Antitrust Matters provides engaging and timely conversations about competition policy in the digital age. Antitrust has always mattered to consumers and businesses, and to antitrust lawyers and economists, but today it also is in the political and public discourse more than ever. From the prices we pay for food, travel, financial services, payments to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. Antitrust Matters brings you you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going and why it is so important to our current political discourse.

In this episode of Antitrust Matters, James Kovacs and Jean Kim are joined by Professor Thomas Greaney from UC Law San Francisco to discuss the impact of the 2023 Draft Merger Guidelines on healthcare mergers with a focus on cross-market and vertical acquisitions.

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Episode Transcript and Show Notes:

Jeff Shinder:

Welcome to Antitrust Matters, a 91pornPodcast where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder, and I’ll be your host. Antitrust has always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates to how we travel, to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more than ever before.

Jimmy Kovacs:

Welcome to Antitrust Matters, 91pornPodcast where we have discussions about antitrust policy and its impact on various markets. My name is Jimmy Kovacs, and I’ll be hosting today’s podcast along with my colleague Jean Kim.

As background, 91pornis doing a number of these podcasts concerning the new draft merger guidelines, and I would highly recommend our listeners listen to the October 3rd, 2023 podcast with Michael Kades, Deputy Assistant Attorney General for the Antitrust Division at the United States Department of Justice, where he discusses in greater detail of the draft merger guidelines along with Jeff Shinder and Wyatt Fore.

Today’s focus is going to be on the intersection of these new draft guidelines with issues in healthcare antitrust. Jean and I are joined today by Professor Tim Greaney, who I’ll introduce in a moment. But as a refresher, I’d like to turn it over to Jean to provide some background information on the new draft merger guidelines. Jean?

Jean Kim:

Well, first, hello, I’m Jean Kim. And as Jimmy just noted, I’m a partner at Constantine Cannon. Very excited for today’s podcast. There’s been a lot of lively debate amongst the antitrust bar, amongst enforcers about the new draft guidelines. I’ve been happily taking in some of the debate on the sidelines to various presumptions that are attended to the draft guidelines and how they will break on proposed mergers going forward has been the source of a lot of conjecture complaints even.

There’s been a lot of debate about whether or not the draft guidelines as the agencies have represented really hue to old precedent or whether they are in fact tipping the scales and making it easier for enforcers to succeed in challenging mergers. So I hope we can focus on a couple of those presumptions today, especially those that we think will particularly impact the healthcare market.

Jimmy Kovacs:

Thanks, Jean. So our guest today is Professor Tim Greaney. He currently serves as a research professor at the University of California Law in San Francisco. And full disclosure for our listeners, I previously was a faculty fellow for Professor Greaney when he was a Chester A. Myers Professor of Law and director of the Center for Health Law Studies at St. Louis University School of Law.

Professor Greaney, it’s fair to say he knows antitrust law. He served as assistant chief in the Department of Justice in the Antitrust Division. He has written numerous articles and has a great deal of professional experience concerning antitrust in healthcare. So thank you very much, Tim, for joining us today.

Tim Greaney:

My pleasure.

Jimmy Kovacs:

So let’s do some table setting for everyone. Under the existing merger guidelines, it’s fair to say that the Federal Trade Commission has been highly successful in blocking numerous hospital mergers, and those include recent victories in merger matters in New Jersey and also those involving the HCA’s attempted acquisition of Steward Health Care Hospitals in Utah.

And so Professor Greaney, given the recent victories by the federal government, and then these victories, just so our audience are aware, they come off of the back of the FTC losing a bunch of cases, doing retrospectives, and changing their approach, but under the existing merger guidelines, the FTC has been very successful. So do you still believe even though that these cases have gone forward, the FTC has been successful, that there is still competitions in the healthcare space that need to be addressed?

Tim Greaney:

Yeah, I do. And along with the colleagues at UC Law SF and at the Petros Center at Berkeley, we filed comments supporting the changes in the merger guidelines. And one of the reasons is that to some extent, antitrust law has not kept up with modern economic thinking and Economics has moved beyond the simplistic Chicago school rules that govern some of the old precedent. So I think it’s a much needed update. And the other reason it’s particularly needed is in the healthcare sector where concentration has really grown significantly.

So despite the victories in litigation that you just mentioned, there is nevertheless rampant concentration. The hospital markets, at least the MSAs, 94% are highly concentrated. Specialty physician markets are also highly concentrated. 78% have highly concentrated markets in specialty physicians. And of course, the insurance market is highly concentrated. So you have a sector that is not only highly concentrated, but the overwhelming economic evidence is that concentration results in higher prices.

Prices are higher across the board in all those sectors I just mentioned. And also, there’s growing evidence. So there’s an excellent article in the Bill Grant Quarterly that dissects what the new learning is about quality and efficiency. And it really spells out… It’s Mark Pauly and Lawton Burns, two of the most respected economists affected economists around. It really spells out that bigness does not improve quality. And that beyond a certain minimal level of scale, quality doesn’t increase significantly.

And in fact, there’s some evidence that it deteriorates. So all that adds up to a problem, and the question is what can be done? I think we’ll talk a little about the potential efficacy of merger guideline revisions, but it certainly is I think an important step forward and much needed.

Jean Kim:

Professor, you mentioned the concentration that is occurring in the various healthcare sectors. One area of concern appears to be powerful healthcare systems. Can you explain that concept and why enforcers should be concerned?

Tim Greaney:

Yeah, we put together a long mind-numbing law review article in the Hastings Law Journal about cross-market mergers specifically. And I coined the phrase system power. And the idea is that healthcare systems are potentially a good thing. They may spur some innovation, but one problem is that that system power sometimes translates into market power, monopolistic or oligopolistic power. And we can talk in a few minutes about where that’s been manifest.

But clearly the problem is that large systems have the incentive and the ability to extend their market power beyond just the hospital markets in which the FTC has successfully litigated mergers into other areas, specifically across regions, so that they can exercise market power that extends across an entire region. New evidence has come out on that in economics. And the question is how long will it take for the law to catch up with it?

Jimmy Kovacs:

So one point of clarification, professor, that’d be useful for our listeners is you use the term cross-market mergers. Can you provide the definition for our listeners on that point?

Tim Greaney:

Sure. What that really means is sometimes a hospital system will acquire another hospital that’s not in its geographic market. And there’s an old saying that all healthcare competition is local, or at least most of it is, because patients can only travel so far and insurance coverage reaches only a certain limit. So the notion is that in some cases though, the merger goes outside of the geographic market that’s been commonly recognized, the local market, and those mergers have been essentially immune from antitrust scrutiny.

And until recently, the assumption was that there can’t be any harm from those kind of mergers because they’re in a different market, and indeed the system’s entering a new market. So maybe that’s a good thing. Well, it turns out that the mounting economic evidence suggests that the ability to raise price is increased by that cross-market situation. And that indeed, because there are common customers in the adjacent markets or the nearby markets, that there are common insurers that the system can exercise its market power in various ways.

And the most common one and the most talked about one is so-called all or nothing contracting, in which the system says, look, if you want our system, you have to pay the piper for all our hospitals. Not only the must have hospitals, the hospitals you need to compete, but you’re going to have to pay the piper to the insurance company. You’re going to have to pay the piper for all our hospitals, including the ones in which are in competitive markets, which you may not want so much.

We’re going to get a premium on them too. And the poster boy for this effect is the case recently brought by the California Attorney General and the plaintiffs in this Sidibe case, which was very skillfully argued by the Constantine Law Firm in which the claim was this all or nothing contracting, and you guys can speak more knowledgeably about it than I can since you devoted blood, sweat and tears to that case. The all or nothing contracting really was a device by which market power could be extended into adjacent or markets across a region.

And what spurred a lot of this was some evidence coming out of the Petros Center at Berkeley that showed Northern California prices were way higher than Southern California prices. And the notion was that that ability to raise price through market power through this cross-market leverage all or nothing contracting, et cetera, and other devices was critical. So the problem in antitrust has been keeping up the law with the economic evidence. New cases bring new law, but it takes a while to turn that big tanker boat in the ocean to get precedent moving.

So that’s why the merger guidelines have caught a lot of attention, the idea that they can change judicial preferences or judicial views the way evidence is looked at.

Jimmy Kovacs:

So one of the things that you were just mentioning was the Petros Center’s work, which has been instrumental in looking at cross-market mergers. You talk about all or nothing contracting. I believe [crosstalk 00:11:19] research that has been done in this space, including Leemore Dafny? Can you speak to that?

Tim Greaney:

Yeah. The important economic studies that have come out point to higher prices resulting from these cross-market mergers. So you have Leemore Dafny, a very well-known economist at Harvard, found 12% price increases across markets. And these were price increases in the acquiring system. So when you think about it, when the acquiring system can raise prices, you say, well, wait, that’s not because the hospital that was acquired lacked skill or negotiating sophistication, it really suggests that market power was created.

And other studies by Flum and others showed similarly high price increases as well. And there’s additional research that’s going to be forthcoming that hasn’t been published yet. So the idea is that this area, which was effectively a grant of immunity, if you want to call it that, to cross-market mergers, should be looked at a little more carefully. And that theories need to be developed and law these to move forward to stop mergers in these cases. And we could go into this in a minute, but the new merger guidelines have addressed it quite specifically.

Jean Kim:

Okay. You’ve touched upon this, professor, but it may not be immediately apparent given the complexities of healthcare markets. Shall these merged entities across markets are able to effectively raise prices? Can you get into the mechanisms by which they’re able to raise prices through these types of mergers?

Tim Greaney:

Yes. I mean, the critical notion is that there’s additional leverage created by this, and one economist called it creating holes in the markets that are served by insurance companies. And insurance companies, the economic evidence seems to suggest, that when there’s a hole in the market that they serve, the broader market, that additional leverage in the hands of the health system enables them to raise price, because they know they have customers, they have employees, in some cases, the employer who live across the adjacent market, or they have an insurer who really wants that blanket coverage across the entire region.

And when that hole is created, that creates a problem. Now, in the Sutter case, we saw other mechanisms too by simply making the price so high if you don’t take all of them. That’s another effective way, and we can talk about potential tying as a mechanism for that. So there are different mechanisms that could be used. And of course, the so-called gag orders, the fact that the insurer and the employer really aren’t allowed to speak about the differential and prices.

All those things add up to mechanisms that enable the exercise of market power. So it’s a recurring problem, and the question is when and how can the law develop mechanisms and precedents to address it?

Jimmy Kovacs:

So let’s talk about some of those mechanisms and let’s get into the draft merger guidelines. As we were discussing in the beginning, the hospital merger space where hospitals or providers are operating within the same geographic market. There’s well-trotted ground in terms of the analysis and case law that’s out there. In what way do you view the draft merger guidelines impacting both cross-market mergers that we’re discussing right now and also vertical acquisition?

And for our audience, we think about vertical acquisitions in the provider space as being hospitals acquiring downstream primary care doctors or physicians in general. You could also have acquisitions involving health insurance plans with providers as well. And so it’s a vertical transaction and usually it involves the source of referrals, which are the doctors. And so professor, maybe you can speak about how these draft merger guidelines may impact those types of transactions, which have not been readily reviewed as of recently.

Tim Greaney:

Right. And as I said at the beginning, there are gaps in enforcement and the gaps are now becoming more and more apparent. And the two you mentioned, cross-market and vertical, are things that the guidelines specifically address, and they address some other things that are very important that have also been neglected, so-called potential competition mergers, which have just fallen by the wayside.

I litigated one 100 years ago. But those mergers are important too. But the idea is that these gaps now are… We are now seeing the results of the under enforcement in that area. So to start with the vertical, which you just mentioned, there’s been a gold rush, a feeding frenzy in which hospitals have acquired physician practices, such that enormous sectors of physician practice are now controlled by hospitals owning those practices.

And by the way, as a sidelight, I’ll mention there’s another important development in the case that was just recently filed by the FTC involving private equity, in which private equity firms buy these position practices or affiliated in some very close way with these physician practices, and they do what’s called roll-ups. In other words, they take a few at a time or one at a time, and they usually fly under the radar screen. They’re not even noticed to the FTC and DOJ, and they acquire one after another in a piecemeal fashion.

And once they have that many, they have then the ability to raise price. A case filed in Texas shows that in three major markets, Dallas, Houston and Austin, the price increases were enormous compared to peer markets. The complaint speaks of higher prices in the dozens of millions of dollars million over time in anesthesia practices that were rolled up by private equity. So that’s just one example. In the hospital vertical acquisition area, what the merger guidelines do that’s very important is they propose some guidelines, some thresholds.

Judges are not economic experts and antitrust is often not their favorite cup of tea. So they’re saddled with a complex economic case. And until you have a presumption or precedence that says, here’s a dividing line that you can enforce and that’s understandable both to you and to a common understanding, until you have that, it’s really hard to enforce the law.

So what the guidelines have proposed is to say, when a hospital acquires, for example, when a hospital acquires an entity with more than 50% of the market share, let’s say it acquires a cardiology practice and it has more than 50% of a market share, or let’s say it acquires more than 50% of the primary care physicians, that has the effect that antitrust law calls foreclosure. It really means to other hospitals, it’s going to be pretty hard for you to have a cardiology practice if all the good cardiologists are employed by your rival.

It’s going to be pretty hard for you to get any referrals if they have all of the primary care physicians. So that’s where the presumption could have some real bite is to say, look, rather than have just these vague undefined standards, let’s put in some presumptions. So that’s in the vertical area. In the cross-market area, the very important guideline specifically addresses that in guideline number seven, nerds like me have to quote the exact one, it’s mergers should not entrench or extend a dominant position.

And the idea is, as they put it in the guideline, they say the agencies will evaluate whether a merger involving an already dominant firm may substantially reduce the competitive structure of the industry.So again, this points to the willingness to look closely. The FTC has said this in speeches and other guidelines. It has said, we’re going to look closely at cross-market mergers. We’re going to see whether there is the potential for anticompetitive effects. Now, this is why our law review article is 92 pages.

There’s a lot to do here. There’s a lot of precedent to unpack, to apply and so forth. But the idea is that you could come up with different ways of analyzing it and come up with a sound economic case that would be administer that a court could understand and could administer to this area. And I can mention a few if you want me to go into further detail of ways in which the law could change to apply closer scrutiny to these mergers.

Jean Kim:

Professor, pivoting a little bit to a different area, I’ve been hearing a lot from my colleagues who engage in merger work and getting deals through the various agency approvals. And what I’ve heard from them is, hey, well, why isn’t the consumer welfare standard enough? And we already have the presumption of anticompetitive effects for horizontal mergers that increased concentration beyond a particular threshold.

Why are these not enough? Particularly in healthcare, wouldn’t the consumer welfare standard be particularly important? So why are those tools that we’ve had to date not enough? Why do we need all these presumptions?

Tim Greaney:

First is what I’ve said already, is the gaps that are there, which are just mergers that are just assumed to be okay, cross-market, vertical. Those just require more sophisticated attention. The professor at Georgetown, Steve Salop, has written endless articles of very sophisticated economic articles demonstrating that vertical mergers can, not always, but can have an anticompetitive effect. So ignoring them is just not defensible in this modern age.

The other point I’d point out about the consumer welfare standard is there’s a black hole that antitrust doesn’t really address too effectively or really try to generally ignore, which is quality, which is what about the effective consumers of enhanced or diminished quality? And that’s something that has been certainly hard to litigate in terms of what is an appropriate measure of quality? Is it just mortality? How do you measure that? That’s one of the obstacles. But a full and effective consumer welfare standard would pay more attention to that.

There has been some very good writing. A professor at Gonzaga has done some really interesting writing on that score. But you’re right, I mean, certainly the idea here is that if you are going to address vertical and you’re going to address cross-market issues, you want to have a standard that makes sense in terms of consumer welfare. Now, some have criticized the guidelines for not focusing exclusively on price. One point that’s sometimes mentioned is price is the load star here.

That’s all we should be concerned about, and that’s it. But it’s unfortunate that some forget that antitrust is really a legal process. It really is a way of sorting out possibilities, probabilities, and so forth. So price is certainly something that sometimes you can measure, sometimes you can predict, but sometimes you have to go with other factors. And concentration is an appropriate one because first of all, that’s what the Clayton Act was all about. It really was about concentration.

Those who believe in original intent have to go back and read the debates in the ’50s when the Clayton Act was amended and back in 1917 when it was enacted. It was really about controlling power in bigness. Now, that’s not enough and we’ve moved on beyond that simple measure, but we do need to look at other things. And innovation is another area where consumer welfare is definitely affected. And again, bigness tends to block innovation because the incentives dry up, the incentives disappear when you control an entire market.

So there are legitimate questions being raised about the guidelines, but I think on the whole, they’re moving in the right direction.

Jimmy Kovacs:

So another question that comes to mind is the impact here on efficiencies. And in healthcare, clinical integration, improvements and quality redundancies, just general improvement of patient care are arguments that are often made concerning both conduct and transactions. And be curious to hear from you, Professor, if there’s anything in the draft merger or guidelines that would tackle those issues and how the enforcers are thinking about those problems or those efficiencies.

Tim Greaney:

To some extent, the guidelines really echo what the existing law is, and the existing case law is pretty demanding on efficiency justifications. Several courts have said efficiencies are easy to claim and hard to establish or prove in insensible way. And the case law has been pretty consistent in saying that efficiencies must be verifiable, not speculative, merger specific, meaning they have to be caused by the merger, not by some other effect that could be achieved otherwise, and they have to be pro-competitive.

They have to be the kinds of things that really enhance competition. So you look at those criteria and there’s, in fact, one court has done the research and said, there’s never been a merger that has been excused exclusively by efficiencies. That’s not to say efficiencies don’t count in litigation. You guys are experts in litigation. And if you say something often enough, the judge is not going to ignore it. So I think it may waft over into other issues when a judge is trying to decide what he or she thinks about the merits of a case.

But it really hasn’t been one that has blocked merger enforcement by itself. But I think the guidelines do appropriately keep the bar high or endorse that area. One other thing let me throw in that’s really important is that several of these other areas we haven’t discussed are really important. One is the so-called problem of serial acquisitions. When an entity buys or acquires a small firm here and there or a small group of physicians here and there and none of those even trigger the Hart-Scott-Rodino review process, they tend to get ignored.

And then suddenly, you wake up one morning and they control 60% of the cardiologists or a big chunk of the physicians are now their employees. So again, the guidelines importantly say we’re going to treat serial acquisitions as a group. We’re going to say what’s happened over the last five years and how does that collectively affect competition? So again, it’s a tricky business because the last one jumping on board maybe the one that gets challenged, but they may try to unwind prior acquisitions too, which itself causes some problems.

But at least the guidelines are pointing to these areas that at least the evidence… Again, these are much evidence-based guidelines. They’re really based on what the economics teaches. They’re trying to bring enforcement in line with that evidence. But again, not to be too pessimistic, takes a while to move that tanker boat as I suggested earlier and it may be a while. On the other side of the coin, I go back to the beginning of time, I was actually at the Justice Department back when Bill Baxter put out his merger guidelines, and they radically reshaped the way courts looked at mergers.

And in fact, I haven’t done an account, but I bet you that the merger guidelines are cited more frequently than Supreme Court cases generally. They’re treated as if they’re law. They’re not law. In any sense, they’re just saying, here’s what we think is important. But there’s a comprehensive systematic look at that problem. And as I said, courts, generalist judges need that. They need something to hang their hats on. They can move the tanker ship eventually, but it may take a while.

Jimmy Kovacs:

So Professor Greaney, that’s a great segue for the last thing that we want to talk about and that’s about how you view future enforcement. You’ve already covered some things that I was going to ask, but I’ll go back to one of them, which is when a merger is part of a series of multiple acquisitions, and I think this speaks to the FTC’s case with the anesthesiology practices in Texas, although that involves private equity and some other issues, one of the things that has been going on for a while it looks like in the healthcare space has been these serial acquisitions or lots of small mergers and acquisitions of providers.

Based on the guidelines, which as you have indicated, these guidelines are just that, they are draft guidelines, but ultimately, courts and litigators clearly rely upon them. And so how do you foresee those kinds of acquisitions? Do you see them being challenged in the future?

Tim Greaney:

Yeah, so it’s been a lot of years since I was an enforcer, but I provide unsolicited advice on this score. I think clearly what they’re going to do is they’re going to look for winnable cases in receptive courts, and those are two big challenges. So, what is a winnable case? Well, if history is a guide, the clearest measure of a winnable case is one in which you have internal documents that our friends who have MBAs have kindly written that give away the farm in terms of litigation. They say, “Well, we’re going to raise price. We’re going to do this. We’re going to do that.”

So that certainly helps a lot. They also want to have a sound economic basis for it. And market definition has just baffled courts for many years and now it’s finally come under control. But for many years, they were using a measure of market definition, the so-called Elzinga-Hogarty Test, that even Elzinga himself testified made no sense in healthcare. He said, “It just doesn’t work here. It was met for coal, and it really is not a good measure.” So more sophisticated methods have been developed over time and it takes a while.

But I’d say certainly that’s part of it. Having a winnable case is a big part. The other part, just to be the legal realist in the room, is that that you have to come before a court that’s receptive. And frankly, there are any number of circuits and you guys as litigators know that are just simply not receptive to antitrust and certainly new ideas in antitrust. So when they bring a case certainly in the cross-market area, I think it will be one that has all the bells and whistles I was describing, because the last thing they want to do is lose their first major challenge.

Now, they have brought one or two cases which reflect on that. There’s one in the pharmaceutical area where the issue was cross product markets. In other words, they would be able to leverage, strengthen one pharmaceutical product to benefit the ones, the sort of must have pharmaceuticals, to get higher reimbursements in their other pharmaceuticals. So they’re clearly looking at that. The commissioners themselves have said they were. So I think they’ll be looking for that perfect case, but they sure want to win that first case when they bring it.

Jean Kim:

I think we’re running out of time, but I do have one last question, just an answer to those colleagues and friends who do a lot of deal work and from whom I’ve heard the earful about the draft merger guidelines. Do you think that the FTC, I mean, certainly the lower thresholds and some of these presumptions are going to bring many more of these mergers and proposed acquisitions under scrutiny? Do you believe the agencies are equipped to handle the onslaught, the overflow of merger cases that they may have to litigate?

Tim Greaney:

Yeah, that’s a great question. Because again, as a former enforcer, staffing is everything. You have to be able to litigate a case, and that’s why the states are almost impotent in terms of bringing cases. The states just can’t handle a major case. They do it in conjunction with the FTC, but they just don’t have the staffs. There are many states in which they have one lonely person doing antitrust. So staffing is a big issue and allocating your resources is a big issue. So that’ll certainly be a constraint.

And frankly, there is a blowback against everything about big government. You take all of that in Washington. So in terms of funding of the FTC and the things like that, those are other constraints. And the other constraint is what I just talked about, which is they want to fight a winnable case. So I don’t think there’d be going willy-nilly challenging every merger here and there. I think their focus is going to be on winnable cases and creating precedent. So again, as an enforcer, I’d say, show me a case I can win.

Show me one that will create a good lasting precedent and that we can start trotting around in other cases. So I think that’ll be their focus rather than picking on everything in sight. But who knows?There are countervailing pressures all over the place.

Jean Kim:

Well, hopefully the higher filing fees will aid at least in terms of funding some of this anticipated litigation.

Jimmy Kovacs:

Right. I wanted to say thank you very much, Professor Greaney, and thank you to Jean for participating today. Two notes for the listeners. First, highly recommend reading the comments of the professors of law and economics, economists and health policy researchers on the draft merger guidelines, which included Professor Greaney. Those were submitted on September 18th, 2023.

And secondly, shout out to Professor Greaney, who is also an author. His book is St. Sebastian School of Law. That’s a novel that Professor Greaney has written. So not only is he an expert in antitrust, but he also is an expert in fiction. And so highly recommend his book as well.

Tim Greaney:

It’s a satire about law school teaching, and there are a few topics as easy to satirize as law school teaching. So it was a pleasure. And by the way, having Jimmy succeed so admirably, he carried me on his back for years as my research assistant. And watching him succeed, there was no doubt it was going to happen, but it was a real pleasure to watch him perform in the Sutter case and advance through now a seasoned litigator.

Jimmy Kovacs:

Well, thank you very much for that, Professor. And that’s all the time we have for today, and thank you so much.

Tim Greaney:

My pleasure. Thank you. Take care.

Jean Kim:

Take care.

Jeff Shinder ():

That’s all for our show today. If you like the podcast, make sure to subscribe to Antitrust Matters and leave us comments on how we were doing or on the topics you would like us to cover going forward. You can also follow us on or follow the 91pornantitrust team on . Until next time, be well, and remember antitrust matters.

Read 2023 Draft Merger Guidelines: A Conversation with Professor Thomas Greaney at constantinecannon.com

Antitrust Matters provides engaging and timely conversations about competition policy in the digital age. Antitrust has always mattered to consumers and businesses, and to antitrust lawyers and economists, but today it also is in the political and public discourse more than ever. From the prices we pay for food, travel, financial services, payments to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. Antitrust Matters brings you you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going and why it is so important to our current political discourse.

In this episode, Jeff Shinder and Wyatt Fore are joined by Michael Kades, Deputy Assistant Attorney General for the Antitrust Division at the U.S. Department of Justice.  The three discuss the 2023 Draft Merger Guidelines, and whether they mark a shift in merger enforcement policy moving forward.

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Episode Transcript and Show Notes:

Jeff Shinder:

Welcome to Antitrust Matters, a 91pornpodcast where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder and I’ll be your host.

Antitrust has always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates, to how we travel, to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more than ever before.

Hello, everyone. We are here on Antitrust Matters to talk about an important topic, arguably the hottest topic in antitrust, although it has some competition with some of the trials that are going on currently, and that is the Draft DOJ-FTC Merger Guidelines that were released over the summer where a comment period was opened up and a lot of comments came in. The comment period closed on September 18th, and we’re here to talk about the Merger Guidelines, why they were revised, what is different, why does it matter? How will it affect merger enforcement in the United States?

And we are thrilled to have with us today Michael Kades from the Antitrust Division to talk about this development and what it means and put it in context for everyone. Let me just say a few words about Michael’s background. He is currently the Deputy Assistant Attorney General for the Antitrust Division with a focus on civil enforcement. Prior to joining the DOJ, Michael was Director for Markets and Competition Policy at the Washington Center for Equitable Growth. Before that, he worked as antitrust counsel for Senator Amy Klobuchar on detail from the FTC, and he spent 20 years at the FTC investigating and litigating antitrust actions. So he comes here with a wealth of experience on this topic.

So first of all, welcome, Michael. Thank you for coming on the podcast to talk about this important topic. We’re very happy to have you here. Thank you.

Michael Kades:

Thank you both for having me. I’m looking forward to the conversation and really appreciate you guys doing these sorts of events or podcasts to really help the discussion about these guidelines.

Jeff Shinder:

And before I get into Q&A with Michael, I want to introduce my colleague Wyatt Fore, who is returning to the podcast. Wyatt has been on previous episodes of the podcast. So Wyatt, a big thank you for you organizing this and joining.

Wyatt Fore:

Well, thanks for having me.

Jeff Shinder:

Let’s get started. Michael, I want to start with some basics. First, if you can, situate for our listeners the Merger Guidelines. What are they? What role do they play in merger enforcement? Are they law? Are they something other than laws, force of precedent? Just explain to everyone what the guidelines are and then we could talk about why they were changed and why these changes matter.

Let’s start with the most basic question: What are the guidelines?

Michael Kades:

Absolutely. I’ll avoid starting with the history of antitrust law in general because I think the right place to start here is we have a law in the United States, the Clayton Act, that specifically regulates mergers. And under that law, basically a merger is illegal if the effect of it may be to substantially lessen competition or tend to create a monopoly. Those terms have a legal meaning.

Beginning in the late ’60s, the government thought it made some sense to try to give some guidance, hence the term guidelines, to how the government thought about that standard and how the government would investigate cases and determine whether the effect of the merger may be to substantially lessen competition or tend to create a monopoly.

So the guidelines are not law; they are the principles the government uses in thinking about investigating and analyzing mergers. They have been updated through time and periodically through the ages, but I think it is really important to say these guidelines, like every other guidelines, do not change the law. We still, at the end of the day, whatever the guidelines, we still have to go into court and we have to prove the merger is illegal. Our hope and really the hope for all of the guidelines is it provides transparency to the public, the companies, the bar about how the agencies are investigating mergers, and to the degree they reflect the law, we think they should provide some persuasive authority to courts as they think about the mergers they’re reviewing.

Wyatt Fore:

And so Michael, could you talk a little bit about why the guidelines are being updated now? For listeners, the most recent iteration of the Horizontal Guidelines were in 2010 and the most recent iteration of the Vertical Guidelines were in 2020. Could you talk a little bit about why the agencies decided now is a good time to revise the guidelines?

Michael Kades:

Yeah. So one thing, particularly as to the Horizontal Guidelines, the 13-year time period’s not really out of the ordinary. If anything, it’s a little long. We had guidelines in ’68, we had guidelines in ’82, I think ’87, ’92, ’97, 2010. So just the amount of time that’s passed, at least on the Horizontal Guidelines, is not out of the ordinary.

Maybe more importantly, a lot has changed in the economy over the last 13 years. We have seen the development of digital platforms are increasingly important. There’s been a lot of research being done on, say, the importance of market power in labor markets. There have been new economic tools that have been developed.

So on the one hand, the economy has changed, and really if we look back at the prior Merger Guideline amendments, they somewhat tie them to those sort of changes. The ’68 Guidelines really reflected an economy, a smokestack economy, an economy where you’re largely focused on industrial markets. Then when you get to sort of the late ’90s, that’s coming about at the same time as the dotcom explosion which raised new facets of competition and competition questions. 2010, really those guidelines, one of their goals and one of their successful goals was really to incorporate understandings about how to address not just thinking about markets and market shares only, but also thinking about how to deal with what we would call unilateral effects or what happens when you… Just looking at the impact of eliminating competition between two firms and how that can be anticompetitive. And so it’s time to think about that.

On the other hand, if we think about the way the guidelines have been used and the way the law has gone, in a lot of ways, the aperture of merger focus has narrowed. If we think about merger cases, when is the last time the government has won a merger challenge without relying on the structural presumption? The standard way a merger case works typically in the horizontal context, i.e. between competitors, you define the market, the relevant area of competition, you then measure market shares, and if you’re above a certain level, there’s a presumption. Then the government’s going to provide evidence that that market makes it easier for the participants to coordinate either explicitly or implicitly in a way that suppresses competition or just the evidence of how prices are going to go up. Let’s go back to that. A presumption is a presumption. And if the government always has to prove the presumption, it’s not a presumption; it’s a element.

I think part of what we’re trying to do here is to say we’re looking at the way we think about mergers isn’t simply only about the market share presumption, only about what we call unilateral effects; it’s about thinking about how competition presents itself in the market and how the mergers going to change that and is that detrimental?

Jeff Shinder:

Michael, that’s helpful. Let me drill into that a little more. You said a lot in that answer about changes in the economy and a desire to update the guidelines to reflect those types of changes. And if you could elaborate, and you started in on this in your last answer, on what is new here, what is different here?

