "falls into the 'gray' area of RPM jurisprudence." Varney also joined in a number of other cases challenging vertical price fixing agreements. The Bush administration, however, did not bring a single challenge to an RPM policy. Instead, the Bush administration urged the Supreme Court to overturn the per se rule against RPM, which the Court did in Leegin Creative Products v. PSKS Inc. Since then, there has been much speculation regarding when, under a rule of reason analysis, RPM is unlawful. Given her prior positions in this area, Varney's antitrust division may lead the charge in testing the boundaries set in Leegin by bringing challenges to vertical price restraints. If past is prologue, Varney's appointment suggests that Obama is looking to make good on his campaign promise to pursue a more aggressive and active antitrust enforcement agenda. Sean Gates is a Los Angeles-based partner in the antitrust and competition law group of Morrison & Foerster LLP. He is a former deputy assistant director with the Federal Trade Commission. Tej Srimushnam is a litigation associate in Morrison & Foerster's Washington office. |
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