And let’s say I’m sitting at a company and I’m thinking of doing a deal that has potential antitrust issues. I know the agencies are going to take a look at it and may get a second request. Should my valuation, the potential likelihood of enforcement action against my deal, would it be different ex-post as opposed to ex-ante when these guidelines are finalized?

I know there’s a lot in that question, so start with what is different here, and what is different for people who are looking at either counseling, companies, on the deals they can do, or are sitting and contemplating doing deals?

Michael Kades:

That’s a great question. I would answer it by saying there’s less to me about things being different than building on the concepts that are embedded in prior versions of the guidelines.

And starting in the very big picture, the danger sometimes with guidelines that I touched upon is if you write down what the guidelines are, that as I said, narrows the aperture to the formalistic analysis that’s there. That’s not their goal. I feel these guidelines are, again, trying to expand that aperture. Just to go back to my religious school days of being Jewish, there’s a story that gets told that a man comes to a famous rabbi and says, “Teach me the Torah while standing on one foot,” the Torah being Jewish Bible. And the scholar says, “Whatever you don’t want done to you, don’t do to others,” the rest is commentary.

And that’s how I think about these guidelines, that if you were to ask me to say, “Teach me antitrust on one foot,” I would say then, “Think about the competition that’s at stake. Two, in terms of mergers, think about how the elimination of the firm being acquired or the merger changes that competition. And three is that change detrimental?” And the rest is commentary.

And so I think if you look at the 13 principles, they all are commentary on how you think about a merger transaction. There are different ways competition can be affected. It can be affected that what we think is the most likely effect is prices are going to go up. So therefore, things like market share, how the firms compete on price is going to be relevant. But what we’re also saying is there may be other ways the competition presents itself and then you have to look at that, the competition at stake, and how the merger changes it.

Let me stop there because I’m not sure I quite answered your question and you can follow up.

Jeff Shinder:

Before Wyatt asks his follow-up because I know he’s got one. I have to ask you what I think I’m hearing you say, and I appreciated the Torah reference, to my question, is there something different? I’m contemplating a deal. Will the analytical framework ex-post be any different than it was ex-ante? Is it fair to infer from your Torah answer that, at bottom, the answer really is no, that the same overarching questions are going to be asked, although the commentary that may inform that same overarching question has evolved. Is that fair?

Michael Kades:

I think that’s a pretty fair statement because the overarching principle is the law and we can’t change that, but given the way the economy functions and different industries develop and different learning develops in economics, that changes the questions we ask in particular cases. And I guess maybe the bottom line is a little better.

You started with a question about a firm thinking about a merger. In that context, I think it’s important to recognize that if you’re a firm and somebody comes in and is telling you, “Okay, we just need to think about what… We need to define a market, we need to measure market shares, we need to think about unilateral effects,” we’re sort of putting the cart before the horse because that’s the legal analysis and really the way to think about this is how is this merger going to change competition, if at all, is the first question to ask. And if you ask that question first, I think these guidelines provide a much clearer understanding of what the government’s going to be interested in.

Wyatt Fore:

Very interesting, Michael.

Now, some of our listeners might not be as familiar with the administrative process for how these guidelines are pulled together and finalized. So currently, we have the Draft Merger Guidelines and we’re currently in a comment period, I believe for 60 days. Do you anticipate any major changes in anticipation or in response to that comment period or how much can people expect the sort of finalized Merger Guidelines to be similar to the Draft Merger Guidelines that the staff’s put so much work into already?

Michael Kades:

I think the comment period closed last week, so if you haven’t submitted your comments, you’re out of time. But the way we were trying to affect transparency here is about we made sure that we involved not just the top levels of the agencies drafting these. These guidelines went to staff at both agencies multiple times, multiple changes made, trying to make sure we understand what it is staff’s doing and that the guidelines reflect that.

And then we release them and we’ve gotten, I don’t even, a lot of comments, some of them positive, some of them negative. I think what’s really been fascinating is the amount of commentary coming from people who aren’t within the antitrust community. I know there’s a comment, Jonathan, the Assistant Attorney General, has been talking about nurses talking about how a merger made it harder for them to do their job or they had less support or they had to work longer hours.

And so the idea here is that this is we live in a time where antitrust matters to people in ways that it hasn’t in a century, so what we’re now going to do is think about all these comments, and we don’t pretend to think we had the answers in the draft. I think these are drafts and we’ll have to see where they come, but we did not sort of view the notice period as, “We’re going to put these out and then we’re just going to dispose of all the negative comments and all the suggestions and just land where we started.” The idea here is we are going to review these comments and think carefully about them. And so changes could occur.

I think, again, going back to my antitrust on one foot analogy, I think that overarching principle, thinking about how competition presents itself and how the merger changes that, that focus is not going to change and nor will the legal principles because we can’t change those anyway.

Jeff Shinder:

Michael, I want to take the discussion in a little bit of a different direction at this juncture before Wyatt and I get up to the wonkier antitrust nerdy portion of our conversation. But let’s stay at a high level for a moment.

And a lot of what you’re saying, and I’ll attempt to fairly characterize it and if you think I’ve missed anything, you’ll correct me, it was saying, look, the economy has changed. I think we’re all experiencing a lot of those changes. So that’s not, I don’t think, surprising to anyone who’s aware and out in the economy that there’s been a lot of significant changes in the last 10, 15, 20 years in the economy, and it makes perfect sense to update the guidelines to reflect those realities.

But, and here’s where I want to take the conversation in a different direction, do you believe that on some level, the guidelines also reflect… You just made a comment about antitrust matters and how it matters in an interesting way today, I appreciate that happened organically and it wasn’t even a plug for the name of our podcast which is Antitrust Matters. Antitrust really matters and that we are in a moment in time where the policy around antitrust enforcement, and we’re antitrust lawyers, so antitrust is law enforcement, but we all also understand that it sits in a policy framework, and we’re in a policy moment that says antitrust enforcement needs to be more vigorous.

One, would you agree that these guidelines in some way, shape, or form should reflect that policy judgment? And if you agree, in what ways does it reflect that policy judgment?

Michael Kades:

I would put it this way. I agree entirely that antitrust has a policy relevance and sort of a public interest that we haven’t seen in a century. I think that interest is a good thing in the sense that antitrust law is not the sole domain of economists and specialized antitrust lawyers like myself. Specialization is important, technocratic expertise is important, but sometimes you need people from the outside not part of that rather small group assessing what’s going on in the market or assessing antitrust enforcement and that can be very helpful.

And second, the other interesting part about it being organic is at the same time antitrust has become top of mind for the public, if you look at the research being done by leading economists, much of that research actually is refining, and in some sense, undermining previous economic principles that I think we all sort of, at some point, thought were likely to be true. Just if you look at the research, vertical integration, vertical mergers, a lot of it coming out now suggests that there are problems. And whether it be there, whether it be on the ability of firms to coordinate in concentrated markets, people are really questioning the learning that I grew up with back in the late ’90s.

So what I would say as to your question is I think that yes, the antitrust enforcement project, which I would say includes all of antitrust enforcement and all of merger enforcement, not just the agency, not just the courts, everything, is not doing as an effective job of deterring anticompetitive mergers as it should be. And part of that is because our aperture, again, we have focused too narrowly on the types of problems we’re examining. And by, again, saying we’re not just thinking about prices of products on their own but we’re thinking about it more broadly, it should lead to more effective antitrust enforcement and improved merger enforcement and protect markets.

Wyatt Fore:

It’s interesting you say that, Michael. Most of my work here at the firm is private enforcement, so we’re very often situated in a situation where we are plaintiffs on behalf of sophisticated entities. And so as a result, we are often doing conduct litigation. And it’s interesting because I would say in the bulk of my cases, if not the majority… Well, first of all, I’m always shocked at what antitrust defendants can get away with on the conduct side, and a lot of that begins at a point of a failed merger enforcement, either a merger that was anticompetitive that was allowed to proceed or a challenge that essentially fell apart for whatever reason, either the court didn’t buy the theory or what have you.

So it’s interesting to hear from your perspective about how economic learning has changed to the extent that there’s a real sense in the economy right now, not just among practitioners but among ordinary people and businesses, that antitrust enforcement, that there’s a serious underdeterrence problem, especially on the merger side because that’s really on the prospective side where future problems are identified in the first instance.

Jeff, I’m not so sure if you have anything to add or if your perspective is different as a person who’s practiced in this area for a longer time than I have.

Jeff Shinder:

No, my perspective is similar to what you both have articulated, and let me actually direct that perspective towards a question for Michael in terms of the guidelines because one of the things that I struggle with, and we’ve seen this in some of our travels here, ways that I can’t get into, less the protective word of gods strike me down but-

Michael Kades:

We don’t want that.

Jeff Shinder:

And we don’t want that. Where a dominant firm acquires technology or a startup where the merger, if you will, would fall within the potential competition framework, but it would be difficult to, when you get to the test of would the target entity have disciplined or does it discipline competition in any which way such that Section 7 standard can be met, it’s a difficult inquiry. Price effect would be impossible. This is more in the realm of innovation harm.

And one of the questions I have just analytically looking at the guidelines, and I’ll just make a statement that Michael, you can have at, it’s not clear to me the guidelines really energize the enforcement possibilities relative to those kinds of transactions where the ex-ante/ex-post question, if we just pose it relative to those kinds of deals, I’m not sure the guidelines as drafted will make much difference.

And so I want you to react to that because I feel like in an era of underenforcement, this is one of the realms where I think underenforcement has been a problem, but it’s a hard one to solve. I’ll stop editorializing and let you agree or disagree.

Michael Kades:

I agree that the types of cases you are talking about have been particularly hard for the agencies and the courts to grapple with.

And let me start with something I should have probably said back at the first question. The most interesting thing about the Clayton Act, which is the merger statute we’ve been talking about, is there are very few laws that I can think of where the concern is not what will happen, but what may happen or what will tend to happen. When you think about your average tort case, slip and fall, you have to prove all your facts, not to a certainty, but more likely than not. But the thing you’re proving is that there was actual negligence.

Here, Congress specifically wrote a law that said, “You don’t have to prove that the merger will be bad, just that it may be bad or that it may tend to create a monopoly.” And so what we’re really trying to do here is a threat of risk assessment, a risk assessment threat, not sure which one of those is grammatically correct.

So getting to the point that you’re raising, what do we do with where we have potential competition, where we have nascent competition? What we have in the law is Marine Bancorp where the court thought about two types of competition, what we would call if you buy somebody who is about to enter, when might that create a risk that it should be illegal, or where there’s somebody not in the market but their ability to enter it has a control, controls how the market operates. So people aren’t raising price because if they do, this outsider will just come in immediately. Those cases in and on themselves are difficult to win. I believe the last two times the FTC has brought those cases, they’ve been unsuccessful.

What I would like to point to you in the guidelines is I think a number of the principles we’re dealing with that could come up, we have developed specific guidelines to deal with. So yes, we have the potential competition idea that comes out of the Marine Bancorp line of cases, but that really deals with a very traditional market where it’s very concentrated and how will the new entrant affect competition? But we’ve also said, “Wait a minute. We’re going to think about more than just that type of competition.” If this involves a two-sided market, we’re going to think about, wait, are you acquiring a firm who threatens to disrupt the value of that platform?

So think about… Take the Microsoft case. What happens if instead of all the conduct Microsoft did to suppress Netscape, it had just simply bought Netscape? The concern would be Netscape, its browser, created the possibility that your operating system would not be as important to running programs as the browser. From our perspective, that’s the fact pattern. That violates the merger law. That would be illegal.

Similarly, talking about the ways in which a trend towards concentration or serial acquisitions can be illegal under the antitrust laws are additional ways to try to reach these issues that arise that deal with things like innovation and network effects and preserving dominance.

So certainly, we’re trying to incorporate all those sorts of ideas. Obviously, as we read the comments, hopefully we’ll find ways to improve upon that. But certainly we’re recognizing that the law protects markets from those types of anticompetitive mergers and provide guidance on how we would analyze them.

Wyatt Fore:

That’s really interesting to hear you say, especially because I know that potential competition and innovation harms are very top of mind among people recently.

I’m going to switch topics briefly and touch on labor. I believe that the Draft Merger Guidelines are the first explicit recognition that harms and abuses of market power in the labor product market are recognizable and also that the agencies are going to look for it. Now, obviously as all antitrust practitioners know, any competitive activities with respect to the labor market have been recognizable under legal precedent for gosh, 100 years at this point. I believe that the foundational precedents are either from the ’20s or ’30s.

So Michael, I’m curious about your perspective about why labor was included explicitly here and what you think that might indicate for merger policy moving forward?

Michael Kades:

So my snarky answer here is when basic principles aren’t articulated frequently, people act like they no longer exist, and that kind of is what happened with labor and antitrust. If we were to go take our time machine back to when any of these antitrust laws were passed, it was very clear that the concern was not just with increasing prices to the sellers, but actually a lot of the support for the antitrust laws came either from labor or from small producers, farmers, small businesses who felt like they were selling to dominant firms, what we would call monopolies.

So part of it is just reminding, on the very basic level, that these concerns matter, including labor and the creation of market power by the buyers has not been a focus. So I think there is value, a lot of value in telling the world we are thinking about these issues and how we would think about them. And in many ways, it is the same approach we use for thinking about creating market power on the seller side.

The third thing, and again, this reflects this interesting synergy, antitrust joke intended, between both popular public concern about dominant power and economic learning. It’s certainly the case, as I mentioned before, a lot of the comments we’re getting come from people who have been on the receiving end of mergers that may have limited competition or labor. Meanwhile, if you turn to where the economic literature is on labor, it’s become very clear that for a lot of reasons that now seem obvious, most employers have a significant amount of market power over their employees and most of antitrust, we spent decades thinking that employment markets were highly, highly competitive, like perfectly competitive, and that’s wrong. That doesn’t mean that every merger that affects labor is illegal because the question is, going back to my one-legged antitrust theory model, how does this merger impact competition for labor?

I think it’s those three points, I guess, which are one, if you don’t say things, people forget about them; two, we needed to really provide some guidance to what we were thinking about; and three, the focus really reflects both the public interests in antitrust, but also reflecting the understanding of labor markets that’s developed from the economist quantitatively.

Wyatt Fore:

Yeah. It’s interesting how there’s been so much empirical research, really in the last five to 10 years, about labor markets in particular and about the market powers of dominant employers. Perhaps it’s going out on too much of a limb, but it’s almost uncontroversial at this point that the fact that we really have a market-power problem in employment markets.

It’s also interesting to me that perhaps this is a generational difference, but I think that my generation, the millennials and people under us, are really reawakening to this fundamental labor problem in a way that felt like, with the fall of the Soviet Union and the ’90s and 200s peace and prosperity forever, it felt like that was a problem that we had “already solved.” And it’s interesting to me that there’s this intuitive understanding out there in the economy outside of antitrust practitioners that, okay, well, for a person selling their labor, your boss or your employer has a lot more power with respect to you than you do with respect to them, not only from the collapse of collective bargaining and other policies, but also just because your job means a lot more to you as a person than your labor does mean to your employer in the vast majority of cases.

So it’s interesting to me to see the recognition come out or this intuition come out in the empirical research and be reflected here. I apologize for the editorializing, but that was something that I was very excited to see in the guidelines.

The last labor question I have is that there’s been this trend towards national product markets antitrust parlance, that geographic markets that used to be very localized are now nationalized because of the advances in the economy. But there are exceptions to that, including hospitals. Because hospitals treat ordinary individuals, they have to go into the hospital. And it seems to me that labor markets are also an area where geographic markets tend to be more constrained in the way that other products don’t.

So I’m curious if you see future enforcement in labor markets to be partnering more with State Attorney Generals, much in the same way that the antitrust agencies partner very closely with State Attorney Generals in terms of healthcare because the geographic market tends to be more limited, that state AGs have a more vested interest in it and are more concerned with it. I’m curious, that aspect of labor merger enforcement, if you see this as an area where the federal government and state attorney generals are going to be partnering more in the future.

Michael Kades:

I’m going to take a little bit of a digression before I get there because you said a lot of really interesting things, Wyatt, so I wanted to react to a couple of them when you were talking about the development of the literature and labor economics.

When I went to college back in the late ’80s, I remember my first day of Intro to Economics or Intro to Macro or Intro to Micro, I can’t even remember which one, the professor stood up and he said there were three things all economists believed, and the first one was raising minimum wage will reduce employment and is bad for the economy. So I think at this point, if anything, we’re getting close to now economists would say almost the opposite. And a lot of that flows from the recognition that if there is market power in employment markets, the wages will be artificially too low. So that just shows the seismic shift in way people think about labor and economics and why I think it is. And to think that that sort of shift would not have an impact on how we think about antitrust enforcement would be odd at best.

I think you’re exactly right that employment markets are likely to be local, in part because not only are these matching markets, I think which is an important point to remind people in the sense that if I’m choosing between a Coke or a Pepsi, I just make that decision and I just go buy the one I want. I cannot quit the Department of Justice today and show up at the FTC tomorrow and say, “I’m here. I like this agency better.” I like them both equally by the way. Somebody has to offer me a job. That makes markets stickier, that make it harder.

But then on top of that, when we think about the issue, I took a digression, but I think I’m coming back to it, it could be, there are lots of jobs you can do in various places, factory worker, secretary, healthcare professional, but it means you have to move and you might not be able to move because your spouse may have a job or you don’t want to move because your children are in school and you don’t want to rip out the society you built locally. So absolutely there may be not a better example of local markets than employment markets.

So I think there is a real opportunity for there to be cooperation between the federal and state enforcers, and I hope that is something that occurs because in my view, antitrust enforcers, we need all the help we can get and working together is a great way to amplify our ability to protect markets.

Jeff Shinder:

This discussion of labor is fascinating. I’ll say, for the benefit of our listeners, because I have follow-ups that I could ask on the question of the antitrust treatment of labor, either generally or in the context of mergers, but I would like to reserve them for a later podcast that is laser-focused on those questions, which we will be doing. I have one more wonky question and then we should wrap up because we’re brushing against the podcast gods who say, “You should only go so long.” It’s so interesting.

I have a very different topic that I want to hear your thoughts on. So two-sided markets show up in the Merger Guidelines for obvious reasons, though there’s been a lot written on them. To date myself in this conversation, Michael, our horizons are similar, although I think I went to college a touch earlier than you did, but I remember in the ’90s when two-sided market arguments were first emerging in some of our cases, in the payments cases primarily, although not entirely, and if you told me back then that two-sided markets would become the law of the land in Ohio v. American Express, I would’ve bet a lot of money against that happening. But here we are.

I completely appreciate the economy has changed, platforms, networks, however you want to characterize them are ubiquitous and they raised particularized competition questions, and one of the things I liked about the guidelines was that they seem to have been written flexibly in terms of analyzing two-sided markets as it could be platform to platform competition, two-sided to two-sided competition. Something that is not necessarily two-sided could affect competition involving two-sided platforms. And sometimes, the issue is really intranetwork or intraplatform competition, which I see in the guidelines, and restraints that go towards those questions.

I’m really throwing this broadly at you. What of your thoughts on how the agencies have gone about addressing this question? Are there any comments? And it’s maybe hard to answer because the commentary just closed, you find interesting on this question, so you may not be able to answer that. And do you see the guidelines changing and influencing in a significant and material way, the Section 7 treatment of mergers that involve two static platforms?

Michael Kades:

I’m just going to admit I’ve not read the thousands of comments in the last six days or so.

Jeff Shinder:

Shame on you, Michael.

Michael Kades:

I’m just going to be honest and throw that out there. I’m not going to comment on the comments. And I think you are really picking up what we were trying to accomplish with platforms and multi-sided markets, that this is the perfect example, that you have to start with what’s the competition at stake? If you’re thinking about a merger between two platforms, the kind of questions you need to ask and the way you define the market is about how those platforms are competing and how it changes. You’re going to be thinking about is this a market where there’s tipping, i.e. that there are maybe two or three platforms competing to do the same thing? We expect over time or very quickly, one will get a slight edge and then become dominant. If that’s true, you’re not really interested in whether there are the participants particularly on a market, except to the way… They are not going to be a protection against the concerns of that merger.

Conversely, as you said, it’s not just about competition for a market, if a dominant platform is acquiring a major participant in such a way that their incentives and ability to discriminate or depress other participants, you’re asking a very different series of questions and the type of… Particularly if you’ve determined it’s a dominant platform, that there aren’t really alternatives. Again, you’re less interested in what other platforms are out there. You’re really interested about how competition within the market is changing. And so that not only raises the question, it also provides the parameters to define the market.

I would just say about American Express, absolutely. Supreme Court decision, law of the land, but let’s be clear that the Supreme Court was really focused here on a very specific type of platform that they saw as really unique in the sense of what they call the transaction platform where basically only the platform is required for the transaction to occur and it’s always a one-to-one correspondence on that. To have a credit card network, it connects one buyer with one credit card company. That’s not the traditional multi-sided market we think about, say, even going back to old economy, newspapers. The newspaper gets funding from advertisers that allows them to charge less for the newspaper that attracts readers, and you have more readers, it means the advertisers are willing to pay more. It’s not that one-to-one correspondence.

So sorry, I got a little off track there, but I felt compelled to talk about American Express.

Jeff Shinder:

Yeah, Michael, I will say, and I don’t want to descend into a two-sided market discussion that could be its own podcast, you’re preaching to the choir here and highlighting the simultaneity that is key to the American Express decision.

One of the things that I was worried about after that decision is that everything would be characterized as a two-sided market when the feature that Justice Thomas highlighted in that opinion is not necessarily present. So your point is extremely well-taken. We’ll reserve that for another day because that is another pretty deep topic that we do not have time to fully delve into.

I’d like to wrap up because I don’t want to offend the podcast gods, but I wanted to leave you really both, if you have any final thoughts on this topic, the guidelines, what they represent in this moment in time, and anything… I’ll start with Wyatt because I want to finish with Michael, but Wyatt, if you have any thoughts that you want to close the conversation with, and then we’ll end with Michael who is our guest.

Wyatt Fore:

Sure. I don’t have too much else to add. This has been a really interesting conversation. The only thing I’ll say is that I’ve been really excited to read the guidelines. I think that they’re really interesting and they’re written in a very accessible way and focused on the law and I think in a way that I think is really refreshing and wonderful.

And also, I would just like to give a plug for all of our public servants like Michael and the rest of the folks who worked on these guidelines. I know that so much hard work went into it. I always think that some of the smartest people in the entire world who think about these issues are on staff at the antitrust agencies and they often get criticized from people from the outside, but I just want to say that I hope that when they see those criticisms, they also know that there’s a lot of people cheering them from the sidelines and who are very appreciative of their work.

So I would extend that to Michael and anyone who’s listening in the government, know that you have a lot of fans who are very excited to see what you’re working on.

Jeff Shinder:

I second that. Michael, to our audience, especially those who are in-house counsel or business people at companies who do deals or to practitioners especially, just practically, people who are going to be counseling or making decisions against the backdrop of the new guidelines, is there any final thoughts that you’d like them to consider as these guidelines are finalized and go into effect?

Michael Kades:

The hope here is one, the guidelines provide guidance to the staff about how to think about mergers. Secondly, to the corporations and folks thinking about mergers, hopefully what they should be getting out of this is not sort of an argument about legal niceties, but that these guidelines suggest that what we’re interested in is really how the market’s working, and that should hopefully demystify the process. It’s not simply a question of somebody runs a diversionary analysis or some other complicated regression and it pops out a magic answer, that really we’re interested in, as I think I’ve repeated almost ad nauseum, how is competition working and how is that going to change? And that should make them hopefully more accessible to everybody.

Jeff Shinder:

Okay. That was really helpful. And this entire discussion, it was so interesting, Michael, we might just have to have you back. Maybe we’ll bring you back after they’re finalized or maybe we’ll bring you back just talk about one of these issues with more of a laser focus. But this was great, so deeply appreciate it. I strongly second Wyatt’s comments with the work that went into this and the hard work that’s done at the agencies at a time when antitrust matters more than ever. So on that note, we can conclude.

Michael Kades:

I just wanted to say I do really appreciate both of you recognizing the talent and the dedication of the civil servants. It’s my favorite part of the job is actually interacting with the career staff at the DOJ, so I do really appreciate you guys calling them out.

Jeff Shinder:

Yeah. On that note, have a good day, everybody, and we will be back with more episodes on the guidelines and on the state of antitrust coming up. Thank you.

That’s all for our show today. If you like the podcast, make sure to subscribe to Antitrust Matters and leave us comments on how we were doing or on the topics you would like us to cover going forward. You can also follow us on or follow the 91pornantitrust team on . Until next time, be well, and remember antitrust matters.

Read Inside the 2023 Draft Merger Guidelines: A Conversation with Michael Kades at constantinecannon.com

Antitrust Matters provides engaging and timely conversations about competition policy in the digital age. Antitrust has always mattered to consumers and businesses, and to antitrust lawyers and economists, but today it also is in the political and public discourse more than ever. From the prices we pay for food, travel, financial services, payments to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. Antitrust Matters brings you you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going and why it is so important to our current political discourse.

In this episode of Antitrust Matters, Matt Cantor, Ankur Kapoor, and David Golden analyze and react to the April 24, 2023, decision of the Ninth Circuit Court of Appeal in the Epic Games v. Apple case.  This episode is a follow-up podcast to Episode 9, Epic v. Apple Ninth Cir. Appeal: Reactions to and Analysis of the Oral Argument.

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Episode Transcript and Show Notes:

Jeff Shinder:

Welcome to Antitrust Matters, a 91pornpodcast where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder and I’ll be your host. Antitrust has always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates, to how we travel, to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more than ever before.

David Golden:

Welcome back, everyone. I’m David Golden, a partner in Constantine Cannon’s antitrust practice. We’re here to discuss the Ninth Circuits April 24th decision in the Epic Games, the Apple case. We’ll be discussing a few of the issues raised in this decision, but I first wanted to introduce again, two of my partners, Ankur Kapoor and Matt Cantor. Welcome, gentlemen.

When we last discussed this case, it was in November ’22 just before the oral argument, and that was in episode nine of the podcast. Now that the Ninth Circuit has spoken, we are recording this episode to follow-up. So let’s get into it. Matt, there was a lot in the decision about the topic of market definition in the Ninth Circuit. Can you summarize what the circuit held and how did that analysis impact the court’s substantive antitrust analysis?

Matt Cantor:

Sure. The Ninth Circuit obviously reviewed the district court’s finding on market definition, and of course, the district court found that Apple had not violated section two or section one of the Sherman Act. And a good reason why it said that that did not occur was because the market pursued by the plaintiff there, Epic Games, was not cognizable.

As you may recall, for those who listened into the previous broadcast that Ankur, Dave and I did on this case, the plaintiff there tried to prove a so-called single brand of market, that there were markets, for example, for app stores and in-app payments that were solely predicated on the iOS operating system.

Interestingly, the reason why that was pursued and the Ninth Circuit references a statistic that the district court did in that regard, is that there was a factual finding that Apple only makes up for 15% of the smartphones worldwide, and therefore 15% of the smartphone operating systems. In my view, that’s just wrong.

I have never seen statistics that low. I’ve seen statistics that are much higher. And in the United States, the statistics are that Apple has well over half of the smartphones. But nonetheless, that was the factual finding that was made, and it was the cause that Apple’s market share was deemed to be so low in operating systems that the plaintiff felt compelled to sue on a single brand market theory.

And a single brand market, just so everyone understands, is a market, just as I said, based only on that brand. In other words, in and of itself, it is a market. That generally happens when there’s some type of unique product that’s involved. And when you’re talking about an aftermarket theory, which this is talking about, this is talking about iOS is the for market or the principle market, if you will, but market powers being leveraged according to the plaintiff in this case, in the aftermarket, which is the iOS App Store and the iOS in-app payment facilitation. Those are derivatives, if you will, of iOS.

So, the plaintiff down below said, “Hey, there’s this iOS App Store market,” for example. And the court said, “No, no, no, that’s not true. There’s a broader market for all types of gaming services” effectively. In order to prove that there are these iOS aftermarkets, you have to show that there’s some kind of lock in effect, that people really didn’t appreciate the fact that they weren’t going to be able to use, for example, another app store when they purchased an iPhone. And basically the Circuit Court said, “Well, there’s a dearth of evidence on that.”

In fact, the district court below said there was no consumer survey evidence or anything of the like that demonstrated that consumers were unaware of this fact and therefore were locked into the iOS ecosystem. That’s the principle thing that you have to prove when you’re trying to prove an aftermarket theory under the Supreme Court’s opinion in Kodak v. Image Tech.

But the thing that’s really curious here is that the majority opinion in this case, because there was two opinions, there was a majority opinion authored by Judge Smith, George W. Bush appointee, and there was a concurrence ordered by Judge Sidney Thomas, who is a Clinton appointee. And basically the majority opinion, which was joined by a district judge sitting by designation, said she got the market definition stuff wrong, particularly because she should have given more analysis on whether or not consumers were locked in and determined whether or not there was a single brand market. But it doesn’t matter.

It doesn’t matter because, under the rule of reason, the court made enough findings to demonstrate that Apple conduct was not anti-competitive. Well, Judge Thomas said, “Well, I agree with the majority. I agree with the majority that there was errors in the market definition analysis.” But that’s where you start under the rule of reason. And if you sort of mess that up, then how can you say that the rule of reason analysis that was done was somehow kosher, that it was done correctly? You can’t do that.

So, while the Ninth Circuit affirmed the district court on the section one and section two analysis, Judge Thomas would’ve reversed on the rule of reason finding in particular under section one because he said that the entire analysis had to be wrong if the market definition analysis was wrong as well. So, that is something that is likely to be thought in this litigation as it goes forward.

David Golden:

So, Ankur, Matt just mentioned the courts section one analysis under the rule of reason. Section one analysis under the rule of reason. Can you take us through what the analysis normally entails?

Ankur Kapoor:

Sure. So the classic formulation of the rule of reason dates back to the Chicago Board of Trade case in, I think, 1912. So it’s well over 100 years that antitrust law has been using this formulation. First, the plaintiff has to show that there are any competitive effects from the alleged restrain of trade. And the analysis is similar under section two of the Sherman Act, where the plaintiff has to show monopolization, but in terms of proving whether the conduct is anti-competitive, it’s the same analysis. The plaintiff has to come forward with a showing of anti-competitive effects.

Then the burden shifts to the defendant to come forward with proof of pro-competitive effects. Because the defendant being the business that put in place the challenge restraints, it knows why it did it, it has the proof for whether it’s beneficial, and so the burden naturally rests on the defendant to come forward with these pro-competitive effects. If the defendant does that, then the plaintiff has two options.

One, the plaintiff can challenge those pro-competitive effects as pretextual. Either the evidence just doesn’t support them, or the defendant is only making this argument up for litigation purposes. Second, the plaintiff can show, well, those pro-competitive effects are all well and good, but it wasn’t necessary to implement the restraint in order to achieve those pro-competitive effects. The defendant could have done, could have implemented a number of alternatives that were less restrictive of competition. So that’s the classic formulation of rule of reason inquiry.

In terms of where the dissent and the majority in the court court of appeals differed, the dissent thought, as Matt said, that precisely defining the relevant market is absolutely essential to demonstrating market power, and therefore showing any competitive effect under the first step of the rule of reason. That’s not entirely accurate.

So there are a couple of ways that a plaintiff can show any competitive effects. There’s rules called direct proof of anti-competitive effects, and there’s indirect proof of anti-competitive effects defining a market, showing the defendant’s market share, establishing market power, those are all indirect ways of showing anti-competitive effects. So let’s say Apple, in a relevant market had a 100% market share. Total monopolies. That would certainly inform the inquiry as to whether or not what Apple was doing and what it could do could exclude competition, but it’s an indirect means of showing any competitive effects.

There are also direct ways of showing any competitive effects. Principally, higher prices, lower output, and harm to innovation. The district court found, and the Ninth Circuit affirmed that finding is grounded in the evidence, that Epic had put forward sufficient proof, direct proof of anti-competitive effects. That Apple’s 30% commission was super competitive, it was in other words, substantially above Apple’s costs. Apple did have a large share in a market for mobile gaming, and that Apple was an extremely profitable company. Those are all well recognized ways of showing market power and proof of anti-competitive effects. So it’s not entirely … It’s certainly one way to show anti-competitive effects. And in that sense, the descent was correct. Look, there was no definition of the relevant market and demonstration of Apple’s market share in that market, and therefore using that methodology, Epic failed to show anti-competitive effect. But that’s incomplete. The district court found that there was direct proof, higher prices of anti-competitive effect.

The Ninth Circuit also holds, I know this is really interesting, that precisely defining irrelevant market or to be accurate, not defining irrelevant market using the accepted tests for doing so in the antitrust laws, not doing so is harmless error. Which is the first time I can recall a court of appeals ever saying … Economists have been saying it for a long time that you don’t have to engage in these economic tests to precisely delineate what the relevant market is. It includes wet cat food, but not dry cat food, which is actually a case I litigated once. You just have to show that there’s a market for something. Cat food apps and prices have gone up. You don’t have to engage in these econometric tests all the time in order to very precisely draw these market boundaries. You’re looking for the harm that the antitrust laws are intended to prevent. Higher prices, lower output, less innovation. And if you find that, it doesn’t matter that you didn’t do these market definition tests correctly.

So in the rule of reason analysis on direct evidence, principally higher prices, the district court found in the Ninth Circuit affirm that Epic had met its burden of proof. And so then the debate occurred over Apple’s pro-competitive justifications and whether or not Epic had put forward any less restrictive alternatives in order to achieve those pro-competitive effects. That’s where the case turned. Apple’s proffered pro-competitive justifications, which really weren’t disputed, or that Apple’s wall garden approach make its ecosystem much more secure than others. And Epic really didn’t have an answer to that. The less restrictive alternatives that they offered, Epic’s proof at trial didn’t fully develop how that might look. And I think the Ninth Circuit reason that Epic didn’t come forward with any evidence showing that Apple could have achieved the same levels of security using these other means that Epic had postulated. And it’s Epic’s burden to do so, so that’s where Epic failed in the rule of reason analysis.

Matt Cantor:

I want to respond to a couple things that Ankur said. I agree with most of what he said. I don’t agree with everything. He is right on the market definition generally is not always needed in a particular antitrust case, particularly in a case concerning horizontal restraints. But the Supreme Court, although economists may differ, the Supreme Court in Ohio versus Amex specifically held that in a vertical case, market definition is necessary, which was something that Judge Thomas pointed to. And why again, he felt reversal was required with respect to Epic. I agree what Ankur said exactly what the ninth Circuit held that Epic did not come back with the least restrictive alternative, or lesser restrictive alternative. Epic did though, at least with respect to the security justification, point out that Apple has something called a notarized system, which is if you download content from something other than the app store and you have an iMac, there’s a little legend that’s put down by Apple that says, “We can’t verify the security of this download.” And they said they could do the same thing on the iPhone if we were allowed to have an app store on the iPhone and people downloaded conduct from our app store. As Ankur said correctly, that that was deemed to be insufficient. I’m spellbound as to why that was deemed to be insufficient, but that was deemed to be insufficient.

Also, with respect to the intellectual property claim that Apple made, which by the way, Apple did not present a lot of evidence, saying that its security justification was supported by fact or that its IP justification was supported by fact. It just basically said, “Well, consumers like security and we have an IP right here.” That generally has not historically been enough, but the Ninth Circuit accepted that. Coming back with the way Epic Games responded to that, Epic Games with respect to the way Epic Games responded to that, Epic Games with respect to IP, said, “Well, we don’t think we should have to compensate them for it, but we’ll engage in negotiations and we’ll compensate them.” That was deemed to be insufficient because there was no specific number that was placed by Epic Games on how Apple would be compensated either by them or by others who wanted to have app stores on the iPhone. I agree with Ankur. Epic Games did not provide persuasive proof, but at least a security justification. They did provide some proof as to how a lesser restrictive alternative can be brought about based on what Apple was already doing.

On market definition, one last thing I want to say. I didn’t add this to my answer, so forgive me, but it’s important that everyone recognizes. The Ninth Circuit on the market definition principles basically set forth or reaffirmed the standard for market definition. There has to be substitution. There has to be the ability of a consumer to substitute for an alternative product in the wake of a price increase. The trick with a single brand market is you are saying that, well, those consumers cannot substitute. Here it was, consumer consumers, regular person consumers, again, not OEMs. They couldn’t substitute for other operating systems, for example, in the wake of a price increase.

That was the issue, or other app stores, in the wake of a price increase because they wouldn’t necessarily go substitute with a Google Android phone. That was the test that was laid out. That market definition is informed by substitution and the ability to substitute and what options are available to the relevant consumer. That was reaffirmed by the Epic Games case.

David Golden:

The decision was widely seen as a win for Apple, but it was not entirely left off the hook because it was… The finding of liability for violating California’s unfair competition law was affirmed. Ankur, can you describe what the court held there?

Ankur Kapoor:

Sure. This finding related to Apple’s requirement that developers use or that consumers use Apple’s system for processing in-app payments or in-app purchases, and that Apple’s rules prohibited developers from pointing consumers to other ways that they could pay for those purchases. For example, in Epic’s flagship game, Fortnite, you can buy lots of virtual goods and if you’re on iOS, if you were playing on your iPad or your iPhone and you wanted to buy one of those goods, consumers had to use and developers had to use Apple’s system for in-app payments. Epic could not tell consumers, “Hey, go to Epic’s website and you’ll be able to buy these goods for less.” Consumers could buy them for less on Epic’s website because possibility was that because Epic wouldn’t have to pay Apple’s 30% commission on the in-app purchases, it could charge consumers less for whatever good they were buying.

But Apple’s rules prohibited Epic from doing that, prohibited all developers from doing that. That’s in fact what led to the… It was the genesis of the dispute when Epic created a hot fix that enabled consumers to go around Apple’s in-app payment system, Apple then kicked Epic off the platform. What the district court held under California’s unfair competition law was Apple’s prohibitions were unfair under the California law and the Ninth Circuit affirm.

My view of it, both the district court’s ruling and the Ninth Circuit deferments, was they really didn’t see a pro-competitive justification for Apple’s restrictions. In fact, the district court specifically noted that other payment services, for example, PayPal or Google Pay or Apple Pay itself would offer better secure… There are number of sophisticated payment systems that have been around for decades. They’ve established a number of security protocols in order to make online or in-app purchases secure. The district court held that some of those competing providers could actually provide better security than Apple. I think that motivated the district court to want to do something about the IAP restrictions. They couldn’t do it under the Sherman Act, but the more flexible California unfair competition law enabled the district court to find that to be on balance an unfair [inaudible 00:20:43] of competition. The Ninth Circuit affirmed, I think without much additional discussion, compared to the district court.

David Golden:

Matt, final question to you, and Ankur for you after Matt, is what are the next steps in Epic v. Apple? Where do we go from here? Then, also, what do you think will be the response, if any, by government enforcers or legislators to the Ninth Circuit’s opinion?

Matt Cantor:

Yeah, but Ankur did a great job in responding to the last question. The only thing I wanted to add to it is I never could figure out why the unfair competition case that was brought by Epic was only brought with respect to these steering restrictions, restrictions that precluded Epic from saying, “Hey, you can go somewhere else to buy our product,” and why it didn’t relate to the gamut of Apple’s conduct. I couldn’t find why that was the case in either the district court or the circuit court opinions. I find that to be curious.

But in any event, there’s two things I’d wanted to say on the question that you stated, Dave, or the questions. One, there is going to be a petition for rehearing on bonk. I agree with you that I think this has generally been perceived as a win for Apple, although I think Apple is an aggressive litigator and is going to certainly fight on the 17 200 aspect, and the fact that there was a split in the circuit does raise the possibility of an on bonk petition being taken. You’re talking about the Ninth Circuit. That is very, very possible.

That’s going to be interesting. I’m not going to predict whether they’ll take the petition or whether the petition would be ultimately successful, but I don’t think this is a petition that will be dismissed out of hand. I think it’ll be considered, and I wouldn’t be surprised if there were some votes on the Ninth Circuit bench for taking the matter on rehearing.

With respect to government enforcers and legislators, look, I think there’s two things to say. One is that there’s been a lot in the last few years, particularly during the first two years of the Biden administration, there was a lot of talk about revising the antitrust laws because particularly when it comes to tech players, the antitrust laws may not have all the quivers that are necessary to adequately enforce the law. I know that there are many people who disagree with that. That was nonetheless the mantra that you heard from many people, including Senator Klobuchar and Representative Cicilline.

This case certainly indicates that it’s hard to get a monopolist to pursue a claim under section two of the Sherman Act against tech monopolist. One of the things that’s interesting here is that there was also a tie-in claim. Again, the Circuit Court said, “Well, this is a form of technological tie, and those types of ties really should be adjudicated under full rule of reason inquiry instead of a more shortened per se standard.” That seems to be a holding that is now almost well established if not well established. It seems very few tie-in cases against tech providers will be adjudicated under the per se standard. I think government enforcers and legislators will look at the case. Again, it’s still ongoing, and say, “This is just another example of how difficult it is to…”

Another example of how difficult it is to pursue antitrust against some of the more incumbent tech “monopolists”, whether it’s Apple or Facebook, for example. And that could at some point on a legislative front spur another legislative charge with respect to enforcers, look, chairwoman Lena Kahn and the FTC, which now does not have any Republican members, only three Democratic ones have been very consistent that the FTC has quivers beyond the Sherman Act and the Clayton Act to enforce competition law.

And that is in particular section five of the FTC Act, which prohibits unfair methods of competition. I would expect that the FTC has taken note of this case, will certainly consider it in its enforcement posture, but will see this as just another reason for why it should have an expansive view of section five of the FTC Act and why it should be in proceedings under section five of the FTC Act. They really haven’t done that yet. Yeah, there was recent case against Amgen and with respect to its acquisition of Verizon that mentioned section five of the FTC, but that’s really a Clayton Act section seven merger challenge. But I just think that given the leadership at the current FTC, that’s going to add more incentive for them to bring a section five case and we’ll see if they do.

Ankur Kapoor:

Yeah, I agree with what Matt said. I think that this kind of case is a prime candidate for the FTC to bring under section five. I think also in terms of enforcement beyond this case, the law is pretty well established that if you’re pursuing an antitrust claim under the Sherman Act based on a single brand market, or Apple in this case is a monopolist, even in a market that consists entirely of Apple’s own products. Or think of Tesla thinking of cars, right? Tesla is a single market because it’s maybe a dominant provider of electric cars. Under current antitrust of the United States, the only way for that kind of claim to succeed is if the plaintiff can show that they and others like the plaintiff were locked in by virtue of something else that the defendant did. In other words, not just that lots of consumers and developers use the Apple platform, but in this case it was that Apple had always told consumers and developers that they could only buy apps on the app store. And consumers and developers freely signed onto the platform, they bought into it, knowing that.

And under the current law, that means that there is no single market claim. It hasn’t changed the fact that you have an entire ecosystem on which a number of developers depend for their livelihoods and a number of, a very large number of developers, very large number of consumers use the platform and spend a great deal of money on it. Whether that law should change is I think a legitimate question for debate. Right now, there’s nothing else the Ninth Circuit could have done, right? It’s constrained by the law and this Supreme Court is not going to alter that law in any way, shape, or form. So I think that’s exactly right that it’s going to fall to the FTC Act and FTC enforcement to bring these kinds of cases.

But I think we should seriously consider whether that should continue to be the law. And in Europe, for example, it’s not. In Europe, the plaintiff, whether it’s the European Commission or the UK competition markets authority or private plaintiffs do not have to show that they didn’t know about this logging. And either it arose, this theory arose, this law arose in the context of, it’s a very specific context of photocopiers. Kodak, the Kodak case, Supreme Court in 1992. In which, the plaintiffs alleged that Kodak had monopolized in the aftermarket for the service and the parts of Kodak copiers, very large, high-end copiers.

That was the cutting edge technology at the time. And the Supreme Court and subsequent cases in the court feels how that, well, look, we’re talking about very sophisticated business customers. They can evaluate not just how much it costs to buy the copier, but how much the parts are going to be, how much the service is going to be, and knowing all that if they still buy into the Kodak platform and they’re logged into it, that’s not anti-competitive, that’s voluntarily done. So they knew well what the costs were going to be. And that’s just not the case with the Apple ecosystem. Even if Apple puts the disclaimer in its developer agreements and consumer agreements, which nobody reads, that you can only buy apps on the app store and use all these restrictions, it just doesn’t change the fact that there’s this logging and it’s a serious question as to whether or not that law should be reformed to fit a 21st century market or 21st century markets more generally.

Matt Cantor:

I think that’s a great way to end. I think that Ankur raises excellent points. I also think that Ankur’s particular point contrasting the European Commission is a very interesting one because very quickly, European commissions, antitrust standards are more lenient and the Digital Markets Act is going into effect, which will also impact the ability of large technology players to take anti-consumer action. So what we’re going to end up happening is you could have substantial enforcement in the EC and changes made in the European economic community, but those changes aren’t made in the United States and American consumers and merchants and app developers are all left on the sidelines. So that would be obviously a very disjointed situation.

David Golden:

Thanks, Matt. Thanks Ankur. We’ll continue to monitor the Epic, the Apple case, and business issues in general.

A postscript to this podcast episode. Since recording, the 9th Circuit has rejected both Epic’s and Apple’s requests for rehearing.  Apple has indicated that it will seek Supreme Court review.

Jeff Shinder:

That’s all for our show today. If you like the podcast, make sure to subscribe to Antitrust Matters and leave us comments on how we were doing or on the topics you would like us to cover going forward. You can also follow us on or follow the 91pornantitrust team on . Until next time, be well, and remember antitrust matters.

Read Antitrust Matters Episode 13: Epic v. Apple Ninth Cir. Appeal: Reactions to and Analysis of the Decision at constantinecannon.com

In this episode, 91pornpartner, Matthew L. Cantor, discusses economic and antitrust issues raised by the conduct of certain large hospital systems.  Joining him on the podcast as guests are Duke University Professor of Law, Barak Richman, and CEO of the policy group known as the Catalyst for Payment Reform, Suzanne Delbanco.

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Episode Transcript and Show Notes:

Jeff Shinder:

Welcome to Antitrust Matters, a 91pornpodcast where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder, and I’ll be your host. Antitrust has always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates, to how we travel, to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more than ever before.

Matthew Cantor:

Hello, everyone. My name is Matthew Cantor, and I am a partner at Constantine Cannon. I specialize in antitrust and healthcare litigation. This podcast is dedicated to exploring the role that antitrust analysis plays in certain actions taken by hospital systems. It asks whether hospital systems, including those that identify as “not-for-profit systems” ever take actions that constitute an anti-competitive exercise of market power. It also asks whether certain arguments offered by hospital systems justify actions that would otherwise be deemed or held to be anti-competitive. And it asks how we should analyze certain hospital actions to determine whether or not they have caused or likely could cause consumer harm.

At the outset, we did want to note that this podcast does not consider the medical treatment performed by specific doctors or nurses or EMTs for specific patients, and it does not question whether hospitals do good things, of course they do, they treat patients, but even though this is the case, the law does not immunize nor should it immunize, in this commentator’s humble opinion, the economic actions of hospital systems from antitrust scrutiny. Hospitals are not permitted to harm consumers or competitors with impunity just because they treat people who are sick or injured. We must, therefore, consider whether certain hospital economic actions could likely harm those that pay hospital prices or try to compete with hospitals to treat patients.

Today I am joined by two true healthcare gurus, both of whom have substantial experience in considering the economic actions of hospital systems. They are, first, Professor Barak Richman. Professor Richmond is the Catherine D. Bartlett Professor of Law at Duke University Law School. He has a PhD in Business Administration from the Haas School of Business at the University of California Berkeley, and he has a law degree from Harvard. He focuses his academic work on antitrust issues raised in healthcare markets. Welcome, Professor Richman.

Barak Richman:

Thanks for having me.

Matthew Cantor:

We’re also, luckily, joined by Suzanne Delbanco. Now, Ms. Delbanco was the founding executive director of the Catalyst for Payment Report. That’s an independent nonprofit corporation working to catalyze employers, public purchasers, and others to implement strategies that produce higher value healthcare and improve the functioning of the healthcare market. She now serves as a strategic advisor for CPR. And previously, Suzanne was the founding CEO of the Leapfrog Group. Suzanne also holds a PhD in Public Policy from the Goldman School of Public Policy, as well as a Master’s of Public Health from the University of California Berkeley. Welcome, Ms. Delbanco.

Suzanne Delbanco:

Thank you.

Matthew Cantor:

Well, let’s get to it. I have some questions that I’d like to ask our guests, and I may have some comments from time to time as well. So Professor Richman, let me first ask you, does the average Joe or Josephine directly pay for hospital services that he or she consumes?

Barak Richman:

Well, it depends on what you mean by directly. I mean, economists have a very different term from direct than the normal person, you might say. When a person requires hospital care, there might be some kind of copayment, some kind of co-insurance. Now, I don’t want to belittle the size of those copayments, they can be quite significant, and they have on their own triggered a lot of economic harm, but the most significant way from a financial perspective, the most significant way the typical non-retiree, non-senior member of the population pays for healthcare/hospital care is through their insurance. Most people get insurance through their employer.

So the financial transaction goes like this: I work for my employer, my employer buys insurance on my behalf. That money, therefore, goes to the insurer, and then when I need hospital care, the insurer pays the hospital. If you’re asking from a transactional perspective, there are three intermediaries there: my employer, the insurer, and then he goes to the hospital. From an economic perspective, it’s quite direct. The vast majority of hospital revenues come from private insurance payments. Private insurance, even though it is paid for through the employer, directly comes out of the employee’s paycheck. For every dollar of insurance the employee gets, that’s $1 less that comes out of the employee’s paycheck. And therefore, from an economic perspective, the typical person, frankly, whether they get hospital care or not, are paying quite directly for the hospital care they may or may not need.

Matthew Cantor:

Given the way that people pay for hospital care, and I’m focusing based on the payments that go through premiums, do you think that the typical Americans should care about hospital prices? And if so, why?

Barak Richman:

The typical American should deeply care about hospital prices. Hospitals consume about 40%-45% of the total healthcare spend. From a per capita perspective, or from an insurance premium perspective, that’s about $16,000. Suzanne, is that about the right number now?

Suzanne Delbanco:

That someone pays on it for over a year?

Barak Richman:

A year’s worth of a insurance?

Suzanne Delbanco:

Yeah, that sounds about right.

Barak Richman:

So now, the $16,000 figure, in addition to being extraordinary, is especially pernicious precisely because the individual is not paying it directly, it’s mostly being paid out of their pockets indirectly through their employer, they don’t know how much it is. But if you figure about 45% of 16,000 goes to hospital care, that’s a lot of money every year for the typical insurance premium payer. So yes, to the degree that any individual cares about a $7,000 annual purchase, they should care about hospital prices.

Matthew Cantor:

I certainly care about it from my paycheck standpoint. So I care. Ms. Delbanco, let me ask you a question. Do you agree that employers pay for a good deal of the insurance premiums, which includes hospital costs?

Suzanne Delbanco:

Yeah, absolutely. At the end of the day, when a person is employed, they’re compensated for their work. Part of their compensation comes in the form of wages, and part of their compensation comes in the form of other benefits, including in many cases health insurance. But the more my health insurance costs, even if the employer pays a good portion of it, the less opportunity I have for my wages to go up. So there is a varying degree of cost sharing that the employer participates in, so they cover a portion of the premium, but the total premium, and even the proportion that the employer is willing to cover, is going to be impacted by how expensive that insurance is overall.

Matthew Cantor:

Ms. Delbanco, in the United States, to what extent are employers required to pay for healthcare expenses for their workers?

Suzanne Delbanco:

It depends on the nature of the employer and the size of the company. But really, employer-based health insurance started out as a voluntary thing. It was added to the offerings really around World War II to try to bring workers that had been lacking when everybody was off fighting war or building ships back into the workplace. And then it became this sort of arms race of, “How great can my benefits be so I can attract workers and retain them?” And so even to this day, a lot of the insurance, even though it’s regulated, is something that is essentially done as a way of luring workers to a given workplace and to trying to get them to stay.

Matthew Cantor:

So employers compete by offering healthcare benefits, is that right?

Suzanne Delbanco:

That’s right.

Matthew Cantor:

Professor Richman, I want to go back to your discussion on premiums. Do you know of any regulations that require or certainly indicate that the hospital costs that are incurred in this country are passed through by health insurers to their premium payers?

Barak Richman:

As a basic matter of economics, if you are a financial intermediary, you’re an insurer who collects premiums then pays for healthcare, everything you do is passed on. All you’re doing is taking money from one pocket and sending it to the other. I’m being a little disparaging when I say it’s all they do. But for sure, the prices of healthcare are immediately passed on to the people who pay insurance. It’s also passed on in the form of health generous set insurances. Prices go up for healthcare services and insurer either increases premiums or reduces the generosity with what the insurance product has. It might not cover certain outpatient services or they might increase cost sharing. So for sure, there is an immediate effect.

Now, are there regulations that require that or are there regulations that mitigate that pass-through? I mean, this is a heavily regulated sector, and you can imagine certain regulations affecting that pass-through. There is, for example, the medical loss ratio. This is a rule that was part of the Affordable Care Act that it sounds innocuous or even well-intentioned. It requires insurers to spend 85% of their total premiums, or total revenue, on healthcare. It basically, you might say, is a cap on how much insurers can keep either for administrative services or for profit. And who can argue with spending insurance money on healthcare? But one thing it does is it means that patients are especially vulnerable to price increases that providers and hospitals imposed. So there is even less discretion on what insurers can do. And frankly, there’s even less of an incentive on what insurers might want to do to counteract hospital prices.

I suppose, I’m sure we’ll get to this, you can consider antitrust law as a form of price regulation. You could think that antitrust law might be a source of regulation that would limit prices that hospitals can charge. But of course, that hasn’t done a very good job.

Matthew Cantor:

We certainly will get to remedies for hospital price increases later on in the program, but I appreciate your answer. Ms. Delbanco, I assume you agreed what I said at the outset that you believe that hospitals provide important functions to society.

Suzanne Delbanco:

Yes, absolutely. I can say that they helped me deliver two wonderful boys, and it helped us through a few other healthcare crises as a family, so absolutely.

Matthew Cantor:

Well, I have three children. They’re all rotten, but I love them nonetheless in any event. So your organization has certainly sought to limit hospital price increases certainly in certain instances, but don’t price increases allow hospitals to gain revenue and don’t they need revenue in order to provide quality care?

Suzanne Delbanco:

Hospitals absolutely need revenue. They have workers to pay, they have supplies to buy, they have insurance that they have to purchase. There’s a million expenses that go into running a hospital, so of course they need revenue. The question is, how much? That’s something that in truth not that many people really know because the way that accounting is done in a hospital or a health system is just one mystery on top of another. We know that in markets where there’s a lot of competition among hospitals they manage to deliver care at lower costs than in markets where there’s less competition. What that suggests to me is that if one can’t cover costs through prices or raising prices, one has to figure out how to root out unnecessary costs. It could be something as simple as where you’re sourcing the bed linens from. It could be something much more complicated like what are the financial incentives that your bedside providers have not to waste resources? But either way, we’re pretty certain that there’s a lot of room for cost-cutting in the delivery of care that means that hospitals could have a decent margin without the price increases that we’ve been seeing especially over the last decade.

Matthew Cantor:

When you say cost-cutting, do you mean cutting cost but also impacting quality negatively, or do you mean keeping quality flat but still having costs go down?

Suzanne Delbanco:

Keeping quality flat, but still having costs go down. There’s a lot of debate about whether improving the quality of care reduces costs. Or on the flip side, we could say reducing costs, could it improve quality? Let me give you a great example. We have too many unnecessary cesarean deliveries in this country. There’s all kinds of reasons for it from the OB-GYN who wants to have control over their schedule, to even a patient demanding to have a baby on a certain day. So there’s lots of reasons why we have unnecessary cesarean deliveries. But the truth is we pay about 50% more for cesarean delivery than a vaginal delivery. And as long as there’s an incentive to generate revenue at the hospital and we pay more for cesarean deliveries, there’s really not a lot of pressure on the hospital to change.

But we also know that cesarean deliveries can lead to worse outcomes for the baby, for the mother. They’re not much more dangerous than vaginal deliveries, but there are some issues that can arise, especially when it comes to the respiratory health of the newborn. And so, if we were to simply pay less for those cesarean deliveries, we might see a shift toward more vaginal deliveries and supporting women in labor. And people would, I think, wholeheartedly agree that that would be better quality. So it can go both ways in terms of costs and quality. Does higher cost equal higher quality? Does lower cost equal higher quality? It just depends on the clinical area and where the costs are getting cut from. But I think one thing that consumers often make the mistake of believing is that more expensive care is higher quality care, and the data shows there’s absolutely no correlation.

Matthew Cantor:

Ms. Delbanco, I want to stick with this issue for a second, and Professor Richman, you can feel free to comment on this too. But there’s one argument that hospitals make oftentimes that I’d like you both to comment on, and it’s this: many not-for-profit hospitals have to offer something called charity care, which I think listeners may not know, but that’s providing care to the uninsured, to the indigent who have no Medicaid, no insurance whatsoever in order to pay. And then, of course, hospitals also have to provide care to patients that are on Medicare. These are generally older patients for which the government insures, and Medicare rates are generally lower than rates that commercial insurers can negotiate with hospitals. So you have sort of higher commercial insurance rates, sort of lower Medicare rates, even lower Medicaid rates, or about the same as Medicare, and then you have no payment whatsoever that goes to the hospital in an uninsured payment. Hospitals will often say that they need higher commercial payments in order to cross subsidize these critical services that they provide to the elderly and to the indigent. To what extent do you believe that cross-subsidization argument holds water? And do you believe that it has justified price increases by any hospitals?

Suzanne Delbanco:

I’ve been working on behalf of employers and other big purchasers to push the healthcare system to deliver better value since 1999. One of the age-old debates is whether or not, the phenomenon you’re describing is cost-shifting, are employers getting saddled with extra costs because the government doesn’t pay enough? Or is it what an economist would call price discrimination, where the hospital will charge the most they can to any different payer, and if the payer’s willing to pay whatever the price is, then fantastic. And they don’t have to work as hard at being efficient at rooting out excess costs and they can just make things work by getting a higher price paid by someone who’s willing to pay it.

I personally believe it’s the latter. I’m sure there’s cost-shifting that happens. It goes back to that issue I raised before which is that if you were to really delve into the cost of operating a hospital and delivering care, hospitals don’t actually know what it costs to deliver a unit of care or a particular type of service because it’s all muddled together in the top line. What are our expenses? What do we want our revenue to be? What do we want our margin to be? And they negotiate at a very high level about that stuff.

Again, going back to what I mentioned earlier, there is some data that has been put out by the Medicare Payment Advisory Commission, a group that advises Congress, that suggests that hospitals in areas that are more competitive do just fine on those lower government rates. But it’s a hell a lot easier just to charge higher prices to those willing to pay than to actually have to figure out how to have a good margin on those lower rates.

Barak Richman:

I would put it even more strongly. I would say not only does it make more sense, but it makes no economic sense to suggest a cost-shiftings happens at all. It suggests that hospitals, unlike other organizations, including nonprofits, they’re not trying to maximize. They’re not trying to do whatever they can given the market environment that they have. It suggests that hospitals are behaving in distinctively uneconomic or economically irrational ways, and that for whatever reason, they’re the one lone exception to microeconomic theory.

Suzanne Delbanco:

I love that.

Matthew Cantor:

Just for the record on this program, I just want to say I and my firm have litigated various hospital matters where this has come up. We contend that in antitrust in particular, that it is impermissible to offset or to balance an anti-competitive effect in one market with a pro-competitive benefit in another. We don’t think that antitrust law should be doing that kind of weighing because that would lead to all sorts of very difficult outcomes to assess and would really reduce the enforcement aspects of the antitrust law. So that’s an issue, a legal issue that we have litigated. We think we’ve got the better view of the law on that. If you go with our view of the law, since government-insured patients are generally not deemed to be in the same market as commercially-insured patients, that kind of argument we don’t think is recognizable under antitrust law. But I find it an interesting economic and antitrust issue.

Professor Richman, we’ve talked about market power, and this is a phrase that I’m sure you’re very familiar with, can you define it for our viewership or for our listenership?

Barak Richman:

Yeah, so market power is the ability to control or dictate prices. If you are one of 1,000 lemonade stands on Main Street, if you price above the lemonade stand next to you, assuming all the lemonade tastes the same, you’re not going to get any business. You are a price taker. If you’re one of 1,000, you do not have any pricing power. If you’re one of three, you might have a little pricing power. And if you are the lone lemonade seller, you have entire pricing power, you set the price. Now, of course, you don’t set the price at the highest possible amount. You are still restrained to some degree by what the market will bear, but you have market power in the sense that it’s just you and the marketplace. It’s just you and the body of consumers. You can control prices without concern for our competition.

Now, I will add that, and I don’t think this has been recognized; certainly hasn’t been recognized as a matter of antitrust law. I don’t think it’s widely appreciated even in policy circles. But hospital market power, I have argued, is even more potent than just normal monopoly power. If you are the only lemonade seller in town, yeah, you can charge the monopoly price and maybe, especially if it’s a really hot and dry day, you can charge even more than that. But hospital care is a genuine must-have product. And for that matter, most of the margin of most hospital care is covered or clouded by insurance. There really is not a price that the lone hospital can charge that will price it out of the marketplace. So not only is market power in any market a real problem, you want competition, you want prices below the monopoly price, you want to close to the competitive price, but hospital market power is especially pernicious and especially costly.

Matthew Cantor:

Let’s talk, Ms. Delbanco, about certain remedies that your organization has advocated for in order to try to reign in hospital pricing. First of all, have you looked towards antitrust enforcement as a potential way to do so?

Suzanne Delbanco:

Yeah, so I guess what I would like to give as a image is that we’ve taken a belt and suspenders approach. You want to make sure those pants stay up, you got to have a backup plan. You’ve got the belt and you’ve also got the suspenders. We have done a lot of work to help employers and other big purchasers think about the way they buy healthcare and come up with strategies that can generate competition where it’s lacking. But when those strategies aren’t enough, antitrust enforcement is incredibly important. Honestly, I think we’re at a stage where in most markets, market forces alone, the way employers buy healthcare, is not likely to create the solution that we need. It’s complicated and there’s lots of reasons why it could get into that employers are unlikely to be bold organized actors. But at the end of the day, if the marketplace is broken and not working because we have an imbalance of market power, we’ve got a dominant provider and fractured almost individual purchasers of their services that are not organized and able to mount a market power battle, then we’re going to need some enforcement of their behavior.

I just want to add that I appreciate the narrow definition of market power focusing on price, but we’ve seen market power exhibited in other ways too. If you’re the only shop in town, you’re the only lemonade stand in town, your lemonade doesn’t have to taste that good. It has to taste decent, but you’re not going to be reviewed and compared to the other lemonade stand because you’re the only one. So if you’re the only hospital in town, everything from your customer service to the bedside manner to the quality doesn’t have to be that great because there’s not a choice that anyone has. And we’ve also seen market power exercise not just in sort of, “Oh, I don’t need to worry about quality as much or innovation in any way,” but we’re not going to just charge higher prices, we’re also going to restrict how those who buy our services can behave, where else they can send patients. There’s all kinds of complicated things that hospitals can try to do to exercise their market power beyond just the prices.

Barak Richman:

I accept that as a friendly amendment.

Matthew Cantor:

Well, I have a question for Professor Richman. This is a question that I’m asking to answer in a couple of minutes, but I recognize that we could be talking about this issue for years or decades, which is this: if Ms. Delbanco is correct, and most hospital markets are characterized by market failure and not competition, do you think that the only way to remedy the issue of rising hospital prices is via regulation? When I say regulation, I mean some type of price cap. And if so, what are the pros and cons of doing so? I understand that’s an unfair question for a couple of minutes by as the MC, I use my MC prerogative.

Barak Richman:

Right, okay. Let’s say you’re living in a town that only has one hospital and the hospital’s charging you monopoly prices, what sort of remedies are there? Well, I would first embrace the kind of remedies that Suzanne is suggesting. If you’re an employer and there’s only one hospital in town, maybe you’ll hire the equivalent of a school nurse or maybe you source some healthcare internally. Maybe you can try to figure out ways to send your employees that all need knee replacements to the hospital in another state. Maybe you can facilitate some kind of competition that normally isn’t there. The fact that you have only one hospital in town doesn’t mean there’s only one hospital in the state, and it might require some effort, some convincing of your employees to travel, it might require some creative contracting. But I would think that my first step would be Suzanne’s first step, which is, let’s see if we can really try to be creative and bring competition in a market that currently is this lacking.

If that doesn’t work, and for sure it wouldn’t work for certain things, you only have one place to deliver babies or you only have one place for emergency cardiac surgery, then there are a number of regulatory reforms that might bring prices down or usher in competition. One, it certainly could be price regulation. We’re only going to allow you to charge a certain amount for a delivery or a certain amount for a cardiac procedure. Another could be antitrust regulation or antitrust lawsuit. Suzanne was suggesting that often what hospitals do to exercise their market power is to foreclose entry, or they say, “If you want access to my emergency room, then therefore you have to let me control your outpatient facilities also,” that might be an antitrust violation. You might be able to carve out certain services from the monopolist through an antitrust lawsuit.

But there are others too. There are other ways to think creatively. Just like the employer or the purchaser can think creatively, the policymaker, the regulator can think creatively. We might be able to remove certain certificate of need laws, so we could build another hospital or build an ambulatory care surgical center. We might be able to liberalize licensure law so people can get telemedicine from people out of state. Maybe for even primary care, certainly for follow-up care, it would be a lot easier, for example, to get a knee replacement elsewhere if you can follow up with a doctor through telemedicine. And maybe also there are other kinds of regulatory liberalizations like expanded scope of practice for NPRN, for nurses, to provide primary care. A lot of the healthcare sector is regimented because of the regulatory environment that we have, and some of those laws prohibit competition, and some of those laws allow anti-competitive conduct. We have to think creatively with all every arrow that we have in our quiver.

Matthew Cantor:

Let me ask this last question of you both, and maybe this is more of a personal preference or political question than it is a legal or economic one, but in the last few years in the antitrust world, the headlines really have focused on technology. That’s not to say that some of the technology players may not have violated the antitrust laws or engaged in unfair methods of competition under Section 5 of the FTC Act, but that’s really where the headlines have been. Do you think that there should be a greater amount of discussion and a greater amount of enforcement efforts amongst the antitrust authorities to reign in hospital price than has occurred to date in this country?

Suzanne Delbanco:

I’ll take the first stab at that, and the answer is absolutely yes. We’ve done a variety of things in the antitrust space. I’ve served as an expert rebuttal witness, I’ve been a lay witness, I’ve written amicus briefs, and I have spoken to the National Association of Attorneys General. I have been called by many Offices of Attorneys General at the state level trying to learn more about healthcare. What I’ve learned through all of this is that antitrust enforcement has very limited resources and very few people that understand healthcare markets. And so, while I don’t think we’re going to solve our problems really through law enforcement, I think we do need a policy agenda, new laws, new regulations that make the markets work better. There’s no question that antitrust enforcement is very under-resourced. So yes.

Matthew Cantor:

Professor Richman, do you have a view on this?

Barak Richman:

It certainly is under-resourced. Part of the reason it’s under-resourced is because antitrust law has gotten really very, very complicated. You get very little bang out of your buck. But another thing that’s happening is that there really has never been a full appreciation for how costly uncompetitive healthcare markets are. One of my very first ventures into writing in this area looked at unsuccessful campaigns by the Federal Trade Commission to stop hospital mergers that really any economist would say should never have even been contemplated. The FTC ran into all sorts of legal barriers, not just complexities in the litigation process, but also just judges that were hostile to the claim. I think we’re turning the corner a little bit. Thanks, frankly, to a lot of the work that Suzanne’s been doing. Frankly, Matt, a lot of work that you’ve been doing also. I think that there’s now a greater appreciation for just how harmful hospital monopolies and concentrated hospital markets are, and there might be more fertile ground, more popular support for antitrust actions. But the law is still really complicated, and an antitrust claim is still really hard to win.

I would say that, yes, we need to pursue aggressive antitrust enforcement, we need to supply the Federal Trade Commission and state’s Attorneys General and other parties, including payers and employers, with a lot of enthusiasm and financial support for antitrust actions. But we also really need to look at other legal remedies also. To the degree that we think that antitrust law is the go-to law to stop monopolies, I’m not sure it is for healthcare monopolies. I think that other legal remedies, including basic contract law, including fiduciary law, including licensure law, all of these might even be easier legal remedies to usher in competition than antitrust law. There’s a lot of thinking to be done and a lot of work to be done. If there’s a reason for optimism, it’s probably because people like Suzanne have convinced state’s Attorneys General and others that this is a real problem that needs to be addressed. What’s nice is that there are lots of ways to do that.

Matthew Cantor:

Yeah, I’ll just end by giving my two cents on it. I mean, I obviously am a pro enforcement person, but I am consistently amazed by the statistics that I see where they compare the United States healthcare market and other countries. My understanding, and you guys can correct me if I’m wrong, if you compare our market to Japan, in Japan, the average lifespan is 10 years greater than the average American lifespan, and they spend about a third or a quarter as much on healthcare than we do in the United States. That’s an absolutely disturbing juxtaposition. I agree with Professor Richman, I think antitrust enforcement has a significant role here, it is complex, but I do believe that greater resources should be given to enforcers to try to halt price increases. But I think there are other levers that can be pulled by constantly discussing the fact that I think so-called not-for-profit health systems are really left off the hook with this ability to not have to pay federal or state income tax even when they have billions upon billions of dollars in investments and are receiving money under the CARES Act, notwithstanding this.

I think that there are things that can be done to ensure that price increases do not occur by saying, for example, under the tax code, “If you’re going to be not-for-profit, you have to do A, B, C, and D,” which is not an obligation that necessarily is placed on them today. So yes, I agree, Professor Richman, that there are other levers that we can pull to halt this. With that said, I really want to thank you, guys. I think this has been a really interesting discussion. You didn’t have to do this, but making your time available is great for me personally and for anyone who listens. So thanks so much for being a part of this.

Suzanne Delbanco:

Thank you.

Barak Richman:

Thanks for having us. And I guess the California Bears have been represented well in this podcast, right?

Matthew Cantor:

Yes.

Barak Richman:

Yes. Go Cal.

Matthew Cantor:

Take care, everyone.

Jeff Shinder:

That’s all for our show today. If you like the podcast, make sure to subscribe to Antitrust Matters and leave us comments on how we were doing or on the topics you would like us to cover going forward. You can also follow us on or follow the 91pornantitrust team on . Until next time, be well, and remember antitrust matters.

Read Antitrust Matters Episode 12: First, Do No Harm. Does the Business of Hospitals Follow this Creed? at constantinecannon.com

In this episode, our guests, Robin Noble and Helen Ralston-Smith, expert economists with Oxera Consulting discuss with Jeff Shinder and Stephen Critchley the UK’s post-Brexit divergence from EU competition law generally but taking a particularly deep dive into the UK’s and EU’s new vertical agreements rules which both came into force earlier this year.

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Episode Transcript and Show Notes:

Jeff Shinder:

Welcome to Antitrust Matters, a 91pornpodcast where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder and I’ll be your host. Antitrust has always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates, to how we travel, to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more than ever before.

Welcome everyone. We are back with the Antitrust Matters podcast, and we’re going to do something a little different today. We’re going to cross the pond and we’re going to get a report on some interesting issues and recent cases that have been adjudicated over in the United Kingdom and a view from our friends in the UK regarding the state of competition law on some important topics that my partner, Stephen Critchley, will introduce. Stephen is a competition law and competition litigation specialist. Along with Stephen, we are joined by two economists from Oxera. Oxera is a European economic and finance consultancy. We have two partners from Oxera here, Helen Ralston-Smith and Robin Noble.

Helen Ralston-Smith specializes in financial services markets and has experience in competition, policy and regulation, litigation and arbitration. She has analyzed the economics of markets on both the wholesale and retail sides to the financial services sector. Much of her work has been focused on high profile issues, including the European Commission’s investigation into the proposed London Stock Exchange and Deutsche Börse merger, the impact of the financial transaction, tax and the investigation into FX trading by various competition and financial regulators.

Robin Noble is a partner at Oxera with more than 18 years experience. He specializes in digital issues, competition, economics, and quantifying damages. He advises governments, regulators, and businesses on high profile issues and is recognized as a leader in his field. He leads Oxera’s work in the digital arena, his advises high profile clients such as Amazon, Google, and Microsoft. Issues he has examined in this area include valuing data, policy and regulatory issues in the UK and EU, cryptocurrencies and algorithms. Welcome, Helen. Welcome, Robin. Stephen, it’s great to have you here. I’m going to toss the baton from New York to London and you can introduce our topics and I will turn it over to you. And again, I’m looking forward to a very interesting discussion.

Stephen Critchley:

Thank you, Jeff. So, we’re going to be discussing today specifically vertical agreements and the vertical agreements regimes in the UK and in the EU. For context, I’m going to start by setting out the basic framework, governing vertical agreements, which is the dry bit, in other words, before Helen and Robin get into some real world examples. So, I’ll canter through it quickly. The old EU regime, which governed vertical agreements in the UK expired on the 1st of June. That’s not a Brexit thing, it expired all across Europe. So, on the 1st of June, the EU and the UK both introduced new regimes. And today, what we’re going to be doing is a three-way comparison between the old regime and the two new ones.

The framework’s easy because it’s the same for all three regimes. The legislation against anti-competitive agreements is the same. The UK legislation is basically a copy and paste of the EU legislation. And despite Brexit, I don’t think there’s any plans to change that. So, the framework is this. The, legislation is short, it doesn’t give all the details you need to comply with it. So, the European Commission and now also the UK’s competition and Markets Authority publish lengthy guidance on how to comply with the legislation. And there’s different guidance for horizontal agreements. Today we’re just talking about vertical agreements, ensuring compliance with the guidance can be pretty technical and costly, particularly for smaller companies. So, there is a vertical agreements block exemption, which specifies that if the market shares the parties to the agreement are below 30% on their respective levels of the supply chain, the agreement is within a safe harbor.

Agreements within the safe harbor may be unlawful if they contain certain, what are called, hardcore restraints. In other words, the most objectionable restraints, these hardcore restraints are listed in the block exemption, things like price fixing, which in the context of vertical agreements, means fixing the purchaser’s onward sale price. But so long as the parties have market shares under 30% and their agreement avoids hardcore restraints, then it’s lawful and the parties don’t need to bother themselves with the guidance. If, on the other hand, a market share threshold is exceeded or if it’s not exceeded, but the agreement contains a hardcore restraint, then the parties need to reach for the guidance. And in the case of a hardcore restraint, the guidance probably won’t save you. So, that’s the framework within which Robin and Helen will be speaking. Now, this divergence between the EU and UK vertical agreement regimes is, needless to say, not the only consequence that Brexit has had on competition law.

So, Jeff’s asked me to pull the camera back and give an idea of where today’s subject sits in the overall story of Brexit, which is a fairly daunting ask given the size of the subject. But very briefly, I’ll try to summarize the effects of Brexit. First of all, legislation. Whilst the UK was in the EU, EU laws became so pervasive that we couldn’t just scrap them all when we left, it would just have left a massive hole. So, the EU Withdrawal Act, a UK Act parliament created something called Retained EU Law. Essentially it turned EU law into UK law. So, calling it Retained EU Law is really a misnomer. It’s UK law now, it just has origins as EU law. The idea was that we would then be free to change the law and diverge from the EU at our leisure. So, the old Vertical agreements block exemption that we’re talking about today, that was Retained EU Law, which is why it governed us until it lapsed last June.

Now, that leisurely divergence is likely to get upended because during the, blink and you missed it, Liz Truss Administration, the government published draft legislation to revoke at the end of 2023 all Retained EU Laws except any which might be chosen to be explicitly preserved. So, it’s basically the opposite of the Withdrawal Act, which retained EU laws to avoid massive gaps in our legislation. The new law is almost designed to create gaps, so it’s set to turbocharge our divergence from the EU. Although, if you ask me, it’s divergence for divergence’s sake and it’s been widely criticized as a bull in a China shop measure, which is just political, but there’s been no indication from Sunak that he will change course on that.

As I said, the UK legislation against Anti-Competitive Agreements is a copy and paste of the EU legislation. The other behavioral competition law (against Abuse of Dominance) is also a copy and paste of the EU legislation. And both of those laws are immune from this revocation. The law against Anti-Competitive Agreements and against Abuse of dominance were copied from EU law, but they were copied donkeys years ago and they’re UK law, they have been ever since the Competition Act 1998. However, we’ve just got rid of section 60 of the Competition Act 1998, which obliged the UK courts to interpret those laws consistently with the EU Court of Justice. So, over time now, section 60 has been repealed, the UK and EU regimes will start to drift apart. What we’re going to chat about today, the divergence of UK and EU vertical agreements regimes wouldn’t have been possible without the repeal of Section 60. Okay. So, that’s the first big point, the new legislative landscape.

Second point, investigations. Businesses can now be subject to parallel investigations if they’re alleged anti-competitive conduct effects both the EU and UK markets. Similarly, with merger control, where a merger has an EU dimension, the National Regulator cedes control to the European Commission, but not for the UK anymore. If a merger affects the EU and the UK, you need to apply for parallel merger clearance from the commission and from the UK’s competition and markets authority.

Finally, you’ve got state aid. Now, these are rules to keep a level playing field in the EU single market by preventing member state governments from subsidizing their own pet industries. There are exceptions to it. The bank bailouts during the financial crisis were a big one. Still, I think if an EU member state tried to pass something like Biden’s Inflation Reduction Act, the European Commission’s entire dashboard would start flashing red. The UK is introducing its own looser state aid regime and EU state aid rules will continue to apply in Northern Ireland because Northern Ireland is remaining in the EU single market to avoid a hard customs border between it and the Irish Republic for extremely important political reasons. This does, however, require barriers to trade between Northern Ireland and Great Britain, which is an unresolved issue and there’s a whole podcast to be had about the ructions that that has been causing.

So, that’s the helicopter view of the effects of Brexit on competition law. At the risk of giving our listeners whiplash, not only are we going to zoom back into vertical agreements. We’re going to take a deeper dive into it. So, I’ve given you the framework which is common to the UK and the EU. Just to remind you, it’s a block exemption which offers a safe harbor to agreements between parties with under 30% market share, so long as there’s no hardcore restraints and there’s guidance to help apply the law outside of the harbor.

And so, our guests Helen and Robin are going to discuss some, but by no means all of the differences between the old EU regime and the new EU and UK ones. I think the first one you wanted to discuss, Helen and Robin, was most favored nation clauses or MFNs, where a hotel booking site, for example, says to the hotels, “Look, if you want to list on our website, you can, but you can’t sell rooms directly to customers more cheaply than you sell them through our website.” So-called narrow MFNs. Or you can have wide MFNs, where the website says, “Not only can’t you sell more cheaply direct to customers, but you can’t sell more cheaply through other channels either.” So, for example, through other hotel websites. The old regime was almost completely silent about MFNs because back in the day they mainly cropped up in business to business deals. But with the advent of the internet, e-commerce and especially price comparison sites, they have become much more of a thing. So, Helen, if I can hand over to you on the question of MFNs.

Helen Ralston-Smith:

Sure. Thank you, Stephen. Yes. So, that’s exactly right. So, the new regime in the UK and Europe has now tightened the use, or suggested guidance that tightens the use, of wide MFNs. And in particular, I think you were explaining the safe harbors. In the case of the UK, wide MFNs are now referred to as hardcore. So, it wouldn’t naturally fall into that area of safe harbor even if you were small provider meeting the other criteria. And that’s quite interesting, for me at least, because I recently testified, or actually, a year ago, I testified for CompareTheMarket in its appeal of the CMA, the UK authorities infringement decision against their wide MFNs in home insurance.

And the reason this is a hot topic is the judgment came out at the end of August, only a couple months after the UK VABEO, Vertical Block Exemption Regime, was published in law. And the surprising point there, perhaps to some, is against this wave of regulation starting to push back about wide MFNs, the UK competition court decided that in this case there was no effect on insurance on the two main outcomes of competition, I.E. These weren’t Anti-competitive and fully turned over the UK authorities infringement decision.

Jeff Shinder:

Helen, if I could jump in, there’s a couple of terms you used that I just want to make sure that our audience understands because they’re not native to the US. So, wide MFNs. And I’ve read the decision and it talks about narrow MFNs and wide MFNs. Could you explain both?

Helen Ralston-Smith:

Yeah, absolutely. Apologies for that. So, one way to think about these MFNs is as best price guarantees. We all get what that means. So, best price guarantee, when it’s a narrow MFN, and they’re also actually called narrow parity clauses as well. When it’s narrow, that best price guarantee is from a platform, but it’s only giving you the best price relative to direct websites. So, a classic example here is if you are looking on a hotel booking website, if that booking platform has a narrow best price guarantee or a narrow parity clause, the hotel can’t offer a better price direct. So, the consumer can’t save money by ringing up the hotel and trying to sidestep the platform. And when it’s a wide MFN, that best price guarantee is broader, it covers other platforms as well. And that’s the general principle.

Jeff Shinder:

So, the notion where the wide MFN is that it has the potential to undermine competition between the price comparison platforms, would that be correct?

Helen Ralston-Smith:

Yeah, absolutely. So, the theories of harm and the way in which these MFNs can cause harm is they inhibit the ability of price differentiation between platforms. So, they can restrict what’s often referred to as intra-brand competition, which is the competition between different sales channels. And the way in which that happens is partly indirect. So, firstly, the first effect is they prevent the supplier offering a lower price in a different distribution channel. So, that in itself can restrict retail price competition. By definition, you can’t have lower prices elsewhere. But that has this knock-on effect on the platform-to-platform, or, distribution channel-to-distribution channel, competition.

Because the platform knows they can’t get a lower price from the supplier, by for example, reducing their commissions. They have a lower incentive to do so, so they have less incentive to discount their commissions and attract lower prices from suppliers. The wide MFN would require that supplier to offer the same discount to the platform imposing that condition.

Jeff Shinder:

And so, is it correct that theory failed in the CompareTheMarket case? And if that’s true, if you could explain to our viewers, our audience, why it failed.

Helen Ralston-Smith:

Yeah. So, that’s a theory, firstly. So, as you say, it can fail. There are a lot of theoretical models that explain the mechanisms about how that [harm] can arise. But in this market, it was quite important two big things. One was market definition, and related to that, was the coverage of the MFNs. And related to that, the extent to which the suppliers adhered which in turn affected coverage. So, firstly, what is this case about? So, what is CompareTheMarket? So, in the UK, for the distribution of insurance, a lot of retail insurance products like home insurance or car insurance, there are a number, there are four in particular, websites. A bit like online marketplaces, a bit like Amazon, a bit like various kinds of online marketplaces where you can quickly and easily search between many insurance products and find the best price.

But that’s not the only way to buy insurance. And that was a really important question in this case, how important were these platforms in distributing the home insurance relative to the direct sales by the insurance? Why is that important? Well, the direct sales, to an extent, where outside the scope of the wide MFN (renewals) and could impose direct competition and mitigate any anti-competitive effects. And even within the scope of PCW sales, that’s our acronym for price comparison websites, not all insurers agreed to the wide MFN. Now, that’s quite interesting. Roughly, half of the insurers by sales agreed to the wide MFN. So, even in that price comparison website only market, so when you’re considering customers that only look online, even those people could be attracted by discounting because many insurers were not tied to the wide MFN at all.

Jeff Shinder:

Okay. I have one more topic on that case, Robin, and I want to bring you into the conversation, but I can’t help myself on the two-sided market element to the decision. Helen, as you know, two-sided markets has been an important topic of conversation in the United States, Ohio V. American Express ushering in a major sea change in the law here requiring two-sided market treatment for so-called transactions markets where there’s a simultaneous handshake between one side and the other. And ensuing cases then discussed, is it a transactions market or not? Are the network effects indirect? Sufficiently indirect such that it should be treated as one? A platform that links two distinct markets? And the courts are trying to figure out the teaching of Ohio V. American Express. And that decision has been much criticized. And I noted, in reading compare the market, that the tribunal noted the “Powerful dissent of Justice Breyer.”

So, if you could spend a moment just discussing how the two-sided market issue came out. Robin, I promise to bring you into the conversation, but this is an issue that is consequential.

Robin Noble:

Keep diving because this is absolutely fascinating stuff. It’s a case that’s really made a lot of headlines in the UK and it’s being much talked about across Europe. So, yes, we should keep diving deeper.

Helen Ralston-Smith:

Yes. So, I think market definition is another really important aspect of the judgment which has wider, broader implications than just parity clauses and MFNs which are a specific conduct. So, what are the issues at stake? The first question and a big question is, should you define one single market which encapsulates both sides of the platform? So, here, the insurers and the consumers. Or should you define two markets on each side? That’s often considered the most important question. And I understand in the US, with the transaction markets, you have agreement that it’s one market for both sides. Now, that is my opinion and that would be consensus actually of the CMA in this case as well. That there’s a single market for both sides. The reason I laugh is despite consensus by the economists that that’s the right approach in this case, the court took a different view. They said that it could be two markets on both sides or it should be, you should define two markets one on each side.

Now, that sounds controversial but I really don’t think it’s actually that different to where the evidence that Oxera put forward on behalf of CompareTheMarket. So, why do I say that? Well, the main thing to take away from the judgment is the real importance to test both sides of the platform very carefully and thoroughly. What the CMA did was they tested the competitive constraints on the supplier side. Well, they agreed that you should test both sides but they thought it was sufficient to test the consumer side only through the pass through of the supplier, the platform fee to suppliers to consumers. So, putting this in real terms, a price comparison website, like many online marketplaces, charges suppliers a commission and there’s no price to consumers.

They get free search, there’s no explicit price. So, the CMAs approach was we’ve got a commission fee, that’s where the platform earns its money, lets impose a SSNIP test, the hypothetical monopolist test to that, and see how many suppliers divert and how many consumers would divert from the pass through. Our view is that’s not testing the consumer side properly. By definition, there’s a partial pass through of the SSNIP, it’s not a SSNIP, it’s a half a SSNIP, for example. And that is what the court agreed with, that you need to test the consumer side properly. I would suggest testing the consumer side properly in the context of zero price markets by, in this case, we’ve got retail prices to consumers, they’re selling insurance just like on other platforms you’re selling goods and other types of retail. So, why not take those prices and apply a SSNIP to them?

And we’re in a digital market setting. So, you’ve got a bucket load of data to look at how customers might switch away from that platform in response to small changes and prices. So, it’s not actually that hard to quantify or really explore firmer than just hypothesize in your mind. And that’s what we did. We had the data, we found that it’s likely there’d be enough consumers to switch to the renewal channel or insurers direct to broaden the market. The court took a different view. They really wanted to test the consumer side and saw a disadvantage of only applying it to retail prices: there are some consumers that browse and you don’t test their diversion if you only apply it to purchasers, which is the case with retail prices.

So, they introduced a special fee, a new fee, which is quite novel. This platform doesn’t charge consumers at all. They said, “Why don’t you introduce a fee?” That fee really has a similar effect to the SSNIP on retail prices. And they deduced from the evidence that everyone’s put forward about the high price sensitivity of consumers, the market is broader on the consumer side. So, they concluded, agreed with the CMA that the suppliers may not switch, that that might be a narrow market price comparison website only. But on the consumer side, it was a broad market including the direct channel. And then, they kind of forget about the insurer side of the market when they do the effects analysis, which in this case is entirely right because the concern, as we were talking about before, is that the wide MFN restricts price competition, retail price competition and commissions. So, you’ll think about retail prices and its consumers who respond to retail prices. So, that consumer market is, perhaps, more important.

Jeff Shinder:

Robin, I think you wanted-

Robin Noble:

Yeah. I was going to just answer that, Jeff. I mean, in a sense, zooming out a little bit from this specific case, because, of course, there’s a lot of specificity in what Helen’s describing because we’re talking there about insurance markets and renewal is really important in that. You’ve been insured by someone, you will receive a letter from that insurer offering to renew your policy. And so, of course, that’s a really key part of the factual matrix of a case like that. But for me, when you zoom out and look at, what lessons does the in-house counsel take from a case like this? For me, there are really three. The first is that, as Helen articulated, as I think both yourself and Stephen articulated, there’s a lot of theory behind why it is MFNs can be good, but also MFNs can be bad.

And I think it’s worth getting under the skin of that because it helps you understand the ways in which some of them are a little bit counterintuitive, that certain types of parity causes on their face can be good but could actually, under certain circumstances, have some harm. And I think everyone accepts that, theoretically, these things can happen. But I think there are two other really critical lessons that come out from this case. One is, Helen used the word substitution a lot and I think that’s a real buzzword and something you should take away because it is critical. Whatever framework you’re going to use to think about this, it’s almost trite to say that, fundamentally, antitrust competition economics is a lot about substitution. It’s the ability of suppliers to substitute to other sales channels. It’s about the ability of consumers to substitute to other buying channels.

Whichever framework you’re going to use, understanding the degree of substitution is really, really important. Conceptualizing of it and then going to get the detail on it. And then, I think the third real message from that is that the facts matter, renewal really mattered in that case. This was a great way for the incumbent to contact their customer and it meant that they were always competing against the renewal. You’ve got a renewal that you receive in the post that’s normally the prompt to then go to a comparison website in the first place. Now, of course, that’s not true for a lot of other mediums. You talk about hotel bookings, well, maybe there are people that get renewals, they have long term leases, but normally that’s not the way the world works.

You are going on holiday somewhere, you want to go and visit somewhere, you are proactively reaching out. It’s a different kind of search. And the same, again, for resale websites, et cetera. So, the facts really, really matter. The context really, really matters. And so, one has to think pretty hard about these things.

Helen Ralston-Smith:

It might not have been clear, but just to clarify, renewals would not be captured by these wide MFNs. An insurer was free to offer any price through the offline (paper) distribution channel. So, via the renewal, hence, why this coverage, the scope of these wide MFNs, when you consider the proper market as defined by the courts, the broader one, they’re much narrower, and therefore, their ability to have anti-competitive effects is inherently limited.

Jeff Shinder:

So, let me follow up on a couple things here, if we stay. And I want you both to comment on this. Helen, you walked us through the market definition analysis and I understand why the tribunal would have an issue with the pass through approach. And as I understand what you explained, this is how I netted it out, if I get it wrong, you’ll tell me, is that this is a platform that links two sets of interdependent suppliers, of home insurance, on the one hand and the consumers of home insurance on the other hand. So, it has two sided characteristics. I think that’s easy and doesn’t help that much towards the ultimate outcome. And that on both sides of the platform, the tribunal essentially said, “Do a traditional market definition analysis.” Almost as if there are really two distinct markets to evaluate, ultimately, whether there was harm on the consumer side since, as you articulated well, the issue of a wide MFN would be whether pricing to the, what we’ll call, the end consumer was elevated.

And so, this raises the following question in my mind, what does the two-sided market nomenclature add if, ultimately, what was demanded was an evaluation of what essentially are two distinct but linked markets? And, to my mind, this is what Justice Breyer, forgive me for expounding on US law, we’re here to talk about what happened in the UK, this is what I thought Justice Breyer was talking about in his dissent as the right way to analyze these platforms, which are fairly ubiquitous now. So, did I get anything wrong?

Helen Ralston-Smith:

I think I’ve got two points to say here. So, I think the key to the question was why does two-sided-ness matter here? And I want to just… The first point I’ll make is actually a really important part for the judgment and I think a takeaway for a lot of digital markets is almost that point. The court said, “The CMA is basically…” A phrase I use, at least in England, is “They’ve lost the wood for the trees.” Basically, this is just an intermediary. And the CMA is so focused on trying to find other comparison websites or the full features, the full bells and whistles that a price comparison website offers, that it’s missing the competitive constraints of the direct channel. Effectively, consumers can buy insurance through intermediaries or they can go to insurers direct. And yes, one of these intermediaries offers other things such as comparison and search.

The main thing that a consumer values from that intermediary is the product, the insurance product. And there are other ways they can go about getting that, and I think that’s an important takeaway. And then, we see that in other precedent. However, when it comes to effects, I would push back and I would say that there’s actually… The competitive pressure on the consumer side in this situation also prevented harm on the supplier side and it would be much easier to show you with a visual. But if you think it through, if there’s competitive pressure keeping prices to consumers at the competitive level, it also means you can’t have the platform charging higher commissions to some suppliers, which is the way in which the theories of harm work through. Because, effectively, this is a competitive market, the insurer market is competitive. So, if it can’t pass this through, higher commissions through to higher retail prices, then they can’t pay those higher commissions themselves.

And how does that work? Well, you can think about it as the platform faces competitive constraints in this situation by the value chain, the bundle, the suppliers and the platforms or the renewal channels that aren’t covered by the wide MFN. So, suppose an insurer is going around offering 150 pounds on the wide MFN platform. There’s an insurer on that platform, not constrained by the wide MFN, that’s free to offer 145 pounds and they will win the customers from that insurer. Simply, another platform can go around and offer lower commissions and attract that insurers lower 145 pounds and win customers from the wide MFN platform. So, the wide MFN platform itself is hurt by keeping commissions up. So, through the competition on the consumer side, actually the harm on the supplier side dissipates and that’s because it’s a two-sided market.

Jeff Shinder:

Okay. That was great. Appreciate that, Helen. Robin, do you have anything to add?

Robin Noble:

I think Helen covered the key points which is, I think, in a sense… I mean, maybe, again, one of the lessons here is in cases like this, it can be helpful to almost think of it both ways round and try to test the logic. Don’t almost fall into the… What I think, sometimes, can be the alluring trap of trying to put lots of things into the two-sided markets bucket. That’s pretty fashionable to do that. And I think, in a way, back to the substitution point, one of the messages from this case, I think, is about sometimes simpler can be clearer and more insightful and it can really stress test whether or not a theory of harm that might be very reliant on a two-sided intellectual structure actually isn’t robust. And sometimes the answer is it’s not.

Jeff Shinder:

Well, one thing I’ll say before I hand the baton back to Stephen is any sensible discussion of any antitrust issue in any jurisdiction, what you said, Robin, the facts matter, has to be front and center. The facts always, always matter. And, as basic as that is, it is worth emphasizing. Stephen, let me turn it back to you because I know there’s some other topics that you want to navigate.

Stephen Critchley:

I was going to say a final word on the MFNs, actually, because we were talking about the different regimes, the new EU regime and the new UK regime. It’s worth mentioning that under the new UK regime they made wide MFNs hardcore, but they didn’t do that under the new EU regime. So, there’s a divergence there. And Helen mentioned, when we were chatting offline, about isn’t it interesting the moment the UK says, “Wide MFNs, these are terribly restrictive and they’re hardcore.” Almost immediately, the competition appeal tribunal comes out and says, “There’s nothing wrong with the wide MFN in this particular case.” And how do you square that circle? I mean, when I was introducing this earlier, I said that if you’ve got a hardcore restriction, it’s not necessarily unlawful, it just means you’re not in the safe harbor and you’ve got to reach for the guidance.

And I said in the case of a hardcore restriction, the guidance probably won’t save you. I think this is an example where the guidance would save you. And it just goes to show, as you were saying, Jeff, it turns on its facts and it’s not the end of the world if the block exemption says this is a hardcore restriction because it could be you say, “Well, okay. Then, I’m outside of the safe harbor, but anyway let’s have a look at the guidance. And it could be that this is lawful anyway and it’s worth taking a shot at it.” So, that is what I would say on that one. But yes, time is a thing. And moving on, Robin and Helen, what was the next point you wanted to discuss? Was it differentiation of pricing, online and offline?

Robin Noble:

Dual pricing, I guess, is another interesting topic that it’s worth diving into. And just to explain some of the background on this, under the old EU regime in our three-way comparison, dual pricing, which is where, as a supplier, you are charging different prices to one group of sellers and another group of sellers. In particular, one group of sellers being online sellers and another group of sellers being offline or physical sellers. That was regarded as a hardcore restriction in the old regime. Under both the new regimes there is a new approach which is much more accommodating towards this kind of dual pricing. And the examples that they use are typically the online versus the offline. And typically, they talk about how it might be the case that as a manufacturer you might wish to charge online sellers somewhat higher prices than offline sellers.

And they cite examples, like the fact that offline seller might be doing an installation for their customers, but an online seller might not. And of course, that might then impose costs on the manufacturer. It might be that there are more warranty claims, for example, from the online sales because perhaps they’re not being installed quite so well by the home installer as opposed to the more professional physical training business. Now, of course, if we remind ourselves, if we wind back the clock a little bit, it’s worth reminding ourselves almost why is it there was this distaste or lack of enthusiasm in the guidelines about your pricing. In one level, one explanation certainly that I’ve heard a few times in Brussels is that, in fact, it wasn’t a really a competition issue at all. This is more about EU single market and the fact that online sales were seen, at least some years ago, as needing a little bit of nurturing.

And that since having manufacturers or brands deliberately discriminating against online sales by charging online sellers higher wholesale prices than physical sellers would be harmful both to the growth of the internet in Europe, but also potentially to cross-border sales, which is so important within the EU. And obviously, online cross-border sales, perhaps a little bit easier to nurture than physical cross-border sales for obvious reasons. But I think this is actually really quite an interesting development and it’s a change of tone in both of the guidelines. And it’s also quite interesting in a sense the type of evidence that is now being talked about in this guidelines about… Well, not necessarily that the low bar, but it’s not requiring that you have a great steal of evidence. There is some discussion in the guidelines about how one should think about what a cost orientated differential might be between the two, perhaps looking back to some of those points around whether it imposes more costs on you because of faulty sales, et cetera.

But no, I think that’s quite an interesting point, I think, for people to be aware of. And actually, it flows into another related point, which is that, as you might imagine, given the history of the EU and the UK, both guidelines are not particularly welcoming of resale price maintenance, which comes together in the context of online sales. Because we have started to see, in enforcement terms, quite a few cases emerging around Europe that have really been looking very hard at resale price maintenance. And so, it’s not just the fact that the guidelines say that resale price maintenance is a hardcore restriction and doesn’t benefit, it’s also that it’s being pursued more generally. And you’ve even started to see litigations emerging, business on business litigations not involving authorities either that have been exploring that topic.

Jeff Shinder:

So Robin, if I may follow up on the second point you made, because that’s an interesting divergence between what’s happening over in Europe and the United States where resale price maintenance post Legion is a rule of reason issue, can be anti-competitive if there’s horizontal effects, but the tenor of the Legion decision recognized the possibility of the resale price maintenance can facilitate pro-competitive outcomes that are beneficial for consumers. And as we noted earlier, the facts matter. So, if you could speak to the, why is it the case in your view that the direction of the law and litigation is different in Europe? Are we missing something here in the US?

Robin Noble:

Well, I guess maybe if I start by talking about some of the litigation, because, in a way, what’s really interesting about the litigation is that, naturally, I think the litigation is actually drawn more naturally to the US view because, of course, the litigations that you see tend to be business on business. This is a retailer litigating against its supplier. And of course, it’s worth thinking about why is that happening? Because traditionally, one reason why authorities and legislators don’t like resale price maintenance is actually quite similar to the points that Helen was making about intra brand competition. Because what does resale price maintenance do, is it reduces the competition between retailers, and that may reduce overall competition, which may then result in higher prices for consumers. Now, that does have some logic associated with it, but I think, as we talked about earlier, facts matter. And I think that’s where the US perspective comes in of, well, that can work, but it doesn’t always work, so let’s look at the facts.

But it’s worth, just go back to those litigations because those litigations tend to be a retailer against the wholesaler. Now, if you think resale price maintenance is having this effect, how is it doing it? Well, what it’s doing, typically, if it’s working and it’s harming consumers, is that it is raising the margins that retailers can earn because there’s less competition between them, so they don’t drive down the margins between each other so ferociously, therefore, the price to the end consumer goes up. And if you think about that through, what does that mean? That means actually retailers, maybe they quite like resale price maintenance. They don’t have to compete so hard with each other. They might sell a few less units, but they earn bigger margins on the units that they do sell. So, it’s actually, potentially more profitable for them to be in a resale price maintenance world than a not resale price maintenance world.

But then again, go back to the fact that this is retailers suing their suppliers. But then, look a bit deeper and what it tends to be is this online specialists suing their suppliers. And of course, why does that make sense? Well, that makes sense because you may think that, well, what differentiates an online specialist? Is low prices. What differentiates a high street retailer? It tends to be location, service, in-store experience, et cetera, maybe slightly higher prices. And of course, if you have effective resale price maintenance that applied to the online and the offline, well, actually, that can mean, well, why would I want to go to an online seller when I can get the in-store experience, I can get the benefit of the advice from the salesperson essentially for free, because I can’t get it cheaper anywhere else. So, potentially, what happens in a situation like that is that effective resale price maintenance really takes away the competitive advantage that an online seller has got.

And essentially, you do work through the mass very high elasticity of demand for that firm, there’s lots of sales, it’s actually quite bad for them. And so, again, the theory works, but in a litigation you’ve got to test the facts. You’ve got to go and find out, “Okay. How many sales did you lose? Who did you lose them to? Was the resale price maintenance actually affected?” All of those kinds of things. And there’s a few cases… None of them have gone to trial, so we don’t know all the facts that are associated with them, but they cover things like lawn and bowling shoes, lingerie products. There’s all sorts of things that people buy online and wherever they buy them online, this is the potential for cases like this.

Jeff Shinder:

So Robin, there are two issues lurking in your answer that I want to just probe a little deeper on. One is, is the resale price maintenance and the fact patterns you just went into a legitimate device to protect against free riding? So, that’s one question. Second is, interbrand versus intrabrand competition. And here, the Supreme Court has said, “The primary purpose of the antitrust laws is the protection of intrabrand competition.” Which doesn’t mean you can’t have a violation of the antitrust laws based upon a restraint intrabrand, but it does mean here… And the question is, is it different? And Stephen, you may want to jump in too here. Is it different in the United Kingdom or Europe? Because I hear that fact pattern… So, maybe there’s a restraint intrabrand, but if there’s vigorous competition interbrand, what’s the problem? I mean, that’s the US perspective on it. So, I toss two things at you.

Robin Noble:

Let me try and grab with the second one first, which is the inter versus intra. And again, I mean, this is where I think the litigations are perhaps the closer mirror to the US, which is that, in a sense, those are the facts in these cases. I mean, we’ve advised on several of them. You have to look very hard at the intrabrand competition. So, who are the rivals? Are you the only online specialist if you are the claimant? Are there lots of other people like you? How price sensitive are customers for this specific product? But then, of course, you’ve got to look at the interbrand dynamics too. How important is this particular brand to you? How many other brands do you carry? How easy is it, for you as a retailer, to switch to other brands as well? Because, of course, it’s not just… If you’re talking about the harm to a retailer, it’s not just about the overall harm to competition, it’s about the harm to them.

Most retailers don’t stock all products, they stock a subset. And so, you’ve got to explore all of those topics. But I think, zooming back out, I guess it’s a bit hard to draw general lessons about, does Europe have a different view about inter versus intra? I guess perhaps it’s got a little bit less faith in the power of competition of one layer of a value chain to save you from reductions in competition at another layer of a value chain. That might be one hypothesis to explore.

Stephen Critchley:

Is substitutability an issue here, Robin? I mean, you were saying it’s always about substitutability. I mean, the example that was occurring to me as you were talking was tomato ketchup. I don’t know how it is in the state, but there are some people that are only going to have Heinz tomato ketchup. They want their Heinz. And I think what you were saying, Jeff, was that provided you’ve got competition between different brands of ketchup, who cares. Whereas, if you’ve got a consumer base that doesn’t see it as particularly substitutable, then that’s when it’s more important to have measures which seek to promote competition even within the supply chain of one particular brand.

Jeff Shinder:

Robin, I’m tempted to toss this back to you, or to Helen. I see Helen…

Helen Ralston-Smith:

I was just going to say, from one economics perspective, is… I mean, Heinz is a good example perhaps because you’ve got to think about the value chain and how much value is created by the brand as opposed to the retailer there. And perhaps Heinz is quite cheap to produce. So, it’s actually the logistics and the retail there where there’s more cost involved. And so, competition at that point of the value chain might have a bigger impact on a consumer overall price. Whereas, in my case of the MFN case in home insurance, the home insurance product is the valuable part. And the court was seeing that, at the most, wide MFNs were restricting intrabrand competition, which is a small component of the overall consumer cost. But they can actually intensify in interbrand competition by reducing search costs and clarifying where the best price is for the right brand.

So, I think that would be one way to try and evaluate. If you were to want to look at the overall impact on consumer costs, think about the value chain and where is the value, where is the cost most.

Robin Noble:

Yeah. And I guess, Jeff, you are bridging to the conversed here in the sense of, we economists are great enthusiasts of effects based analysis, looking at the facts of every individual case. But I guess, as pragmatists, we can also see the value that policy makers can sometimes take the view, we just want to take a judgment call on something, we want to guide the nature of competition in a particular area, in a particular direction. And if we’re concerned, if we find some of these theories compelling enough of the time, then maybe we just want to make it harder for people to do those kinds of things in the first place. And of course, there are pros and cons of making choices like that.

You see that in other related legislation. I mean, we go slightly beyond the vertical sphere, but those kinds of debates are right at the heart of the discussions around the Digital Markets Act, where essentially there are some parts of that that are based on competition and antitrust thinking, but there are other parts that are drawing much more heavily on more traditional regulatory market design principles about, how do we want things to work? We want to steer competition in a particular way because we think that is the better way? And in a sense, for better or worse, those are the kinds of judgments the policy makers make and we just have to look carefully at them. And business people have to think carefully about, well, how do you comply with those rules? How do you make the best of them? How do you optimize with them?

Jeff Shinder:

So, let me say that we have a few topics here that would merit a follow-up podcast. First of all, I’ll throw a prop to my partner in London for his very quick summary of Brexit, which merits its own discussion. And two-sided markets, we should have a two-sided market focused discussion on both sides of the pond. And this discussion of dual pricing, dual distribution also merits further, deeper dives. But we will save that for another day because-

Stephen Critchley:

I would just like to add one, Jeff. At the very end there Robin threw in something called the Digital Markets Act. I’m not sure if this is something that’s come across your radar yet. It’s new EU legislation which is aimed at regulating just the behavior of the largest tech firms and which, like GDPR is set to have ramifications all over the world. So, that is another piece which could very likely be of interest for a future podcast.

Jeff Shinder:

I completely concur. So, Robin and Helen, we’ll have you back. Who wants the last word, the economist or lawyer?

Robin Noble:

The title of this series is Antitrust Matters, but I guess one of the messages from this is Facts Matter.

Jeff Shinder:

Bravo, I want to thank you all. This has been great. Stephen, thank you for putting this together. Helen, Robin, it was fascinating and a pleasure meeting you in all this and we will have you back. Be well everybody. And thanks for your time here.

That’s all for our show today. If you like the podcast, make sure to subscribe to Antitrust Matters and leave us comments on how we were doing or on the topics you would like us to cover going forward. You can also follow us on or follow the 91pornantitrust team on . Until next time, be well, and remember antitrust matters.

Read Antitrust Matters Episode 11: The EU’s and UK’s Differing New Antitrust Regimes at constantinecannon.com

In this episode, Jeffrey Shinder and Wyatt Fore are joined by Amanda Hamilton, Senior Correspondent at the Capitol Forum, to discuss emerging issues on private equity and antitrust.  The three consider the extent to which enforcers have signaled a shift in approach by reviving dormant legal theories, including the prohibition of interlocking directorates.

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Episode Transcript and Show Notes:

Jeffrey Shinder:

Welcome to Antitrust Matters, a 91pornpodcast where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder and I’ll be your host. Antitrust has always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates, to how we travel, to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more than ever before.

Hello everyone. We are back for another episode of Antitrust Matters, and we have an interesting topic and an interesting guest today, our first journalist. Welcome, Amanda. We have Amanda Hamilton, a senior correspondent at Capitol Forum, and I’m also joined by one of our rising stars from our DC office, Wyatt Fore. Welcome, Wyatt. Amanda and Wyatt are here to discuss private equity and the antitrust issues that the increasing prevalence of private equity investments across many sectors of our economy, the issues that is having, and whether the antitrust laws as currently configured are well suited to addressing those competitive issues.

Let me just introduce Amanda. Amanda is a senior correspondent covering antitrust. She joined the Capitol Forum after working as an attorney in the Office of the General Counsel for the US Consumer Product Safety Commission. Prior to that, she was an attorney at the United States Postal Service and antitrust associate at Haug and Partners, hopefully I did not mispronounce it, and a staff attorney in the Federal Trade Commission’s Bureau of Competition. Amanda holds a J.D. and a B.A. in Economics from the University of Iowa and we are really pleased to have her on the pod. Amanda, welcome. Welcome, Wyatt. We have two newcomers today and we have an interesting topic that is cutting edge in antitrust. I wanted my colleague from DC to tee it up and explain it a little more. Wyatt, I’m going to turn to you to start. Why don’t you tell our audience a little bit about why private equity is an interesting topic in this moment of antitrust ferment? That raises unique issues that the antitrust laws in some form or fashion should address. I will turn the baton to you.

Wyatt Fore:

Wonderful. Thanks, Jeff, and welcome, Amanda. One of the animating questions I had for this podcast was in the last 30 years or so, the American economy is seeing the rise of these giant non-bank financial institutions, including private equity and hedge funds and shadow banks and that sort of thing. There’s a flurry of investment activity throughout the real economy, so to speak, and that this trend mirrors in my mind and to a lot of commentators, the trend that we saw in the late 1800s, early 1900s that gave rise to the original Antitrust Act where you had, because of these baseline financial interests, there’s increased coordination among traditionally separate horizontal rivals. These investments might have sort of competitive effects that are not immediately ascertainable. Because of the rise of what I’ll call private equity, but non-bank financial institutions, that’s happening in real time and that there’s a lot of questions and concerns about that rise.

It’s one of the things that our existing legal and economic tools are a step behind and are trying to catch up with, trying to figure out what are the effects of these investments, what are the effects of these giant financial institutions that are underlying a lot of the American economy? That’s one of the things that I’m interested in. There’s been a focus by the Biden enforcers on these private equity institutions, but as Amanda well knows from her reporting, they’re a step behind what’s happening. There’s a question of, well, what’s the appropriate legal tool to address this? How do we think about these problems? Are they problems at all? How do we measure the competitive effects? Are there competitive effects?

There’s a lag between what’s happening in the financial and real economy as well, a lag between that and our legal and economic tools to evaluate them. That’s the sort of overarching capital ‘P’ problem that I’m thinking about when I was trying to think about a guest for this podcast. I thought that, considering Amanda has extensive journalism and reporting on this, that she would be a wonderful guest to introduce to our audience on them.

Jeffrey Shinder:

Okay. Amanda, let me turn this over to you. From your perspective at the Capitol Forum, what are you looking into? What are you interested in? What are you seeing that relates to the issue that Wyatt just articulated?

Amanda Hamilton:

Yeah. No, absolutely. A lot of our subscribers at the very beginning, Biden’s enforcers, Johnathan Kanter over the Department of Justice, Lina Kahn over at the FTC, issued a lot of statements surrounding private equity. Majority of their statements were related to whether or not private equities were good stewards of assets as a divestiture buyer and mergers, or even just how to evaluate whether or not a certain merger or their acquisition violates Section 7 in a very traditional sense, so whether or not this merger should go through, whether or not they should buy this asset. The FTC and DOJ has moved past that and where our subscribers are particularly interested in, they want to know what are the anti enforcers, what should they be expecting, how are antitrust enforcers foreshadowing, how they plan to combat the issue that they have spotted, which is private equity.

One of the ways Jonathan Kanter has been very vocal about how he wants to revitalize Section 8 enforcement, which is looking at interlocked directorates, and he’s made good on that promise. Recently as October, he announced that seven individuals resigned from five different company boards. He said that that’s just the beginning of the end. There’s also been reports by Bloomberg that DOJ has subpoenas out and CIDs out to massive private equity firms looking at the Section 8 problem, one being Apollo. He’s also mentioned that how private equity rollups, so a private equity firm acquiring competitors within a horizontal space… Could it potentially be attempted monopolization?

He’s not alone. FTC has joined him in his enforcement calls. FTC recently issued a revised policy statement saying that, “Look, it’s very clear. Section 5 goes beyond the Sherman and Clayton Act. There are things we can reach and we’re looking at things that affect competitive conditions and there’s a lower burden of proof for this, and that’s okay because we’re an expert agency.” It’s interesting to see how Lina applies that in a private equity context. Then, on the sidelines you have the academic community, which Kanter and Chairwoman Kahn are very close to as well. They’re asking the FTC and the DOJ to shift their focus to horizontal shareholding.

In that context you have non-controlling minority where, for example, investors will have a non-controlling minority interest in a highly concentrated industry, but buy stocks and every single member of that industry are each market player. The academic community has shown that the results are clear. That has resulted, they believe, in higher prices, and so they’re been looking at that as well, my understanding. My question to you guys as private enforcers is that we have this revised policy statement from the FTC that’s looking to go pretty far. My question to you guys would be, what would be a great test case there? Would horizontal shareholding be a good test case for the FTC to take on there?

Jeffrey Shinder:

Let me take the first crack at answering that, but I actually want to take this conversation from the abstract to the more tangible or particular by quoting from a Harvard Law Review piece that Einer Elhauge published on horizontal shareholding. His piece opens with the following, and this is fascinating. He opens with this, “An economic blockbuster has recently been exposed. A small group of institutions has acquired large share holdings in horizontal competitors throughout our economy, causing them to compete less vigorously with each other. For example, from 2013 to 2015, seven shareholders who controlled 60% of United Airlines also controlled big chunks of United’s major rivals, including 27.5% of Delta, 27.3% of JetBlue and 23.3% of Southwest Airlines. More generally, institutional investors held 77% of the stock of all airlines operating in the average flight route from 2001 to 2013. A new econometric study shows that this sort of horizontal shareholding has made average airline ticket prices 3 to 10% higher than they otherwise would’ve been.”

Now, that’s the opening paragraph of Einer’s piece. I haven’t actually had the benefit of crawling into the econometrics that he cites there. I’m not here on this podcast to bless those numbers, having put forward a lot of economic experts in our cases and understanding the complexities of econometrics. I would say the following, to answer your question. The policy statement on the revised deployment of Section 5 calls out interlocking holdings and directorates as a potential test case. The background of Section 5 deals with incipient harms to competition. I would think that in particular industries, and I’m not sure whether airlines is the best example…. Financial services is another, that Einer calls out. I know the private equity, and Wyatt can speak to this, is deeply involved in healthcare. Their tentacles are far and wide in the economy.

The selection of the industry in question is one that has to be done with some care. You would want to have some ability, likely through econometrics, to understand the price effects and maybe have a situation where there’s a preexisting set of structural investments across an industry where you can isolate that price effects are happening. Then, private equity is deepening their investments in ways that would intensify a preexisting problem. That could be a good use of Section 5 because what I take from Elhauge’s piece is that you don’t need majority interests across these companies to see competitive issues. What he’s identifying is a tendency to pull competitive punches in the absence of Section 1 conspiratorial activity.

Those outcomes are harmful to consumer welfare and they would not be condemned by the Sherman Act. They strike me as exactly what Lina Khan is trying to accomplish through a re-energized deployment of Section 5. Picking the right case is critically important. As an economist on a recent pod said, “The facts matter.” In fact, he suggested maybe we rename this the Antitrust Matters. The facts matter. The facts matter, and the facts would matter. This has to be really thoughtfully selected, but private equity, interlocking holding type case strikes me as a good use of a re-energized Section 5. Wyatt, I don’t know if you want to comment on that or you want to speak to Section 8 and Jonathan Kanter’s activity there. I’ll toss it over to you.

Wyatt Fore:

Well, I totally agree with everything that you said, especially about the incipiency point. Part of the problem in my mind about the Sherman Act is that Section 1 and Section 2… Under a Section 2 you have to have a firm with monopoly power, which is a very, very high standard. In sort of casual parlance, people think of monopoly as being a market of one, although economics and law, there’s more fuzziness around that. If you don’t have a monopoly, then you’re stuck with Section 1 where you have to have an explicit agreement. There’s a gap in oligopolies where if you have a market with, for example, three firms, those firms can coordinate and pull punches and not compete vigorously in a way that would fall below an explicit price fixing agreement.

The trend of the last 30 years in this country is going from competitive markets to oligopolistic competition. Those oligopolistic markets are largely insulated from sort of scrutiny under the Sherman Act. We have to look at other tools outside of Section 1 and Section 2 to address those. The prime one that government enforcers use, and private enforcers can use as well, is Section 7. Well, in order to prevent a market where you have a lot of competitors to a market where you have few competitors, is Section 7 preventing these transactions.

I think that Jeff’s point about incipiency is really important because there’s all these markets, and airlines allegedly being one of them, where you used to have a lot of competitors and now you have relatively few of them. Absent a explicit price fixing agreement, it’s really difficult to address competition concerns there. Looking at Jonathan Kanter and Chairman Khan’s more expansive view of government enforcement I think is incredibly important and appropriate to address these situations.

Jeff, you mentioned interlocking directorates. That’s certainly one mechanism by which private equity can exercise restraining competition in oligopolistic markets. Also, I think that Section 7 in terms of common ownership, horizontal shareholding, but also Jonathan Kanter was quoted as saying, “Okay, well, actually, this might also be a theory of attempted monopolization.” I think that in terms of our legal tools, we have legal tools for it. It’s just that we need to update those tools to the fact patterns of the 21st century. I think that as Professor Elhauge, however he sort of surveyed the economic tools that we… The economic research on this is pretty clear that oligopolistic markets have restrained competition in a way that’s directly harmed consumers. We just need courts and enforcers and private enforcers and governments to update our tools for the 21st century.

Jeffrey Shinder:

Amanda, let me go back to your FTC experience. We have a policy statement that just came out that seems to signal a sea change in how the FTC is intending to deploy Section 5. I’m interested in your view on how that compares or contrasts with the deployment of Section 5 back in the day when you were at the FTC.

Amanda Hamilton:

Yeah, when I was at the FTC, it was Chairwoman Ramirez. Josh Wright was also one of the commissioners as well. I think that one of his lasting legacies was to strip Section 5 and essentially just having it to reach outside of Sherman Act and Clayton Act to reach an invitations to collude. I have to say that I know there’s been a fair amount of criticism of FTC staff over the years. I have to say that even the most conservative members of FTC staff, people who have clerked on the Fifth Circuit and whatnot, were incredibly upset by the narrowing of Section 5, just to invitations to collude.

I think that there was a disagreement among political spectrum of how far Section 5 should go, but I think that there was essentially a consensus, at least among the younger members of staff that we should… Section 5 was a tool and it was a tool that we could use to combat concentration, competition problems, and we should certainly take it for a ride. How far of a ride was a disagreement, but I think that there was certainly a consensus that perhaps leaning towards Chairwoman Khan’s vision of Section 5 enforcement.

Jeffrey Shinder:

Would it be fair to say in your view that the policy statement that just came out is a pretty significant sea change in the direction of the FTC?

Amanda Hamilton:

It’s an incredibly significant sea change. While I understand it’s a broad policy statement to set parameters it, the focus is turned from whether or not a conduct impacts competition to competitive conditions, which just certainly opens the door and I think was very nicely added by Chairwoman Khan as well. Also, it seems to me that while certainly a smart enforcement articulation of a standard, it seems to me that there is a lacking of perhaps a burden of proof. I think that the way that they manage and were stewards of the FTC maybe imposed higher burdens than maybe was necessary for them to do so in the past.

Jeffrey Shinder:

Let me turn to you, Wyatt. We’ve got Section 5 of the FTC Act and a re-energized commitment to Section 5. It seems to be the direction of the commission. We have a Section 8, the generally long dormant but longstanding prohibition against interlocking directorates. We have Section 1 attempted monopolization under Section 2. There are different tools. You make a point that is interesting, that the exercise is to apply those tools in a 21st century setting in a way to make them more effective given the challenges that we face today, which has been the history of the Sherman Act and antitrust law generally. Amongst those options, which do you see as the most potentially important in terms of dealing with the problem of private equity?

Wyatt Fore:

That’s a great question. I think that my general view is all of the above, that we have a lot of tools, that a screwdriver doesn’t necessarily do the same thing that a hammer does, and so I hesitate to put too much emphasis on one. I do think that the Section 8 investigations and communications with private equity firms has been really important. In many respects, it’s the lowest hanging fruit. It’s a per se violation. If you establish that certain conditions are met, it is automatically a violation of the law. I think that because it’s long dormant that a lot of companies are violating the law and it’s very important for them to be aware that this is a risk. Also, I think that because interlocking directorates, it’s intuitive to see why that’s a competition problem, that even though it’s a low-hanging fruit, it’s an important one because it reeducates the wider community on how horizontal rivals can coordinate in a way that’s problematic.

To get to the meat of your question, what’s the most important tool? I would say it’s not the lowest hanging fruit, but in my mind, Section 7 is severely under enforced, especially among private enforcers. I would love to see the private bar become more active on this. I would also like to see government enforcers. It’s difficult to say for them to be more active on this because this really is the bread and butter of the DOJ and FTC is their Section 7 merger enforcement, but I would really love to see a test case to articulate how these theories of rival coordination through private equity firms. I think that certainly the public inquiry with respect to revising the horizontal merger guidelines, ask the public about economic and legal tools that the enforcement agencies can use to address issues of private equity in horizontal cross-holdings or common ownership situations.

I think that it will be really interesting to see how the agencies respond to that, and then once they have those economic tools as incorporated in new guidelines if it exists, will be really interesting. I would really love to see a test case under Section 7 exploring these issues because the traditional advice that you always hear, that horizontal merger bad, vertical merger good, that rule of thumb doesn’t really apply to the 21st century with as much strength. To answer your question, I think that Section 7 is very important and wide reaching and the legal tools that we have are more easily up dateable to the fact patterns of the 21st century. But I do think that I would like to commend the government enforcers for using Section 8, interlocking directorates, because I think that it’s a low-hanging fruit that educates the wider community about the possible competitive effects of these arrangements.

Amanda Hamilton:

I have a question for Wyatt. A lot of the pushback I get from our Capitol Forums readership is that, look, if it’s a novel legal theory and the government’s not likely to win, they shouldn’t be bringing it at all. I guess with a lot of these test cases, because it’s treading new grounds, should the government not be bringing these cases unless they’re sure to win? I would love to hear your thoughts on that as a private enforcer who probably would love to bring a lot more cases, but probably have financial reasons for not doing so or resource reasons.

Wyatt Fore:

That’s a good question.

Jeffrey Shinder:

Wyatt, I’m going to let you have that first, but I definitely want to weigh in on this one. You go first.

Wyatt Fore:

Yeah, and I think that that’s a great question. My general view is that the government is in a strong position that… Yeah, it’s something that we all know that courts struggle with antitrust, and when the United States Department of Justice or Federal Trade Commission comes in and makes a point that courts listen to them in a way that they don’t listen to private enforcers as well. I will say that my view is that this is not as novel of a legal theory as I think the judiciary or the wider business community thinks. If you look back to earlier Sherman and Clayton Act cases that this idea that horizontal rivals can affect each other’s competitive decisions through a common ownership or a common trade association or whatever is actually well trod in the antitrust legal precedence in that.

That’s why I tend to use language that we should update it for the fact patterns of the 21st century, because in my mind this isn’t really new. It’s just forgotten, and so it’s really important to draw the judiciary’s attention to the fact that there are these precedents that exist and that we can apply them. I also think that a lot of whether or not these cases live or die really depends on the economic evidence and that we already have really good economic evidence about this problem. It’s just applying it to a particular case. I will say that obviously the government has a very strong institutional position that it doesn’t like to lose. Unfortunately, that means that they have to bring good cases and win them.

That’s easy for me to say as an arm chair coach on the sideline, cheering them on. I realize that these are very resource intensive and difficult and there’s a lot of procedural and logistical reasons why they might not bring a case, but I would like to just encourage them to find a good case and bring it and to win. That’s all there is to say. It’s easy for me to say it on the sideline, but that would be my suggestion is that you can’t update these laws without cases, without carefully educating the judiciary on them. That can only happen in the context of a good case that’s well run and well litigated and well argued.

Jeffrey Shinder:

Let me add to what Wyatt said and perhaps be a little more iconoclastic about this, which is I think it is the wrong standard for the enforcers, FTC or DOJ, to select only cases that they are very confident in winning. Antitrust cases are hard. The good ones are always hard. As I say to many clients, there are no slam dunks in antitrust. There are a lot of good cases where there is some prospect of defeat, particularly because the court may misapprehend the economics or a particular court’s political leanings are against vigorous antitrust enforcement for whatever reason. Risk of loss should be accepted as a reality of the enforcement of the antitrust laws and it should not chill the bringing of cases. I wish I could remember who said this recently because I would quote, I think it was a him on this, but someone I remember recently said, “The government has to bring cases and maybe lose them or lose some of them to reorient our culture around antitrust enforcement and generate more education at the judicial level.”

That may be part of the process. Sometimes you got to bring cases and lose them to advance the ball, which may seem counterintuitive. The other thing that I want to speak to, because this is something that frustrates me, is, I understand we have a lot of corporate clients. I’ve counseled a lot of corporate clients and in-house counsel wants predictability in how things are going to be enforced. The reality of the antitrust laws, which, by the way, informs some of the current judicial hostility to the antitrust laws, is that most cases are adjudicated under a rule of reason standard. Per se rules have largely fallen away, not completely. There’s some left, but the greater the zone of the rule of reason, the more unpredictability is introduced into antitrust outcomes because they’re fact dependent.

I said earlier, quoting the economist on our last podcast, “The facts matter.” You hear the corporate community say, “Well, we don’t know. This is novel. We don’t know what the rules are.” I say to that ‘bunk’ at the end of the day. Sophisticated antitrust counseling, which every company that operates in highly concentrated industries, they have antitrust lawyers who are embedded, who understand their business. They understand the give and take and the complexities as to the facts. They get counseled and they take their risks accordingly. What I would caution the audience and you and your readers is sometimes commentaries around, “Well, we need bright line rules and the Sherman Act is too vague.” What’s a restraint of trade or what’s a monopoly or an attempted monopoly? And this is really just a backdoor way of attacking antitrust enforcement and its ideology more than serious discussion of the law. That’s my perspective on your question, Amanda, I’m curious to know if you have a reaction and pushback. I’m happy to have pushback.

Amanda Hamilton:

Yeah, I guess one of the things is that I wonder if the media’s responsible for that, because Jonathan Kanter over there is bringing very heroic government challenges. He suffered three losses in a row and some of them are up for appeal and people have more in the media has been focusing on the losses and not necessarily the burden. The federal judiciary is the one who adjudicates these cases, so we’re focusing on the fact that DOJ lost. The media’s doing that, versus what tools he has at his disposal, how difficult it is to prove those cases and the federal judiciary’s role in that. Would it be more helpful to maybe government enforcement efforts if the media focused more on the judiciary’s role on that and the dual tools that are at his disposal? For example, the role of reason, that’s a really difficult burden for a government enforcer to prove.

Jeffrey Shinder:

Well, I’ll give you my reaction, but Wyatt, I also… I can’t criticize the media for some focus on the obvious outcome where they have brought a series of cases and lost. They’ve also won in some instances, and so I’d like to focus on that as well. These are hard cases and courts sometimes get things wrong. I know there is some effort within the federal court system to help judges get educated on the economic issues that antitrust cases bring to bear, and that’s a good thing.

My hope would be that the government enforcers are not responding to media pressures. I’m sure if they were on, they would say they’re not. I think the current regime has really done a good job, and I credit both the FTC and the DOJ for really trying hard to find new ways, innovative ways. I liked Wyatt’s approach of updating. The law is the law, but the facts change. Our economy changes, the competitive challenges change, and the antitrust laws are there to meet them and they’re really doing their best. I love what they’re doing and hopefully the media will in their own way, although I can’t blame them for reporting on negative outcomes, because it happened. That’s not necessarily a bad thing for the ultimate enforcement and the antitrust laws, which is going back to my previous point. Wyatt, I don’t know if you have any further thoughts on that.

Wyatt Fore:

I totally agree with what you’re saying. That’s where I think that presumptions are the enforcers’ friends, especially in the merger guidelines. Speaking off the cuff, there’s no law, to my knowledge, saying that you have to have merger guidelines. The agencies just do that to provide some comfort to the business community about how they’re going to enforce the antitrust laws. I think that the merger guidelines have been really important to educating the judiciary about the economic effects of transactions. The enforcement agencies are looking at the economic evidence and they’re drawing a dotted line in the sand saying, “Okay, well because of our updated knowledge about economics and HHI, we have all this economic research about how HHI concentrations above a certain level can lead to bad unilateral effects and bad coordinated effects. Therefore, we’re going to say as a rule of thumb, that mergers that increase HHI concentration above a certain amount, there’s a presumption that we’re going to challenge them in court and that we’ve met our prima facie burden.”

I think that this has been a wonderful tool, not only for the business community to who has certainty, but also for antitrust practitioners who are interested in updating the laws pursuant to emerging economic research. I would like to see a lot more presumptions broadly in antitrust law about these. There’s emerging economic evidence about how certain tools like MHHI and modified index can capture the likely competitive effects of horizontal cross holding. Certainly, our firm does interesting transportation work in the oceanic carrier context. There’s emerging economic tools in addition to MHHI that sort of capture the likely competitive effects of certain arrangements, like joint ventures and consortia. I think that what the enforcement agencies are doing, asking the public, asking economists, “Okay, what tools do you think are helpful?” Then, responding to those comments and incorporating them into transaction guidelines moving forward, I think that that’s a very appropriate way to act and I would like to see more presumptions.

Jeffrey Shinder:

Amanda, I’m intrigued by the question you asked us, and I think I heard you correctly, and if I didn’t, you’ll correct me, that your readership is critical of the notion of government enforcers bringing, and I put it in quotes, “novel theories.” That’s something that they’re hostile to on some level. Yeah. Can you expand on that a little bit? Exactly what is their perspective? Where is it coming from, in your sense?

Amanda Hamilton:

Yeah, I think their perspective is, and I’m certainly parroting them, but they see it as bad governance. Former Commissioner Phillips said it best, when they’re just increasing the M&A tax. Go in for a deal that normally wouldn’t be challenged. It gets challenged. You spend all this money in federal court and just for a judge to rule, “Okay, this deal’s fine, there’s no Section 7 violation here.” The way that they say that they could predict it from the forefront, that just raises the tax of the deal. That’s certainly not the way that business has been done in the past, but I guess in some ways the good governance… They have a good point. They shouldn’t be raising M&A taxes on certain things. I do think that the context of private equity, my days as an FTC enforcer when we were, and bouncing divestiture offers off of customers, and this is a long time ago, was a lot of the customers would say, “Anyone but private equity would be an appropriate divestiture buyer.”

It’s not until today where Chairwoman Khan is now saying, “No. No to private equity.” We’re finally listening to consumers, but I guess going back to what my subscribers are saying, I think they were saying, “Look, here’s another example of good governance.” Not all private equities are slash and burns. Not all private equities are created equal. They’re not all the same, and so they see this as a wholesale condemning private equity where private equity has some benefits. They believe in investments stimulating new startups and generating new competition. I think this is another example where some of our subscribers would say, “This is another example of bad governance.”

Jeffrey Shinder:

I appreciate that answer on a couple levels. One, going back to the facts matter theme that’s come up a few times, I’m certainly not expounding the position that private equity is bad and necessarily generates anti-competitive outcomes. It depends. It always depends. I appreciate that comment. Your overarching answer triggered the following thought in me, which is almost a philosophical discussion around antitrust, which is what’s worse? The false positives or the false negatives? I just think wherever you sit on the ideological divide in terms of antitrust, your answer to that will be really predicated on ideology, more than economics, more than law.

Your constituency, at least the portion in which you’re talking about that the false positive positing and positive in terms of enforcement, the costs of that are attacks, and that’s a problem. That’s what they’re saying and Wyatt started the discussion with… Look over the last 20, 30 years, 40 years. We could take it back to 1980 and the beginning of the serious Chicago School era, really. It’s 40 years now, 45 years of the Chicago school, if you take it all the way back to Sylvania. All the false negatives, and what have they contributed to? Highly concentrated oligopolistic economy, higher prices for American consumers, and so what’s worse? That’s the question. I will put that to you. False positive, false negative, both of you if you want to speak to it. Amanda, you could channel your audience if you like. What do you think? What’s worse? I’m challenging both of you.

Amanda Hamilton:

Just putting on my personal hat, I certainly think false negative is much worse. I think, in putting on my former enforcer hat, I remember being at the FTC and growing increasingly frustrated by us not bringing more actions and perhaps just not being more bullish on transactions or even conduct. Perhaps, in certain instances, maybe articulating a prima facie case that was probably higher than maybe what a court would accept, and I think that we just increased the burden for ourselves. I think channeling many members of my audience, I would certainly say a false positive is much worse because you just increased transaction costs and you reduced predictability and then there’s lower transparency. They would argue, and as a former defense attorney, I would also argue, there’s a lot of companies out there, if they were aware of the risk beforehand, they probably wouldn’t enter into the transaction in the first place. Once they’re there, they’re just going to go for it, but I leave it to Wyatt.

Jeffrey Shinder:

Wyatt, you can’t dodge this one, so have at it.

Wyatt Fore:

I think that Amanda’s comments are really insightful. There has to be- The challenge is sifting through the transactions, for example, on practices that are pro-competitive or competitively neutral, from the relatively small category of transactions and conduct that are very problematic. I think that over the last 40 to 50 years, maybe shorter than that, the dial has been way too geared in one direction. The concern against false positives has far outweighed the false negatives. I would like to see it moderated a bit. I think that it’s difficult for businesses and the business community who are trying to have a non-problematic transaction. I think that Commissioner Phillips comments are well received, that for a lot of conduct and transactions where there’s really no issue, that raising the tax for those transactions is problematic for the economy.

Certainly, I worry about overregulation and over-enforcement with respect to those, but because most of my work focuses on the problematic conduct, I am continually frustrated to see what defendants get away with that are with their problematic activity. They essentially pay no price or pay pennies on the dollar compared to the anti-competitive effects. Unfortunately, Jeff, I’m also going to evade your question a bit because I’m not so sure if there is empirically a question about whether or not false negatives or false positives are worse. I think that the burden shifting framework of the rule of reason helps to sift through these problems and I think that I would appreciate a perspective that goes more towards the middle of weighing the difficulties for both of them. As opposed to now, where I think that enforcers and judges are so worried about false positives that they’re letting so much problematic conduct go wreak havoc on our economy.

Jeffrey Shinder:

One thing I’ll add to the give and take, and I appreciate your answers, is the role of the private bar. We’ve been talking about the FTC and the DOJ. Obviously, there’s no private right of action under Section 5, so the private bar does not have those tools, but it definitely has Section 7 tools. It has Section 1 and 2 and the private bar is important in all of this. The one concern I have is the death by 1000 cuts to private enforcement that has been ushered in over the last X number of decades. It’s much, much harder to certify classes and get class action certified. The class device is important. The law around arbitration clauses is an issue, and private enforcement, we need all… If it’s a three legged stool, we need all three legs to support the stool and private enforcement’s important. With that noted, I want to give each of you a last… If there’s anything, any final thoughts on this topic before we wrap up. Amanda, I don’t know if you have any questions or thoughts that this conversation has generated.

Amanda Hamilton:

Yeah, I think that there’s always new issues emerging and just because government hasn’t necessarily took an action on those issues in the past, it doesn’t necessarily mean, I think, that previous government enforcers necessarily rubber stamped those issues. For example, how loss of competition led to job cuts or agreeing on wages that no one before necessarily saw that as an antitrust violation. Recent government enforcement action had that. As a reporter, Chairwoman Khan and AAG Kanter has certainly made my life more interesting. It’s certainly made it more difficult to crack cases and to report on what’s happening because it’s not always so clear because they are looking to reinterpret antitrust laws and bring exciting new cases. I will say that it certainly made my life interesting.

Jeffrey Shinder:

Wyatt, I’m happy to give you the last word if you want it.

Wyatt Fore:

Always stressful. No, I would only reiterate that I think that some of the smartest people in the country today are attorneys and economists working in the enforcement agencies. I think that they do, in general, a wonderful job with a very, very difficult task. Any criticisms or suggestions that people make, I hope that they know that they have a lot of fans on their sides, that they’re doing the best with the very limited resources they can with a large set of problematic tasks, and prioritizing them and attacking them are always challenging. I would just like to give a shout-out to our quiet government enforcers who certainly do the Lord’s work every day under very challenging circumstances.

Jeffrey Shinder:

Well, Wyatt, I’ll say that resource constraints is something that’s important to point out. They are under-resourced and they really are doing great work under somewhat difficult circumstances and it’s appreciated. Amanda, I want to thank you for coming on the pod and bringing the Capitol Forum and the perspective of your readership to this conversation. It was great. Wyatt, I appreciate your insights and organizing this pod and we will definitely have you back. I think we can conclude.

That’s all for our show today. If you like the podcast, make sure to subscribe to Antitrust Matters and leave us comments on how we were doing or on the topics you would like us to cover going forward. You can also follow us on or follow the 91pornantitrust team on . Until next time, be well, and remember antitrust matters.

Read Antitrust Matters Episode 10: Private Equity & Antitrust – A New Approach? at constantinecannon.com

Antitrust Matters provides engaging and timely conversations about competition policy in the digital age. Antitrust has always mattered to consumers and businesses, and to antitrust lawyers and economists, but today it also is in the political and public discourse more than ever. From the prices we pay for food, travel, financial services, payments to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. Antitrust Matters brings you you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going and why it is so important to our current political discourse.

In this episode of Antitrust Matters, Matt Cantor, Ankur Kapoor, and David Golden analyze and react to the recent oral argument before the Ninth Circuit Court of Appeal in the Epic Games v. Apple case.  Both Epic and Apple appealed the district court’s bench trial decision, which ruled against Epic on its antitrust claims but nevertheless issued an injunction against Apple’s iOS antisteering rules under California’s Unfair Competition Law.

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Episode Transcript and Show Notes:

Jeff Shinder:

Welcome to Antitrust Matters, a 91pornpodcast where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder and I’ll be your host. Antitrust has always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates to how we travel to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going and why it matters today more than ever before.

David Golden:

Welcome back, everyone. I’m David Golden, a partner in Constantine Cannon’s antitrust practice. I’m filling in for Jeff Shinder today. We’re here to discuss the recent Ninth Circuit oral argument in the Epic Games, the Apple case. This case has received considerable press coverage and many people in the technology industry are following it closely, and not just antitrust lawyers. Competition issues in the technology industries are a hot button issue now with bills pending in congress, cases and investigations by the DOJ, FTC and other competition authorities as well as recent legislation in the European Union and other areas around the world.

To set the stage, Epic v. Apple concerns competitive restraints in Apple’s iOS platform, specifically the App Store and in app payments. Apple does not allow competing app stores or competing in-app payment systems for digital goods and services on iOS. Epic Games is a video game company that makes the popular Fortnite game among other products. Fortnite was available on iOS via the App Store until it enabled its own in-app payment system. Apple kicked Fortnite out of the App Store, and shortly thereafter Epic filed an antitrust suit against Apple in the Northern District of California.

After events trial, judge Yvon Gonzalez Rogers ruled against Epic on all of its antitrust claims but did rule for Epic under California’s unfair competition law and issued an injunction against some of Apple’s anti-steering rules. We’ll be discussing a few of the issues raised with oral argument, but I first wanted to introduce two of my colleagues, Ankur Kapoor and Matt Cantor. Ankur and Matt are partners in the antitrust practice as well.

Ankur co-chairs the ADA antitrust law sections media and technology committee and his practice has involved antitrust litigation and counseling on many digital platforms. Matt has been at 91pornfor 23 years and is a partner that leads its healthcare practice. He has tried a number of antitrust cases, both bench and jury trials, and argued several times in the various courts of appeal. He has litigated antitrust cases concerning healthcare, payments and media and telecommunications and is currently lead counsel for a certified class in an antitrust case concerning hospital services that is currently on appeal in the Ninth Circuit, in which Matt will argue before a Ninth Circuit panel next year.

Welcome gentlemen. So the couple of years, antitrust cases did not exactly capture public imagination, but this case and others continue to generate public interest in competition law. Matt, let’s start with you. What do you view as important about the Epic case?

Matthew Cantor:

Well, I think it’s important because there has been such an emphasis lately placed on the antitrust laws application to technology providers. Clearly there is a lot of chatter concerning the subject in the press, on social media and in the Congress. There’s been cases brought by the Federal Trade Commission against Facebook by the Justice Department, against Google and by state’s Attorney General. So there is an overall concern that some of the technology players have violated antitrust law.

Let me just say that it’s not necessarily true that they have. Some may have, some may not have. All of them may have, none of them may have. The one issue that needs to be thought of though very, very specifically is just because these entities are big doesn’t mean that they have offended antitrust law. You can become a monopolist because you have better skill or better business acumen. You just built a better mouse trap that consumers wanted. So just because these entities are big doesn’t mean that the antitrust law has been violated. Not withstanding that, there are certain practices that they’ve engaged in that have caused a substantial concern, particularly for antitrust enforcers. And this is the first case that has really generated significant appellate opinion as well as a trial record. I know that that’s something that Ankur has thought on.

Ankur Kapoor:

Yeah. I was just going to say that thinking about the major enforcement actions against some of the large digital platforms that have come under antitrust scrutiny, Amazon, Apple, Facebook, Google, some people include Netflix, Microsoft is certainly one as well. This is the first fully developed trial record that we’ve seen. We’ve seen a number of district court opinions, but they’ve been at the pleading stage before there’s been any factual or expert discovery. This is the first action in which there is a robust evidentiary record detailing in this particular case, how Apple’s platform iOS operates both technologically and economically operates with respect to mobile gaming. And mobile gaming, as the court found, that’s 100 billion dollar a year industry. So in terms of big tech cases, this is certainly one of them and it’s the first where we have a record that we can discuss and that the Court of Appeals is going have to deal with.

Matthew Cantor:

I should also just state, David, you said why is this case important and I just talked about the headlines, the enforcement actions and the legislative proposals. But it’s also important because technology providers affect all Americans. Every American, or virtually all Americans, have a smartphone. All Americans are familiar with social media whether or not they actively use it or not. Amazon sells goods to virtually every American, if not all Americans. So these are very, very big players. So on the one hand they’re used, but on the other hand they affect everyone from the most wealthy to the least wealthy. So they’ve just had a tremendous effect on American lives.

David Golden:

Let’s delve into some of the issues in the oral argument now. There was extensive discussion of the rule of reason and role of balancing anti-competitive arms with pro competitive benefits. So Ankur, I’ll first turn this over to you and then Matt can respond, but it would probably be helpful to the audience to explain exactly what the rule of reason is and the role of balancing in this context.

Ankur Kapoor:

Sure. So broadly speaking in antitrust law, there are two modes of analysis. The first, which is not an issue in Epic versus Apple, is the so-called per se rule where certain conduct is per se unlawful, and that includes classic hardcore price fixing. A number of competitors get together and agree on the prices that they’re going to charge for their products. This again, is not one of those cases. The second paradigm is the so-called rule of reason. And the rule of reason dates back to Justice Brandeis’s opinion in Chicago Board of Trade in 1918. So it is 104-years-old. And the rule of reasons is simply you have to weigh any competitive effects of a restraint of trade or a challenge conduct against its procompetitive effects.

Antitrust law is a no harm, no foul jurisprudence. So there has to be some competitive harm in order for the conduct to be held unlawful under the antitrust laws. And as the rule of reason has evolved over the last century and as recently as the Supreme Court’s decisions in Ohio versus American Express in 2018 and CAA versus Austin in I think it was 2021, as it’s evolved, it’s evolved into a three step burden shifting process. The first step, the burden is on the plaintiff to prove the anti-competitive effects of the challenge conduct, and those are classically higher prices, lower quality or lower innovation, lesser innovation.

Once the plaintiff has met that burden of proof, the burden then shifts to the defendant to demonstrate the procompetitive benefits of the challenge conduct. And the reason for the defendant to bear that burden makes a great deal of sense because it’s the defendant’s conduct, the defendant decided what were the business reasons for engaging in that conduct for implementing that business practice? How does that conduct benefit the defendant? How does it benefit competition? So the defendant is really in the best place to put forward the justifications for its conduct. And that’s why the burden sits with the defendant.

If the defendant does that, then the burden shifts back to the plaintiff to show one of two things. The plaintiff could show that the defendant’s procompetitive justifications were pre-textual, they were just made up for the litigation. Or the plaintiff could show that there are ways to accomplish those procompetitive objectives using means that are less restrictive of competition. And if the plaintiff does that, then inherently in that analysis, the anti-competitive effects are greater than the procompetitive effects because you can get those procompetitive effects without restraining competition as much.

Ultimately, the finder of fact, and that could be a jury, in Epic versus Apple it was the judge because it was on trial, the finder of fact has to balance the anti-competitive effects and procompetitive effects. If it’s a jury trial, we’re not privy to the jury’s deliberation. So we, the lawyers or the public, don’t really know how juries weigh procompetitive effects and anti-competitive effects. But in Epic versus Apple, because the judges required as the finder of fact in its judgment to put forth the reasons why the anti-competitive effects are greater or lesser than the procompetitive effects, the absence of that has generated Epic’s principle argument on appeal.

In other words, that the district court did not engage in that balancing and simply said, “Here are the anti-competitive effects. Here are the procompetitive effects I find for Apple.” That’s essentially what the District Court’s opinion said. And Epic’s primary argument on appeal is that the district court, as the trier of fact, was obligated to conduct that balancing and determine net was this conduct good for competition or bad for competition?

Matthew Cantor:

Yeah. Let me just step in. I’m not going to restate the rule of reason, because Ankur did such a great job doing it. The rule of reason is antitrust 101. One of the things that was very surprising about the role of argument yesterday was there was a debate over whether or not there is a balancing form. In other words, when you get to that after the plaintiff has established that there’s some anti-competitive effects put into practice and the defendant has established there’s probably some also procompetitive benefits as well, there wasn’t question and a debate as to whether the court should do anything thereafter.

And clearly, the rule of reason requires that balance. The authorities that Ankur mentioned, very recent authorities merely just reaffirm what’s happened over the last century in interpreting the rule of reason, which is at the end of the day, if you find effects and you find benefits, there has to be a way. There also was discussion. Judge Smith was the judge who posed a question. There was discussion about how do you do the balancing? Does there have to be some type of quantitative analysis that demonstrates that at the end of the day the anti-competitive effects outweigh the procompetitive benefits? And the plaintiff’s lawyer, Tom Goldstein, said, “No. This can be done qualitatively.” So I was surprised that so much debate was had yesterday over whether or not a balancing should be done or explicit balancing needs to be done by a judge who’s making findings of fact and conclusions of law under the federal rules of civil procedure. But nonetheless, that was being debated yesterday.

Ankur Kapoor:

And I think that there are some cases where you can do a quantitative balancing. So I’m thinking of, for example, cases involving payments from brand name pharmaceutical companies to generic pharmaceutical companies which settle patent litigation between the two of them, but which result in the generic pharmaceutical company agreeing not to bring its lower cost generic drug to market. And there you can quantify how much more have consumers and health plans paid for prescription drugs? And you can quantify what the savings were in litigation costs by settling that litigation. So there you can actually do math and to a reasonable degree of accuracy calculate what the net anti-competitive harm is.

In Epic versus Apple, the anti-competitive harm that was alleged to be Apple’s maintenance of a super competitive commission of 30% on all app sales and in-app purchases. And Apple’s procompetitive justifications were payment security and data privacy, which are notoriously difficult to quantify. So I think in this case the idea of a quantitative balancing, it just doesn’t work. And as Matt said, the rule of reason has never required quantitative balancing. It certainly can accommodate it where it makes sense, but it’s never actually required.

David Golden:

So let’s shift to market definition. There was a significant amount of argument over the markets at issue in the case. And first, and I’ll put this to you, Matt, is what is market definition in an antitrust case and what were the markets at issue here in the context of the oral argument? And it’s a bit of a preface, because we all know market definition is not necessarily required in antitrust cases, especially where there’s horizontal conduct, but it was established here.

Matthew Cantor:

So in many rule of reason cases, the court requires that markets be defined because when you define a market, you are setting forth the scope of effective competition. And by doing that, you are providing the court with a proxy to determine whether or not the defendant wields market power. Do they have a large slice of the defined relevant market that make up 50%, for example, or 60% of the commerce in that market or what kind anti-competitive effects have been caused? Where have they been caused? Have they been caused in this area of effective competition?

So in many rule of reason cases, particularly cases that are wholly vertical, that’s where you have a manufacturer that’s coercing, for example, retailers to engage in certain distribution policies, where you have that kind assessment, that’s an issue in an antitrust case. You generally have to define a relative market. Not in the first eight cases that Ankur mentioned. One is if it’s a price fixing case, you don’t have to do that. And not in some other rule of reason cases, particularly those that are dealing with what are called horizontal restraints.

And there was an issue in this case, I must say. There was a fight over whether or not the restraint at issue here Apple’s requirements regarding its App Stores that were put on its developers, whether this was a vertical restraint of trade or it was horizontal because it effectively, according to Epic, kept horizontal competitors from supplying the same services that Apple was providing. Market definition can serve an important function. Most economists will tell you at the end of the day it’s just a lawyer’s construct, right? They will say, “We don’t care what kind of market share someone has,” or “We don’t care whether or not certain products are substitutable for another,” but that will all come out in the wash. The question here is whether the defendant, by virtue of the policies at issue, has been able to charge higher prices than it otherwise would’ve or has been able to foreclose competition or to stunt innovation.

Economists want to get to the end game. They see this as a hurdle that’s not necessary. But here the argument was, “Well, does Apple’s operating system constitute its own market, over which Apple has market power?” And the judge didn’t buy that. The judge said, “That’s sort of silly.” There are certain single brand markets that have been defined under the United States antitrust loan. There’s a famous case concerning Kodak copiers, but those markets are generally disfavored. And here, the court went as far as saying, “Look. There’s no market for Apple’s operating system because Apple doesn’t even sell it or license it to anybody. The only entity that uses Apple’s operating system is Apple.” So that market was rejected.

So it defined the market where Apple still arguably had market power, which was the market of mobile gaming. And it was within that lens that the court adjudicated whether or not Apple had caused anti-competitive effects and whether it yielded market power. And at the end of the day it found that Apple does have some market power and has caused some anti-competitive effects. At the end of the day it also said, “Well, but there are justifications behind these policies.” And then we were sort of left with an implicit conclusion that they didn’t violate the antitrust laws, because the weighing that is required that Ankur and I discussed under the litigation was not completed. But that’s how market definition relates to cases in general under the antitrust laws and why it was important in this case as well.

David Golden:

And there was a bit of argument yesterday about foremarkets and after markets and the nature of whether there was actually any discipline that was provided from the foremarket that Epic contends exists, which would be iOS or the iOS ecosystem. Ankur, what are your thoughts on the argument yesterday regarding foremarkets and aftermarkets?

Ankur Kapoor:

So the idea of an aftermarket claim or a Kodak type claim as its own is that there’s insufficient competition in the foremarket. So foremarkets, think of when consumer is actually purchasing the phone, they’re deciding between an iOS device and an Android device. And then there’s an aftermarket, everything else you buy in order to be able to use your smartphone. The apps, accessories, et cetera. And in the Kodak case it was copiers which were, and back then the size of a car and probably just as complicated. So there was a huge aftermarket for copier parts and businesses that serviced Kodak copiers. And as often happens, the aftermarket is even bigger than the foremarket.

So in order to demonstrate there is harm to competition in the aftermarket, an antitrust plaintiff has to show that competition in the foremarket is insufficient to check whatever happens in the aftermarket. And Epic’s argument was that, “Look. Consumers, once they buy an iPhone for whatever reason, they’re locked in.” They’re just not going to switch from an iPhone to an Android and vice versa. If they buy an Android, they’re not going to switch to an iPhone. Although, the data show that consumers are I think more likely to go from an Android to an iPhone than vice versa. But the data are clear and undisputed that very, very few consumers actually go back and forth from one to the other, because if you’re on Android, all your photos are on Google Photos. If you have an iPhone, and I don’t, all your photos are on whatever Apple calls its photo service. So you’re not going to lose all that and switch to another phone.

Epic’s argument was regardless of why, consumers aren’t switching away from an iPhone. So because of that, competition in the foremarket is just not checking as a practical matter. The reality is it’s not providing any kind of constraint on what Apple can do in the aftermarket. Therefore, Apple can exercise power over price, it can charge 30% commissions and it has market power. The district court rejected Epic’s claim on the basis that Epic had not put forth sufficient proof that consumers were locked into iOS, because they were unaware of Apple’s aftermarket policies. In other words, that you could only buy apps on the App Store. That when you made an in-app purchase, you had to use Apple’s in-app payment systems.

Apple had disclosed all of that to consumers before, so consumers were fully aware and their deciding to buy an iPhone with open eyes, that’s not an exercise of market power. Some of the cases talk about it being an exercise of contractual power. Apple has by virtue of the way it’s set up its ecosystem, the walled garden, it makes consumers and developers well aware of that fact and consumers and developers choose to buy into the Apple ecosystem and that’s not an exercise of market power. It’s voluntary.

And the Court of Appeals certainly showed some skepticism as to whether Epic had met its burden of proof on this claim, but maybe more tellingly Epic’s lawyer acknowledged that that was a weakness of Epic’s claim in the district court. And instead what Epic’s lawyer I think very smartly and tactically did was get to the heart of the issue on the appeal, which is, “Okay. Even if there is no single brand market for Apple devices, the district court still found that Apple had market power over the relevant market for mobile games.” Mobile games, not just on Apple devices but mobile games on Android, Nintendo, all competing mobile devices. And it had a 55% market share in that market. Epic’s point was, “Look, regardless of what the relevant market is, we do have a finding that Apple has market power when it comes to mobile games.”

Maybe the market’s broader, maybe not. But at least for mobile games, Apple has market power. It’s charging a 30% commission, and that’s far above its costs and therefore, that’s the economic definition of it being super competitive. So what the district court had to do was weigh those anti-competitive effects against the procompetitive effects. Ultimately, whether it’s a single brand market or a market for mobile games, it’s a rule of reason case in the district court, so you end up there anyway, regardless of which route you take in terms of market definition. You end up in the rule of reason and that’s where the district court went wrong.

Matthew Cantor:

I just wanted to say two things to follow on what Ankur said really quickly. One is it was extremely interesting that the plaintiff’s lawyer just started saying, “It really doesn’t matter what the market is here.” But that’s really what he said. He said, “It could be Apple iOS, it could be Apple phone. It doesn’t matter.” And the defense lawyer said, “Oh no, it matters a lot.” And that was the acknowledgement, as Ankur said, of a weakness in the way that Epic proved or failed to prove its case. But I also want to state my own opinion, which is I absolutely believe that there is a single brand market for Apple. I think that there is a number of lock-in effects, as Ankur mentioned, which is that you buy an Apple phone, you get certain media relative to Apple, Apple interconnects with other devices that you have. It’s constantly changing its user policies.

I doubt very much that we’re all aware perfectly of Apple’s various distribution policies when we buy the phone or that sufficient notice is really given by virtue of a term sheet to consumers that’s probably hundreds of pages long. So no, I think that the notion that Apple is a single brand market is a viable economic and antitrust theory. I think what happened here was that, as Ankur said, Epic failed to prove it down below. And my expectation is that when the Ninth Circuit writes on this case and they discuss the single market issue, I think that will affirm her on market definition and say that Epic failed to prove the single brand market. I think that’s how they’ll put it. I think they’ll say, “There was a failure of proof at the district court level.” I don’t think they’re going to make sweeping findings here or sweeping statements that Apple cannot be a single brand market. I don’t think you’re going to find that.

David Golden:

So we’ve discussing some of the claims under the Sherman Act that Epic brought, which it lost below in the district court. But wanted to turn to the one bright spot for Epic in the district court and that would be Unfair Competition Law that is a California state law in unfair conduct. And there the lower court issued an injunction against certain Apple anti-steering rules, as they’re called, and allow developers to put, for example, buttons or links in their apps on iOS to link to outside platforms, whether it’s another platform like iOS or perhaps just a website. And Apple is challenging that rule in that injunction. So I’ll turn this over to you first, Matt. Maybe first describe what are anti-steering rules and then your thoughts on the oral argument on these topics.

Matthew Cantor:

Well, anti-steering rules are rules that have been used by various entities. They’re sometimes used by monopolists, which basically prevents the downstream contracting party from suggesting or redirecting the consumer to another competitor. For example, in the American Express case that Ankur mentioned that went to the Supreme Court, the case was about how Amex said, “If you are a merchant that accepts American Express cards, when an American Express card is presented to you at the point of sale, you got to take it. You can’t then say, ‘Please give me a Visa card instead.’ You can’t have signage that says, ‘Please give us Visa cards even though we also accept American Express.’ You can’t discount for other forms of payment,” et cetera. So that’s one thing. That’s in the payment industry. You see it in the healthcare industry. A hospital monopolist. There have been a number of cases now that have been litigated, one which expressly found that anti-steering rules by hospitals that say to health plans, “You cannot steer your insured members to hospitals or healthcare providers that offer lower prices.”

Those rules were deemed to be anti-competitive in the healthcare system in North Carolina that was sued by the United States Department of Justice over that settled and got rid of the rules. So there are rules that you find in a number of industries, but they can be anti-competitive when imposed by a monopolist in order to preserve its market position. And here, that’s exactly what the judge found. In fact, what’s really curious about the judge’s opinion is that she failed to do the weighing that Ankur and I have discussed today under the rule of reason with respect to the litigated antitrust claims, but she did the weighing when it came to determining whether or not these other practices were quote-unquote unfair under California state law, the Unfair Competition Law. And there she said specifically, “Look. There are anti-competitive effects from these rules.” She said that, “Epic has demonstrated real anti-competitive effects and Apple has proffered mostly, not all but mostly valid and non-pretextual procompetitive justifications.”

She said, “To a large extent” quote-unquote, “not fully, that makes the conduct more than not anti-competitive.” But then she says, “The procompetitive justifications were only part of certain practices and not the anti-steering rules.” So it’s just curious that she said, “On balance, these are unfair practices.” And the UCL, by the way, is broader than the antitrust law. There’s a case called Cell Tech that was decided by California appellate court some years ago, which says basically that if a practice violates the spirit of the antitrust laws and is incipiently anti-competitive, in other words those effects are going to start soon, well, they can be enjoined under the UCL. Well, they can be enjoined under Clayton Act section 16 as well if they threaten consumers or competitors.

And I’m not casting dispersions on Judge Gonzalez Rogers at all. She wrote 180 some odd page decision, single space. She put in a lot of effort here. But it’s curious that she did this weigh in here but didn’t explicitly do the weighing under the antitrust laws. And it raises a question as to what is the Ninth Circuit going to do. And we’ll talk about my handicap at the end of this call. But it’s sort of an unusual thing. So what happened here? Yeah, the judge found the UCL was broader than the antitrust laws and she found that these policies, when it comes to the anti-steering rules on balance harm consumers and should be enjoined.

Ankur Kapoor:

I’ll just add that some of the inconsistency between her approach under the UCL claim and her approach on the antitrust claim also shows up where she talks about Apple’s procompetitive justifications of payment security. And what she says, what the court found as a factual matter is that competing payment services to Apple’s payment services had greater scale and data. If you think about such payment services as American Express or PayPal, they’re as payment services much larger than Apple, and so they have a lot more data with which to combat payment fraud. And the court finds that competing payment services could provide better payment security. In other words that Apple’s restrictions on apps directing consumers to other payment services, just the opposite of promoting security actually undermined payment security because the competing payment services offered better security, which suggests that her balancing on the antitrust claim, or had she done a balancing on the antitrust claim, it would not have come out in Apple’s favor. And I think that inconsistency is going to bother the Court of Appeals.

David Golden:

And I would just point out on this that to me, it’s almost an explicit acknowledgement from Judge Rogers in granting the injunction and finding for Epic under the UCL that there is consumer lock-in here. And while there may have been a failure of proof on Epic’s part, the fact that she was so concerned about information provided to consumers about potentially lower prices on other platforms or websites or what have you to me shows that she concerned about some form of lock-in of consumers on iOS. So I’ll turn to our final topic, which will be, as Matt said, handicapping what we think might happen with the Ninth Circuit when it writes its decision. Obviously, none of can know where the judges are leaning, but based on the oral argument, I’d like to first turn it over to Matt to give his closing thoughts on where he thinks the panel might come out.

Matthew Cantor:

Yeah. I’ll give you my closing thoughts on where they’re going to come out and I’ll give you my closing thoughts on what I’d like to see. I think that they’re going to affirm the antitrust analysis. I think at the end of the day, I really would be shocked if they said there’s no balancing requirement and that would just be wrong. That would be erroneous as a matter of law. I think more likely they’ll say, “Well, there may be a balancing requirement,” and maybe she didn’t explicitly do the balancing under her analysis of the antitrust charges, but she effectively did or she implicitly did. Therefore, she found at the end of the day that the laws didn’t violate section one and section two. So the balancing was appropriate or the balancing, as I said, was maybe not explicit, but it was enough to get you past the hurdle of whether or not this matter should be sent back to her for further analysis.

On the UCL claim, they made some references that the analysis was cursory. And I think the reason why they thought that among other things is she only spent about four or five pages on the Unfair Competition analysis and she spent 160 on the antitrust law analysis. So I think that they may reverse her there. And if they do reverse her, my hope is that they’ll reverse her and remand it for further proceedings and not just reverse her outline, because if they say at the end of the day, “Well, she needs to do more to explain why this is unfair or why these particular anti-steering rules should be struck down and there should be another trial on that,” then that’s what should happen. But to say at the end of the day that somehow these anti-steering rules were as a matter of law not unfair, given what Cell Tech says and given what she found, which was that the anti-competitive text of these rules outweigh the procompetitive benefits, it would seem to me to be a miscarriage justice for them not to reverse and remand for further proceedings.

So what I would like to see here is I frankly would like to see the court, if I had my druthers, the court would say that a balancing is required under section one of the Sherman Act, sufficient balancing was done with respect to the anti-steering rules. They should continue to be enjoined both under the antitrust laws and under the UCL. And with respect to the other policies at issue in this case, there should be further proceedings held for the court to explain whether on balance they were anti-competitive or not. And that’s what I’d like to see. I don’t think that’s what will happen. I think they’ll affirm the antitrust judgment and they’ll reverse the UCL. I hope for further proceedings, but they may not. They may just reverse it outright.

Ankur Kapoor:

Well, wishful thinking that I’m a Ninth Circuit Court of Appeals judge. What I would do is very similar to what Matt thinks might happen. I would affirm the dismissal of Epic’s single brand market claim. Again, not because it’s an invalid antitrust claim. In theory, you could have one and there are good reasons to think that Apple, it is a single brand market, but because Epic did not meet its burden of proof as Epic almost, if not actually, conceded at oral argument. But that’s the claim which would deem Apple a monopolist over its own product and allow Epic to have its own store within the App Store.

The other reason I think that I don’t think the Court of Appeals is going to allow such a claim to proceed is because antitrust law looks askance at competitors working together. And the idea that Apple has a duty to help its rival by letting its rival establish a store with an Apple store… I mean, think about Walmart wanting to establish a store within Target. That’s what Epic is seeking and that’s something while it’s theoretically possible in an antitrust law, antitrust looks really skeptically upon those kinds of claims.

So I think that claim is not going to survive. Because of the court, the District court’s findings of anti-competitive harm and undermined payment security that the court made within the UCL claim, I think that’s going to give the Court of Appeals some pause in affirming the District Court’s decision on the antitrust claim involving Apple’s in-app payments. So I think that at least what I would do is reverse the district court on that claim and send it back for the court to conduct the rule of reason balancing on the antitrust claim and then also address the UCL claim.

David Golden:

Well, I think all of us and the Antitrust bar and both people inside and outside the technology industry will be watching this closely and looking to see what the Ninth Circuit ultimately decides. I just want to thank both you, Matt, and you, Ankur, for participating in this podcast. I think people will find it very interesting and we’ll be following this case closely.

Ankur Kapoor:

Our pleasure.

Matthew Cantor:

Bye-bye.

Jeff Shinder:

That’s all for our show today. If you like the podcast, make sure to subscribe to Antitrust Matters and leave us comments on how we were doing or on the topics you would like us to cover going forward. You can also follow us on or follow the 91pornantitrust team on . Until next time, be well, and remember antitrust matters.

Read Antitrust Matters Episode 9: Epic v. Apple Ninth Cir. Appeal: Reactions to and Analysis of the Oral Argument at constantinecannon.com

Antitrust Matters provides engaging and timely conversations about competition policy in the digital age. Antitrust has always mattered to consumers and businesses, and to antitrust lawyers and economists, but today it also is in the political and public discourse more than ever. From the prices we pay for food, travel, financial services, payments to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. Antitrust Matters brings you you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going and why it is so important to our current political discourse.

In this episode of Antitrust Matters, we are joined by Doug Kantor, General Counsel of the National Association of Convenience Stores and Ed Mierzwinski, Senior Director of the Federal Consumer Program, at PIRG to discuss competition issues in the payment card space and how they affect consumers.

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Episode Transcript and Show Notes:

Jeff Shinder:

Welcome to Antitrust Matters, a 91pornpodcast where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder, and I’ll be your host.

Antitrust has always mattered to consumers and businesses, but today, it is also in the public discourse more than ever, from how we get our food on our plates to how we travel, to the way we interact daily using digital apps and platforms. Antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more than ever before.

Welcome back, everyone. We are here for a very special podcast. We’re here to discuss one of the industries that has probably if not the most antitrust attention over the last 40 50 years, and that’s the payments industry, and especially Visa and MasterCard, antitrust, public policy ranging from court decisions, landmark antitrust cases, legislation in Congress, attention from the Federal Reserve, FTC and DOJ. I cannot conceive of an industry that has seen more antitrust attention. There are a few that are close than the payments industry. We’re here to discuss the most recent chapter of that long-running saga which found itself in the halls of Congress recently where the Senate Judiciary Committee met to hold hearings to discuss recent increases in interchange rates by Visa and MasterCard that affect millions, if not tens of millions, of merchants across the United States and, of course, their consumers who ultimately absorb those increases in the form of higher prices or less robust services.

Today, we have the pleasure of having on the pod two of the witnesses who testified at that hearing who bring unique perspectives on this critically important issue. We’re joined by Doug Kantor, the General Council of the National Association of Convenience Stores, and Ed Mierzwinski, the Senior Director of the Federal Consumer Programs at U.S. PIRG. Let me say a word about their backgrounds before we actually get into the discussion. First, Doug Kantor. Before joining NACS, Doug served as a partner at Steptoe & Johnson. In that role, he worked with a range of clients, including of course, NACS, to address public policy issues ranging from fuels to financial services. He also established and administered coalitions of companies and trade associations that share common legislative and regulatory objectives. During his 10 years at Steptoe, Doug served as council to the Merchant Advisory Group, Society of Independent Gasoline Marketers of America, and the National Grocers Association, National Retail Federation, Merchants Payments Coalition, and Main Street Privacy Coalition, among others. So welcome, Doug, to the pod.

Let me just say a word about Ed. Ed has worked at U.S. PIRG since 1989. PIRG’s a member-based non-profits that take on powerful special interests on behalf of their members. Ed often lectures or testifies before Congress, state legislatures, and agencies on a wide range of consumer protection and competition issues, including the Fair Credit Reporting Act, and has been involved in all of significant FCRI policy amendments since 1989. HE’s published reports on numerous consumer issues, including the need for state consumer protection laws, credit card practices, and the Durbin Interchange Fee Amendment, big data’s impact on financial opportunity, the CFPB Public Consumer Complaint Database, internet privacy, identity theft, credit reporting mistakes, and product safety. Ed, thanks for being on the pod.

Let me just set the table and then you guys can start. The Senate Judiciary Committee spent time on the issue of Visa and MasterCard interchange recently. For our listeners, if you could explain what precipitated the Senate Judiciary Committee holding hearings on this issue.

Doug Kantor:

So from my perspective, there are actually a few things that came together to get the Senate Judiciary Committee to take notice. One is that there’s just been a huge, huge increase in the fees due to inflation, due to increases of issuance of more expensive cards, higher rewards cards, those sorts of things, that have hit in the last year. And just a few weeks prior to the hearing, Senator Durbin, who chairs the Judiciary Committee along with some of his colleagues, wrote to Visa and MasterCard about their planned rate increases in addition to the inflationary increases that everybody was already seeing and urged Visa and MasterCard to hold off given what was happening in the economy. Both companies refused, although if you can find in their letter where exactly they refused, you’re very good at reading purposely evasive text. But those things together, I think, led the Judiciary Committee to act, along with the fact that there are outstanding regulatory questions that have been ongoing with respect to this industry for a while. So I really think it was a confluence of lots of different events.

Jeff Shinder:

That’s helpful to set the stage. Let me turn to Ed for a minute here. Ed, you’ve spent a lot of time over the years, decades really, focusing on this issue which culminated in your appearance at the Senate Judiciary Committee to speak to how consumers are impacted by these increases. Can you explain what motivated you to focus on this issue among many others? Your bio indicates a wide range of consumer issues that you’ve focused on over the years. What about this issue has galvanized your attention? And in this moment in time, can you speak to the consumer impact of the most recent increases from Visa and MasterCard?

Ed Mierzwinski:

The unfair credit card practices have always been a large part of my portfolio. In fact, just before the Durbin Amendment was passed, Congress passed sweeping reforms of unfair credit card consumer practices, basically UDAP violations under the consumer part of my portfolio. But competition law has always been important to protect consumers as well, and we got involved in this one early on talking with Senator Durbin’s staff and other members of the Congress who asked us to testify. We looked into it. By the way, the thing that really astonished me was, in the run up to the passage of the Durbin Amendment, I testified before Senator Durbin in his role as a subcommittee chair on the Appropriations Committee back, I think, also in 2010, when the Durbin Amendment passed. At that time, a GAO report had come out, and the GAO report’s main finding was not only can small merchants not negotiate, not only can large merchants not negotiate with the credit card networks, even the United States government has no power to negotiate. And that is something that is right in PIRG’s wheelhouse. We take on powerful, special interests. If you are a powerful special interest that can include the government as the people that you’re putting down and forcing to take unfair pricing, that just did it for me. And so, I’ve been all in ever since.

Jeff Shinder:

Thanks, Ed. You used the term Durbin Amendment. I’ll throw this to you or to Doug. Just for our listeners, what is the Durbin Amendment? And whoever’s going to speak to this, can you speak to Senator Durbin’s interest in this issue, which was on display during the hearings?

Doug Kantor:

Sure. I’m happy to start and Ed can fill in. But the Durbin Amendment was literally an amendment voted on the Senate floor when the Dodd-Frank Financial Reform Bill was considered in the Senate in 2010. And it may be difficult, some of your listeners may not have the full context, but we were in the midst of the financial crisis at that time. Congress knew that there were major reforms that needed to be made to ensure that we didn’t go through another one again. That bill included things like creating the Consumer Financial Protection Bureau. But when it was on the floor, Senator Durbin decided it was time to at least begin to reform the payment system. He started with debit cards on the idea that debit cards are just an electronic version of a paper check. And for 100 years, the Federal Reserve had had this policy that there weren’t, what they called, their exchange fees but a central fee that reduced the amount of the check when it was used in a transaction. Those were illegal according to the Fed. He looked at debit cards and said, “Gee, it’s the same thing functionally, only it’s cheaper than flying a paper check around to the correct Federal Reserve Bank around the country to get that transaction cleared. It ought to be cheaper.”

But because of the lack of competition, the market was more expensive. He proposed that the Federal Reserve have the power to regulate the rates charged on debit cards, at least for those banks with more than $10 billion in assets and that there be some competition among the networks like Visa and MasterCard and the other networks that handle the communication of transaction information across the financial industry so that their fees would have to be somewhat competitive. Those were the major pieces of what was in it. I think it stunned a lot of people that it passed and became part of the bill and part of the law when it was enacted, because the banking industry doesn’t lose too many things that they lobby for in Washington, but this is when they lost and by a large margin.

Jeff Shinder:

So Ed, when we were talking before we started to record today, you mentioned Senator Durbin’s history with this issue and comments he made at the hearing to that effect. You’ve had occasion including what happened recently with the hearing to have talked to him about this issue. Can you, to the extent you’re comfortable, speak to those experiences and your perspective on how Senator Durbin has become a champion for reform and the need to change the American payment system?

Ed Mierzwinski:

Well, I think my perspective has always been that Senator Durbin, Dick Durbin from Illinois, he is the Senate Majority Whip and Chair of the Senate Judiciary Committee right now, has long been a consumer and small business champion. In particular, on the issue of the banks, we have always worked with Senator Durbin. Senator Durbin has always been a champion for underdogs, for small businesses and consumers, whether it’s fighting the banks on student loan, bankruptcy issues, whether it is fighting for the Durbin Amendment to make one of our most anti-competitive markets, the credit and debit card market, fairer. He has always been with us, and I could go on and on with a list.

So I was not surprised to see that he learned about this problem and he immediately started to educate himself about it at the hearings that had been held in 2007, 2008, 2009 in the run up. It was just astonishing that he was able to win the amendment because, as he once said, “The banks own the place, Congress. It was righteous to beat the banks, but it was also because he worked very hard.

Jeff Shinder:

Okay, so let’s talk a bit about the increases that were on the table that are going into effect now that were discussed at the hearings. And Visa and MasterCard’s position, they testified, they sent senior executives. What is their defense? What is their justification for raising rates that were already among the highest in the world? We’ll come back to that a few minutes, the US rates relative to the rest of the world. But already high rates were not high enough, they had to go up even more. What is their justification, if one of you could summarize that?

Doug Kantor:

So their stated justification is that their cards provide a lot of value and that they don’t adjust fees that often. The problem with that is prices don’t happen across the US economy based on value. The fact that we’re having this conversation, frankly, from different parts of the United States, talking to each other simultaneously is a miracle of modern technology. Yet the court still broke up AT&T in the 1980s, and we still passed the Telecom Law in 1996 because it’s not enough for something that value, there has to be a competitive market where those prices come out. Those of us who remember the ’96 Telecom Law where they actually put in place competition, know that long distance rates of more than a dollar a minute suddenly became 10 cents and less a minute. That’s because that’s how people benefit, and frankly, companies that compete with each other benefit and get more innovative, get more efficient in their own operations, all of those things work out really well.

But Visa and MasterCard would rather just say, “Hey, these are great products, so don’t bother us and don’t look into it.” That’s just not a good rationale in the United States. And frankly, most of the world doesn’t buy it either because they’ve taken action to make sure their fees are less. So while their point is it’s valuable, we’ve never disputed that these cards do perform an important service, that’s why this is such a problem, but they really need to have competition in order to play that out and have fair pricing.

Ed Mierzwinski:

I would only add that if you were in the room at the Senate hearing and to see the senators trying to ask questions to drill down into this concept of value, they didn’t have an explanation, and it was pretty astonishing.

Jeff Shinder:

Yeah, if I make comments, full disclosure to our listeners, 91pornhas represented merchants adverse to Visa and MasterCard for decades, including currently. I’m going to keep the polemic from me to a minimum. But as an antitrust lawyer, value-based pricing connotes market power. Only entities that have market power can have the capability to price without regard to costs. A competitive market that costs dictate pricing outcomes, and in an uncompetitive market, which this is, they do not provide value. They are admitting that they do not price the cost, that they can pick it out of thin air whatever their value is and set whatever price they deem fit. And this is an example and some of the struggles for them to justify their rates during the recent hearings typify that.

So let’s talk a bit about the politics of this. You guys were both before Senators from both parties who were asking questions. If you are comfortable speaking to, was there a typical schism across party lines in terms of how this issue was approached? Or is this a rare issue where bipartisan consensus could form? I’d like you both, if you’re comfortable speaking to that, whoever wants to go first.

Doug Kantor:

I’m happy to start. This issue does scramble the normal party lines. Both Democrats and Republicans supported the Durbin Amendment when it passed. Folks from both parties are very interested in what can or should we be doing on credit cards at this point. There’s a sense, especially now, and to a greater extent now perhaps than in the past, that consumers are not well served by this situation, especially given inflation, which I mentioned earlier, that these high costs are really a problem that clearly all of us end up paying for. There does seem to be bipartisan concern. The big hill to climb here is that there are folks who have lots and lots of resources and influence that don’t want change, right, because they benefit from the large fees.

Ed Mierzwinski:

Yeah, I think that’s totally right, and it’s very hard to move the bill through Congress. I’m of the belief that most industry lobbyists are paid not to pass bills but to kill them. It’s an easy way to make a lot of money on Kay Street, which is where all the lobbyists supposedly hang out, although a lot of them are now in flusher parts of Washington D. C. than Kay Street, which is a little bit down market. And a lot of public interest groups have moved in. But it’s easier to block legislation. That’s what most lobbyists are paid to do. So it’s going to be a big lift. But we can talk about it and talk about the way the consumers benefit from it and talk about the way the merchants are being treated unfairly. I think there is a moment to expand the Durbin Amendment and to restore some more competition to the broken payment system markets. Again, Senator Durbin teed up by holding a hearing because Visa and MasterCard said, “We’re going to raise our fees, you can’t do anything about it.”

Jeff Shinder:

Let’s step back for a minute. I want to start with Doug and then I want to go to Ed. We have a broken system. Congress is looking at it now. We’ve talked a bit about the Durbin Amendment. 12 years ago, Congress acted and there are lawsuits, and we’ll come back to some of the lawsuits on this issue as well, but let’s situate for our listeners, what is the underpinning of this problem that has persisted for decades? Why is this market so broken? We’ll start there, and then I’m going to turn to Ed and talk about how this really affects consumers. But Doug, if you could spend a minute explaining from your perspective, what’s the problem here?

Doug Kantor:

Yeah, the basic problem is actually pretty simple. Visa and MasterCard are just networks that connect banks on two sides of a transaction. They connect the bank that gives a consumer their card with the bank that does business with the merchant, or the merchant’s processor, they fill the same role. They’re just running data back and forth, but they’ve taken on a bunch of other roles. The other roles they’ve taken on is, one, setting the prices of the bank that gives the consumer their card and then setting a bunch of what they call rules that insulate the whole system from any actual price competition and often price transparency, and consumers don’t get pricing queues.

That’s the central problem, is there are these gigantic banks, we all know the names, Wells, JPMorgan Chase, Bank of America, Citi, you can go on and on, they are huge businesses, they should be able to stand on their own two feet like other businesses, like the corner convenience store that I represent, and set their own prices. It doesn’t seem like it would be that hard, but instead, they all let Visa and MasterCard do it for them, and they don’t then compete on their pricing. That’s the central problem that causes, as you noted up front, Jeff, this industry to have as much or more antitrust focus than any industry in the United States.

Jeff Shinder:

And just so our listeners understand, the price that you’re talking about is the interchange fee that was discussed at the hearings before Senator Durbin, was the subject with debit regulation, and that’s a fee that the merchant pays to the bank that distributes or issues the card to the card holder. Is that right, Doug?

Doug Kantor:

That is exactly right.

Jeff Shinder:

And so, Visa and MasterCard, they’re not setting the annual percentage rate, they’re not setting APRs or annual fees on credit cards to the card holder. It’s the fees to the merchants.

Doug Kantor:

That’s right. These big banks compete on every other aspect of their business, right? They compete for consumers on rates, fees, on checking accounts, savings accounts, credit and debit cards. It’s just when they turn to the merchants that suddenly they lock arms and say, “No, no, no, we’re not going to compete here. We’ve got other people to set the prices for us this time.”

Jeff Shinder:

And so, that sets up the problem, and now I want to turn to you, Ed, and ask a variant of why has this galvanized you so much, but I’ll ask it in a different way. How does this affect consumers?

Ed Mierzwinski:

Well, it’s a non-transparent, non-negotiable system. Non-transparent to both consumers and merchants partly because of the rules that are imposed on the merchants that Doug could talk about all day and all night, hundreds of pages of rules that lock the merchants in. The merchants cannot signal to consumers that, “Hey, do you want to use cash? Could you use a lower cost card?” Consumers don’t have any idea what’s going on behind the scenes of this system. And as I like to say, this simple explanation is all consumers pay more at the store and more at the pump because swipe fees imposed on merchants are passed through to consumers because their merchants are forced to bake the costs of bank fees into the prices that all consumers pay, including cash customers.

So cash customers, obviously the lowest income probably, consumers at any store because they don’t have a card to pay with, they’re subsidizing rewards, among other things, that mostly what the swipe fees pay for is rewards. And what are rewards designed to do? Rewards are designed to get card holders, to run up bigger balances and spend more money. Ideally, they don’t like transactors. A transactor is a person who uses a card and pays off their balance every month. The banks would prefer that all consumers run up balances and run up credit card interest. But the problem here again is very simple, it’s all consumers are affected, not just cardholders, and we all pay more at the store and more at the pump because of a broken system.

Doug Kantor:

The interesting thing I would just add to Ed’s point, just in the week of the hearing, this group called the Hispanic Leadership Fund put out a study. They found that because of the fees and rewards in the way Ed talked about, how the card networks set these pricing restraints, there’s a transfer of wealth from people who can’t get a card or maybe have a card but not a rewards card. People who make under $75,000 a year in the United States transfer three and a half billion dollars a year to people who make more than $75,000 a year. The majority of that is to people at even higher income brackets, those who make more than $150,000 a year. And that’s all completely invisible to these folks, and unwilling. It happens automatically through the way the credit card system is designed. And this is the third in a series of reports. The Boston Federal Reserve found this. There was another group, the Hispanic Institute, that studied this a decade ago. It’s a clear outcome of the way this system’s been set up by Visa and MasterCard, and it’s not something most of us would think makes sense.

Jeff Shinder:

What I’m hearing you both characterize is a fundamentally regressive system where the forces of competition, at least with respect to merchants, do not exist, do not operate. So that frames the problem. Can you compare the state of affairs in the United States to other major OECD jurisdictions that have looked at this issue? If one of you could speak to the US market versus Europe or Australia, some of the other major jurisdictions that have examined this question?

Ed Mierzwinski:

Well, I was just on the phone… actually on a Zoom call not the phone… with my international colleagues in Europe. We talked quite a bit about competition issues. The European consumer groups cannot figure out why their interchange rates on both credit and debit are less than or approximately one-tenth of the rates that we pay in America. Europe passed in around 2013, 2014, the IFR, the Interchange Fee Regulation that applies to all bank cards. They have a robust credit card marketplace in Europe, and the banks are only getting 10% of the interchange because of reasonable regulation. Australia, same thing. Canada is another place.

If you look at maps of the world prepared by government agencies, by the way, and other consultants, you’ll see that our rates are among the highest in the world. The countries that we are near are not OECD countries, which are industrialized, consumer-based economies. They are mostly surprising countries that we share the rates with. Doug, I don’t know if you have anything to add, naming some of those countries. I don’t have a printout of the list, but it’s astonishing to look at.

Doug Kantor:

Yeah, it’s remarkable that there are a number of countries around the world that have taken regulatory action of one form or another to deal with these fees, reduce them, or make them more competitive, and those countries all have much, much lower fees than we do. But there’s even countries that have done nothing, frankly, whose fees are much lower than they are in the United States. And it just goes to the incredible stranglehold that Visa and MasterCard have over the market here in the United States that they can dictate things that they even to a greater extent than they can elsewhere around the world, and we’ve been slow to react.

Jeff Shinder:

Let’s drill into that a little bit more deeply. So, the US rates, as you guys are describing it, are considerably higher than most comparable countries in terms of their economic structures. Why is that the case? I understood, Doug, you just said that Visa and MasterCard’s stranglehold on the market is greater here. Okay, what explains that, and are there deeper reasons than that that actually explain why this problem persists in a unique way in the United States, notwithstanding its regressive tenor that you guys very nicely described a few minutes ago? So Doug, you start, but also, Ed, I’d like you to comment as well.

Doug Kantor:

I think there’s a couple of things. I think one is Visa and MasterCard started here, and that gave them a head start in building that stranglehold on the market, which they have perfected in ways here that are pretty remarkable. But in addition to that, look, as I said, other nations have taken some actions to try to rein this in because they recognize the way these fees get imposed isn’t competitive and has some problems. The US does tend to be more libertarian on these types of regulatory issues a lot of the time, certainly more so than Europe. And that’s played out here and has meant that US regulators and the Congress I think have been slower to react and have more of a tendency to wait and see how the market plays out. What we’ve seen here is that that hesitation has huge consequences for the way the market develops. If you look at, for example, the difference between credit and debit cards, Visa and MasterCard were able to use a market power position in credit cards and bootstrap debit cards to it to get debit cards to really have a prominent position very quickly here. That’s really been to the disadvantage of merchants and consumers over time. And so, those delays do you have really big consequences.

Ed Mierzwinski:

Yeah, I would certainly say everything that Doug said I agree with, but I would also just say simply that the market power that you talked about, Jeff, earlier, market power translates in the United States into political power. And the banks, they got so out of control they wrecked our entire economy in 2007 and 2008. And still, it was very hard to get the Wall Street Reform Dodd-Frank Act over the finish line. Like I say, it was a lot of work. Even though the banks were down, they still had a lot of political capital, and their political capital has been built up over a number of years. They’re a very powerful special interest. Wall Street thought they were the masters of the universe until they destroyed the financial universe in the United States, but the banks still have a lot of power in this country. That’s really it. We’ve got to fight back, and that’s why I’m pleased that Senator Durbin has reopened political debate on this issue. It’s a perfect time to do it because, as you see, the banks are making money without doing anything because of inflation.

Jeff Shinder:

If I may just tack my own comment on top of what you both said, which I generally agree with, but especially picking up on, Ed, what you just said. I think it’s important when studying the United States market and what marks it is unique is a relationship between a small number of big banks and Visa and MasterCard. It’s important for our listeners to understand, Visa and MasterCard were owned and controlled by the banks from inception. They became public companies, MasterCard in 2006, Visa in 2008, largely to avoid antitrust issues inherent and competing banks owning and controlling them and setting rules that regulated how they competed. Those rules haven’t changed. The banks still basically run them. And it’s a small number of banks, Chase, Bank of America, Wells Fargo, Citibank, Capital One, U. S. Bank. And that differentiates the United States the power of those banks, power of them in Washington that plant their power to basically control Visa and MasterCard and keep the same old, same old going, and they’re addicted to interchange.

They’ve been addicted to interchange for decades. They like their interchange. They don’t have to do anything for it. So let me ask you guys the following. So reframe the problem from the birch into the consumer perspective, what do you think will solve it? What’s necessary at this point? So Congress is looking at this again. There are investigations happening. There are lawsuits happening. It takes a village. It’s going to take a village to slay this dragon or put differently a holistic strategy. What do you think is going to fix this problem? I’d like you both in whatever order you want to take on that question.

Doug Kantor:

Yeah, I think one way or another we need actual competition here, competitive pricing. That’s going to mean changing some of the rules and some of the ways Visa and MasterCard do business. As to how that comes about, I’m not sure there’s one silver bullet. Frankly, look, there’s very significant private litigation that’s been going on for quite a while. There are significant regulatory actions, both at the Federal Reserve and with investigations at both the Department of Justice and at the Federal Trade Commission. And then there’s legislative interest, as shown by this hearing, in having some reforms and perhaps looking more into what they can do.

The answer may have to be pieced together from all of those things. It may be that one of them really comes to the forefront and helps solve this issue more than the others, but there’s so many problems. And frankly, when you look at Visa and MasterCard’s practices, there’s layer upon layer of… I don’t know if there’s more things than belts and suspenders that you can put to make sure there’s no competition in this area. But somehow we’ve got to get through at least some number of those layers so that price queues happen, pricing competition happens, and we have a real market system here for the first time ever.

Ed Mierzwinski:

Yeah, I think that’s totally the right answer. I think it’s probably going to take a lot of different actions to go forward, but I’m encouraged by President Biden’s restoration of antitrust and competition as an issue that’s important to America. He has appointed people to run the Federal Trade Commission and run the Department of Justice and this antitrust division who are revitalizing the work that had been largely stymied for years as those regulatory agencies under both Republican and Democratic administrations in the past. But I’m excited about what’s happening on this issue and many other issues of competition going forward. I think it will take private and government administrative actions in the antitrust. And also, competition is now something that is talked about as something that this administration cares about. That’s important.

Jeff Shinder:

What is interesting in both of your answers is the absence of new technologies slaying the dragon. And if I may make a comment on that, as an antitrust observer, it is often technology is the greatest giant killer of all. But in this industry, you have things like Apple Pay or Google Pay and the notion of a digital wallet coming along. Tremendous companies in terms of their financial wherewithal. They can come into market with something new and interesting, and neither of them are competing against Visa and MasterCard. Instead, they’re essentially acting as so-called pass through wallets, which essentially passes through the same rules, the same fees, and just rides on the infrastructure of Visa and MasterCard, which is extraordinarily telling as to the durable nature of Visa and MasterCard’s market power.

And so, we see all of these changes, the IPOs, which I said before, were supposed to be about avoiding antitrust liability, but no one’s fooled. They were just an act of trickery to keep the same cartels and structure in place. Chip-based cards have happened, that hasn’t changed anything. Rise of digital wallets. Nothing has dented the current system, and here we are back in front of Congress. Let me close with the following question that I want you both to speak to, which is, what’s next? What do you see? Where do we go from here? Hearings happened, what do you see the next big moment in this ongoing fight against Visa and MasterCard and their rules and rate structure?

Doug Kantor:

Look, I think the next big moment could actually come from any of those forums. They’re all at this interesting point. Whether it’s the Fed’s regulations, litigation, legislative, they’re all on the precipice of potential action that could be quite significant. I don’t precisely know what’s next. What I do think I know is that the current system is unsustainable. It is so bad and the problems are so clear that there has to be change. I think there will be several of those forums that will have very significant actions in the near future because the pressure is getting too obvious, the problems are too clear. Look, we didn’t talk about these numbers, but just with inflation and other things, the fees have gone up for some of our folks by 27% in the last year. That’s on top of them being so high that folks were screaming already. So something has to give, and we think it will soon. As to where is anybody’s guess.

Ed Mierzwinski:

Well, I think maybe the catalyst is going to be this outrageous inflation that’s going on in this country and the fact that if we haven’t made it clear yet that the credit card networks, Visa and MasterCard, control interchange and interchange is set on a percentage plus basis. So when gas prices double, and I know they haven’t doubled a lot of times, but they’ve doubled over the last few years, when gas prices double, Visa and MasterCard’s big banks get interchange fees that doubles, because it’s set on a percentage basis. And so, they’re contributing to inflation without making anything new, without creating any new tech, without doing any work. And that’s something that I think is going to be what changes here, because consumers are angry about inflation. And when they find out that they’re paying more at the store and more at the pump but the gas company isn’t getting the money and the merchant isn’t getting the money, the bank is getting the money. We just need to tell that story a little bit better because that’s, I think, a much easier story to tell than a lot of other stories in this broken market.

Jeff Shinder:

Okay. We will end on that note. That’s appropriate that we end with the consumer, because this is ultimately where the impact is most acutely felt even though, Doug, your constituency is dramatically harmed as well. Thank you both for a very interesting discussion. There’s a good chance as time evolves, as this issue continues to percolate that we will have you back. But for now, thank you both, and good day, everyone.

Doug Kantor & Ed Mierzwinski:

Thanks.

Jeff Shinder:

That’s all for our show today. If you like the podcast, make sure to subscribe to Antitrust Matters and leave us comments on how we were doing or on the topics you would like us to cover going forward. You can also follow us on or follow the 91pornantitrust team on . Until next time, be well, and remember antitrust matters.

Read Antitrust Matters Episode 8: Antitrust Matters in Electronic Payments at constantinecannon.com

Antitrust Matters provides engaging and timely conversations about competition policy in the digital age. Antitrust has always mattered to consumers and businesses, and to antitrust lawyers and economists, but today it also is in the political and public discourse more than ever. From the prices we pay for food, travel, financial services, payments to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. Antitrust Matters brings you you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going and why it is so important to our current political discourse.

In this episode of Antitrust Matters, Jeffrey Shinder and Taline Sahakian discuss current antitrust policy debates and enforcement trends with Diana L. Moss, President of the American Antitrust Institute.

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Episode Transcript and Show Notes:

Jeff Shinder:

Welcome to Antitrust Matters, the 91pornpodcast where we have engaging in timely conversations about competition policy in the digital age. My name is Jeff Shinder, and I’ll be your host.

Antitrust has always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates to how we travel, to the way we interact daily using digital apps and platforms. Antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more than ever before.

Hello, everyone. We’re back for another episode of Antitrust Matters, and we’ve got a terrific guest today to broaden and continue the discussion about why antitrust matters, why it matters so much today, where it is going, where it has been, or in some cases not been, and what it all means for competition policy and consumer welfare going forward. We are thrilled to have on the podcast Diana Moss. Diana Moss has been the President of the American Antitrust Institute since 2015. Her work spans both antitrust and regulation. Prior to joining AAI in 2001, Dr. Moss was a Federal Energy Regulator at FERC, where she coordinated the agency’s economic analysis for electricity mergers and worked on landmark open access rules. From 1989 to 1995, she consulted in private practice in litigation support for regulatory and antitrust matters. She’s adjunct faculty in the Department of Economics at the University of Colorado at Boulder.

Dr. Moss has spoken and published widely, testified before Congress, appeared before state and federal regulatory commissions, and made numerous radio and television appearances. She was named to the GCR’s Women in Antitrust in 2016 and 2021 and inducted into the ABA Antitrust Laws Section Hall of Fame-inism 2021. Diana, welcome to the pod. Would you prefer to be called Dr. Moss or can I call you Diana?

Diana Moss:

Oh, absolutely Diana. And thank you so much, Jeff and Taline for inviting me on your program today.

Jeff Shinder:

Well, thanks for coming.

Taline Sahakian:

Good to have you.

Jeff Shinder :

I’m joined by my partner, Taline Sahakian. So Diana, let’s start with the current debate about antitrust, antitrust law, antitrust policy. If you could just frame the discussion to start, and then we can go from there.

Diana Moss:

Absolutely. So great time to have this conversation. Antitrust is in an exciting period right now and has been for the last several years. It’s also a very chaotic period for antitrust. How the debate around declining competition, rising concentration, antitrust reform, competition policy is evolving in the US is very, very different than how it is evolving in other parts of the world, especially in Europe. So we’re dealing with a very interesting fact pattern and a very interesting spectrum of ideologies that are driving this debate.

So I think the whole motivation for concerns around declining competition and the importance of strong antitrust enforcement really stems from a mounting pile of evidence, economic evidence that shows that most likely 40 years of lax antitrust enforcement has contributed to a rising concentration in critical markets, growing gaps in wealth and income between different sectors of the economy and between consumers and corporations. We have seen the exploitation of labor as a result of the development of very powerful buyers of labor. So the list goes on and on.

We’re seeing lots of economic indicators and analysis coming out of labor economics, industrial organization economics, macroeconomics, all of which point in the direction that we have a competition problem in the United States. But that is not widely accepted to be true. So for example, detractors or critics of the proposition that we have a competition problem will say that, “Well, rising concentration could be the result of other factors. For example, technological change, economies of scale and scope, and globalization of certain businesses”. And those are all valid concerns and should absolutely be considered. But we now have enough evidence that lax antitrust enforcement, especially in allowing dozens, if not hundreds of thousands of mergers through, often successive mergers in the same markets has really eliminated competition sequentially over time where now we have certain markets that are just dominated by two, three, four competitors.

So that’s the lay of the land. And of course, AAI has been advocating for stronger enforcement for 25 years.

Taline Sahakian:

So, we hear often about the Chicago School. Can you talk a little bit about the ideological spectrum of how people are viewing this moment in time and how that affects their view of reform and what should be done, I guess, in the future?

Diana Moss:

So that’s a really good question to dovetail with what I was just speaking about. And I think the answer is the ideological spectrum in antitrust has really expanded over the last say five years. We used to have a two-ended spectrum. We had what I would call the far right, which was dominated by Chicago School thinking, mostly oriented around the proposition that most mergers are pro-competitive, most practices pro-competitive except for the per se illegal types of conduct that we worry about in antitrust, and that type conduct and mergers should really be evaluated on an ad hoc basis. And that really shaped a very light touch, a laissez faire approach to enforcement of the antitrust laws in the United States. And my view as an advocate, is that laxity in enforcement has really contributed significantly to a concentration problem that we see today. So we’re now seeing the fallout of 40 years of lax enforcement.

The other end of the spectrum used to be on the left end were the progressives, folks like AAI, and AAI started this whole advocacy movement in competition, policy and enforcement 25 years ago. We were the first ones out to be advocating for stronger enforcement because we were beginning to see evidence of concentration and declining competition problems. So the progressives took a very, very different view, but there was really no middle. And the fight was long and hard. And it was like pushing boulders uphill for two decades to shine the light on how enforcement, how important it is and how it can be improved both at the federal, the state and at the private levels. Those are all very important prongs of the antitrust enterprise.

We now have another voice on the spectrum, which is even further to the left. Those are the so-called Neo-Brandeisians, who interestingly are not folks that come in from the antitrust community. These are former journalists, former reporters, policymakers, who are very concerned about declining competition much like the progressives, but who have a very different view of the role of the antitrust laws in terms of an expansive view of the design of the laws to control political power, corporate power and its translation through economic power. So a very, very broad view of the role and the design of the antitrust laws.

And so the Neo-Brandeisians, who have injected a lot of liveliness in the debate and certainly a lot of proposals for antitrust reform, have really stretched the spectrum. So what has happened is the former left end of the spectrum has now been pushed more to the center left of center of the spectrum.

And it really all boils down to what are the asks. The far right is asking for nothing. The status quo, weak enforcement is great. The center, center left progressives like AAI are advocating for much stronger enforcement of the laws, more presumptions in the laws, horizontal presumptions, vertical presumptions, presumptions around acquisitions of nascent competitors, strengthening, modernizing, clarifying the laws. Very much along the lines of what Senator Klobuchar has proposed in her CALERA bills, and certainly preserving the vital role of private enforcement. The Neo-Brandeisians on the other hand are really calling for major overhauls of the antitrust laws.

Jeff Shinder:

Okay. So there’s a lot there that, Diana, that I want to follow up on, but before we actually follow up on some of the specifics, I want to put a finer point if you can and why this matters. To much of our audience or at least some of our audience may come off as a bit of an esoteric discussion. And you’ve said a few times we have a concentration problem. And the concentration problem, I believe summarizing you correctly, it’s your view that lax antitrust enforcement has contributed if not caused that concentration problem. And so my question is a simple one. What’s the problem with that? Big companies are better equipped to build mouse traps or scale economies are necessary, or big companies are necessary to compete in global markets. What’s wrong with a concentration problem? Why is it something that is a problem that’s causing all this ferment in terms of we need to amend the laws?

Diana Moss:

Yeah, that’s a good question, Jeff. And it’s one that we certainly tackle a lot in doing the work of the American Antitrust Institute. I think the first response is a lot of the counters or the pushback to concerns over rising concentration really are not based in good economics, business, legal theories.

So for example, the contention that companies have to be big to innovate, they need the deep pockets to be able to innovate and bring better more products to consumers. That’s just not true anymore. We have looked at research in multiple sectors, food and agriculture, for example, and elsewhere, that says that companies have actually cut back on R&D over time. In fact, total factor productivity in the US is generally on the decline. And so there is not a matchup between the pace of innovation and the growth in the size of companies. So that’s not really holding up either. The whole argument around global footprints and the need for companies to be larger, to be able to compete globally, that pushback doesn’t really hold a lot of water either because US antitrust laws, much like any other jurisdiction, are going to be focusing on harm to competition in well-defined antitrust markets, which absolutely can affect US consumers. So just a couple of examples that really shoot holes in some of these conventional rebuttals to concerns over rising concentration.

The reason why all of this matters is a really simple one. And I talk about it all the time when I speak publicly. And that is we have a market-based economy. The United States was the first market-based economy. It is the leader, continues to be the leader in many aspects of growth and innovation and expansion. And without markets, which are supported by robust competition, we will not have a market-based economy. And most important, we will not have or support the democratic principles that support markets. Markets are all about entrepreneurial freedom, consumer freedoms, the ability of trading partners to come to market, to strike deals, to bargain, to get high-quality, low-priced products and services.

And when you don’t have competition in those markets, it begins to erode the democratic principles upon which markets rest. And that, of course, goes to the entire political economy system in the United States. So when you have markets that are dominated by large firms and tight oligopolies of firms, you lose. In losing the competition, you’re also starting to peck away at the underlying democratic principles that support markets. That’s why every single consumer in the United States, every single small business should, and these are all voters, citizen voters should care about our market-based system and the enforcement of the antitrust laws.

So I always say the antitrust laws are really esoteric wonky part of the law, but they have an out sized impact and importance in our market system.

Jeff Shinder:

So you said something interesting that I think merits follow up, which is the relationship between a market economy and democracy, which has a long tradition in antitrust, which our listeners may or may not appreciate. Do you feel that something like Facebook or Twitter banning speakers off from the right, which has been something picked up by Senator Hawley in terms of his support for an antitrust reform? Do you feel those are examples of the relationship between decline in competition, market power and democracy, even if it is political speech that was implicated that, at least speaking for myself, I will not speak for you, Diana, I did not care for? Do you feel that’s a good example of that or are there better examples?

Diana Moss:

Yeah, I think there are better examples, Jeff, honestly. So I will say controversially that really the only reason why there is GOP support for some of the reform bills in Congress right now is because… Well, first of all, they’re all directed at big tech and we can talk about this later. Why are our antitrust reform bills almost all exclusively directed towards one sector and in particular, certain players in that sector. It’s a very unusual way to approach antitrust reform when we have so many other troubled sectors. Healthcare, pharmaceuticals, food and agriculture. So that’s one important point. But I think the answer is that the issues raised by big tech, don’t all fall into the antitrust bucket. Some are competition issues and some are not competition issues. We have privacy concerns. We have social impact concerns surrounding big tech, free speech issues. The reason why the GOP is supporting those bills is because of the free speech issues on the platforms during the last presidential election.

That is a very narrow focus for the GOP to have in supporting those bills. And so that’s why we watch those bills carefully as they make their way through Congress and getting or not getting bipartisan support. And that story is not over yet. The answer with big tech is antitrust can’t fix all the problems with big tech. We can certainly address issues around discrimination on platforms, frustrating the ability of app developers and third party rivals to sell on eCommerce platforms or to get placement and search results. There is definitely a role for antitrust in that, but there’s also a role, a big role potentially, for sector regulation. Digital tech has enough problems to lend itself to a sector regulatory approach, but there’s also privacy law. And so the whole free speech issue in my view is a section 230 issue where we need the FCC to really look very carefully at who is a content moderator and who is not a content moderator.

So unfortunately digital tech is not a great example of necessarily how the antitrust laws can address bigness. And I don’t think in the public debate that it has been made very clear to the public that antitrust cannot fix all problems in big tech. Now, if you go to another sector like the beef packing cartel, where we have four beef packers who are lowering prices to ranchers and jacking up prices to consumers, and if you go to the health insurance sector where we have only a few major health insurers, or if you go to the pharmaceutical sector where we’ve had massive consolidation, then you’re really talking about the ability of antitrust to more directly and more effectively address those competition issues.

Taline Sahakian:

So you talked to, Diana, about the lax enforcement leading to problems and consolidation. Are there any sectors in particular that you think are more troubled as a result of the lax enforcement and what do you see as the best reform paths for some of those? If you can give us some examples, whether that’s legislative or other types of reform.

Diana Moss:

Right. So again, Matt, the solutions are going to have to be part of a bigger public policy approach. Public policy problems are by definitions, such big problems that affect so many people that a government response has to be a coordinated response across different policy tools. And this is what we heard in the President Biden’s executive order. This whole of government approach, where there would be coordination across different prongs of government to promote competition. But what we’ve seen generally over the last 40 years is really incredibly lax merger enforcement. Deals have gone through at an incredible rate. The government does not have the resources to litigate very many deals. So what we have seen in merger challenges over time is the government has settled more mergers with consent decrees containing remedies like divestitures or conduct remedies versus dealing with challenge mergers by going to Federal Court to get a preliminary injunction.

So there’s this gap between how challenged mergers that raise concerns as a violation of section seven of the Clayton Act are dealt with by the government. And that’s a resource concern, but it’s also the result of conservative ideology really hijacking the enforcement process for many, many years. Certain sectors have been really impacted by this lax enforcement. So for example, in pharmaceuticals, AAI did a big study. The FTC is approved 67 pharmaceutical mergers of branded and generic drugs, subject to divestitures. Many of those divestitures have failed. And what we have found is a shrinking group of branded drug manufacturers, a shrinking group of generic manufacturers, many of which are now defendants in public, federal and state, and private antitrust litigations. And some of those violations are criminal indictments in price fixing cases. Okay, so the pharmaceutical industry and the FTCs merger policy is very, very broken.

In food for example, especially in the middle part of the supply chain in food processing, whether it’s grains or proteins, in food manufacturings, in manufacturing retail grocery, we’ve seen an incredible amount of consolidation. The FTCs policy in retail grocery, not a great policy. The divestitures in Safeway, Albertsons failed and all the stores reverted to the original owners. We are down to four beef packers. I think, as I mentioned earlier, those packers are now the subject of investigations in private cases. And the impacts of that consolidation are enormous. We have thousands of ranchers who are getting lower prices for their fed cattle and consumers who are paying high prices for a box beef.

We’re down to two PBMs, Pharmacy Benefit Managers, that account for over 50% of the market. That directly affects drug prices for consumers. We’re now looking at a merger on deck for yet another airline merger between the two ultra low cost carriers, Frontier and Spirit, which would follow on the tails of already massive consolidation in the airline industry. So I think the bottom line is lax merger policy has really drives a lot of competition problems. And when you have lax merger policy, that’s how tight oligopolies are created. That’s how dominant firms are created. So section seven is really the first line of defense in protecting against monopolization and conspiracies.

Jeff Shinder:

Okay. Before we get to what do we do about all of this, Diana, you just did a fantastic job dissecting and discussing some important industries that touch everyone that have been affected by lax merger enforcement. Forgive me for this, but I still want to pick at what hasn’t happened before we address what should happen. And so you focused understandably, to offer my own views, on lax merger enforcement. But I’m curious to hear whether you think lax antitrust enforcement has permeated other aspects of the antitrust laws. For example, we have not had a lot of section two jurisprudence of any consequence, really since Microsoft in the late nineties at a time when some dominant companies have arisen that arguably could have been subjected to section two enforcement. And there may be other examples where you think antitrust enforcement at least public has failed and has contributed to the situation we find ourselves in today.

Diana Moss:

Yeah. So if you were to unpack the three major areas of enforcement, it would go something like this. The most troubled area of enforcement, I actually think is section two. As you just pointed out, Jeff, you can really count the number of section two cases, public cases on two hands over the last couple of decades. Section one cases, conspiracies. DOJ has an active criminal cartel enforcement program. That was the subject just recently of AAG Kanter’s speech at the International Competition Network Annual Meeting in Germany. There’s a lot of cross border coordination on cartel enforcement and leniency programs, but that’s very low hanging fruit. Smoking gun conspiracies to fix prices and allocate markets, that does not pose enormous evidentiary types of burdens on plaintiffs. Merger control, section seven has been, as I have explained, pretty weak.

We’ve now seen more section two cases filed, public cases. The state’s case against Facebook. We have federal cases against Google and Facebook. DC filed a case against Amazon. I think that was just recently dismissed. So we are seeing more section two cases. Section two law is very troubled. The standards for showing monopolization are extremely difficult. Extremely difficult. The hurdles are incredibly high, and that is a theme that permeates all of antitrust. How the standards for plaintiffs, whether it be the government or private plaintiffs to show violation are rising, rising, rising. We see this even in section one cases, private cases. We follow the decisions and the court decisions very carefully and courts are absolutely pushing up the standards for showing collusion in private cases. That is supposed to be one of the easiest areas of antitrust law to bring cases in. So that’s not a good development, either. The section two cases that we’re seeing, especially the big tech cases, those are going to take a long time to work their way through the courts.

So that raises a question about whether antitrust, especially in digital tech, certainly an important tool, but it could be bootstrapped by other tools like sector regulators of regulatory regime, to look at discrimination problems on the platforms. And so it puts us in a mode where, “Yep, we’re getting more section two cases. The standards are still very high. We have promises of stronger merger enforcement from the Biden enforcers. We have rising standards for showing collusion in private section one cases”. None of these are very good developments, or at least we don’t have enough data points yet to really indicate if progress is being made.

Taline Sahakian:

So in terms of promises of, or more enforcement, we have seen an uptick in filing of merger challenges. There was the book publishers, there was another merger in the sugar industry, another… So do you see any light at the end of the tunnel in terms of section seven enforcement, or do you think those cases are going to face some difficulties in court?

Diana Moss:

So the question of whether we’re going to see more section seven enforcement in terms of movement by public enforcers to seek a preliminary injunction is really a function of a lot of variables. I call it a multi-variate optimization problem. The government has to really think carefully about this, and I’m sure Lena Khan and Jonathan Kanter are thinking carefully. So the government’s calculus when it comes to challenging allegedly illegal deals is a function of the cost of litigation, litigation risk. The government doesn’t like to lose in Federal Court. And that has been a longstanding concern and problem for the FTC and the DOJ. It’s also a function of bringing states onto federal complaints in merger cases. If DOJ challenges the spirit frontier merger, it’ll be very interesting to see which states sign onto that complaint. It is a function of other cases that the government could be potentially moving to block and the likely success rate versus other cases that might have a lower success rate.

But the bottom line is it takes time and money to litigate. And unless the budgets of the agencies are increased significantly, and I think there have been some, there’s obviously been requests for higher budget, it’s going to take a lot of money to litigate these cases. And so we’ll see. We’ll see what happens, but I think it all boils down fundamentally to a willingness for the current Biden enforcers to assume more risk tolerance to litigate cases. That means losing cases in Federal Court. Under the Obama administration for example, I think DOJ won most of its cases it went to court to litigate and that’s good. That’s good strong enforcement. We saw the Obama, the OJ block, Anthem, Cigna. They forced the abandonment of Baker Hughes, Halliburton. FTC for Cisco US foods to be abandoned. There of course, they litigated the fixing court. But I think the real measure, this sounds weird, but one of the real measures of a change in enforcement policy is bringing more cases, but also losing more cases in Federal Court.

I mean, you guys are the expert litigators on the private side. So you know this calculus very well from your side of the equation. My only concern is time is running out. It’s now May of 2022, the Biden enforcers were not installed for quite some time after the Biden administration came in. Who knows what’s going to happen at the midterms with Congress. Who knows what’s going to happen in the 2024 election. But time is running out. Cases take time to litigate and to work their way through the courts. So it really is, time is of the essence in terms of shaping the Biden administration’s enforcement program.

Jeff Shinder:

So let me follow up on that, Diana. You seem, and if I’ve characterized this inaccurately, I know you well, you’ll correct me. So feel free. You seem skeptical perhaps, that public enforcement is going to change things. Maybe skeptical, but hopeful would be a better way to put it. And if that’s accurate, then what is the most likely ways we will see fundamental change to the antitrust landscape that can improve, that can de-consentrate if concentration is the root problem, introduce more competition, more choices for consumers?

Diana Moss:

I think the characterization is right, Jeff. We are very hopeful. As competition advocates, we are very hopeful that the Biden enforcers take a more aggressive approach and it looks like they are absolutely. There’s been a lot of signaling out on merger control. There is the request for information out on the merger guidelines, revising the merger guidelines. That comment date has passed, long past, and they are now going to be processing thousands of comments from individuals, but also advocacy organizations like AAI. Those horizontal merger guidelines are badly in need of some updating and clarification. And we’ll see what comes out of that process. We badly need vertical merger guidelines that are geared towards acknowledging and preventing harmful vertical mergers. So agency guidance is an important part of the whole package. What the agencies do on the litigation front is an important part of the package.

And so we’re very hopeful and very supportive of the agencies. We have a really long history of working with the agencies and the states and private enforcers in a very collaborative supportive way. But I don’t think antitrust is the be all and the end all. It plays a really important role, but the competition problem is significant enough, for all the reasons we’ve discussed that from a policy standpoint, and I’m talking about lawmakers, policy makers, enforcers are going to have to start thinking about the toolkit approach, which is what set of tools are best combined and deployed and harnessed to really get some results in terms of improving the competition problem. And we just haven’t seen that approach in the United States. So I’m talking about strengthening antitrust enforcement through comprehensive reforms. I’m talking about, thinking about sector regulation for digital technology. Not talking public utility regulation, we’re talking access regulation to prevent dominant platforms from exercising market power.

We’re talking about the need for a privacy law in the United States that’s much more coherent than what we have right now. We’re talking about intellectual property reforms. The fact that patent holders can go out after their patent expires and tweak their original patent and get another 20 year patent, that’s wrong. And we’ve seen that in agricultural biotechnology, for example, on transgenic seeds. And so all of these different tools are really important and they all have a bearing on promoting competition pro competitive outcomes. We need labor law in that mix as well, but that’s not an approach that’s been taken in the US. And unfortunately, and this is where sort of some Neo-Brandeisian advocacy comes in. Antitrust is being loaded up with lots of expectations to perform in ways that the laws were not designed to perform in. And one very real concern is that if you load up the laws to achieve outcomes for which they were not originally intended, unless you rewrite them completely and have a massive overhaul of the antitrust legal framework in the United States, that could actually create some significant damage.

Remember all this has to go through the courts. So antitrust ends up in the courts in terms of creating the case law and the precedents and the courts already struggle with antitrust. They struggle with burdens of proof, burden shifting, evidence. They struggle with all of this. So there is a risk that a poorly framed antitrust reform approach will actually create more chaos in the courts than we already have. And so a way to temper that, I think, there is two ways. One is we encourage reform proposals that are truly comprehensive to strengthen, clarify, modernize the antitrust laws. And second, legislators and policy makers really think about deploying these other tools that are available. And we have good examples of that. Digital tech is one sector where that combo toolkit approach would work really well. Agriculture is another sector, USDA has a tremendous amount of authority under the Packers and Stockyards act to prevent things like discrimination and vertical foreclosure of smaller producers like ranchers, for example.

Taline Sahakian:

So there are a lot of bills that are pending in Congress, and there are also some state laws, including in New York, which would significantly overhaul antitrust laws in New York State. Are there any of these that you think are more likely to pass or that we should be watching more closely?

Diana Moss:

Yeah, I’m always reluctant to speculate on the probability of bills passing or not passing, but I do think it’s helpful to put this conversation in the context of the importance of comprehensive coherent antitrust reform at the state and the federal levels. And by comprehensive reform, I’m talking about things like burden shifting. Shifting burden onto defendants to show that for example, in highly concentrated mergers, that there are pro-competitive justifications for that, that would outweigh or counter reveal competitive concerns. Too much burden is on plaintiffs to prove something that hasn’t even happened yet. And mergers haven’t happened yet, but plaintiffs are routinely burdened in federal cases with essentially proving that a merger will be harmful. I’m talking about increasing the number of presumptions about illegal mergers. So we have a horizontal structural presumption. We also need a vertical presumption in vertical mergers. We also need a presumption involving the acquisition of nascent competitors.

Think about all the sectors where firms are getting larger and larger by acquiring their way to largeness. We see this in digital tech. That is the business model. It is growth through acquisition. A lot of those smaller companies that are being acquired, don’t even fall within the HSR reporting thresholds. So it’s all flying under the radar screen and it’s this pretty unrestrained acquisition cycle that we see the digital platforms going through. And the record of merger enforcement and digital tech is dismal. One deal has been challenged out of hundreds of reportable deals, and that was Google ITA in the late two thousands. Okay. So we need burden shifting. We need stronger structural presumptions. We need a private enforcement to be protected, strongly protected, and the ability of private plaintiffs to bring cases and to litigate those cases. The cost of litigation, as you know, are skyrocketing. Standards are increasing.

It is difficult to bring and litigate antitrust consumer class action cases. And by the way, most private cases are section one cases, as you well know. I think almost 90% of private antitrust cases are section one cases, price fixing conspiracies, market allocations. A very small percentage are section two cases. So there’s a lot of things that comprehensive reform could look like. And again, I’ll sight to Senator Klobuchar’s CALERA bills. We have some real concerns about reform proposals, as I said earlier, that simply target one sector and target just a few players in that sector using. For example, in the Senate Bill 2992, the Online Innovation Act basically determines whether a company will be subject to the law based on their market capitalization. How many users? Yeah. And I could list dozens of companies who don’t have market caps of $500 billion, but they do have market caps of $300 billion or $350 billion, who are growing rapidly through acquisition, who would not fall within the net that is cast by that law.

So I think we have to ask ourselves from a policy perspective, do we want comprehensive reform that will strengthen, modernize across the board and across all areas of the antitrust laws? Or do we just want to target specific sectors and players in those sectors? And if we’re going to go that second route, then how about having bills? I mean, this could go on at infinitum. We could have bills that target the largest beef packers. For example, we could have bills that target the two largest pharmacy benefit managers. So that list could go on and on and on, versus reforms that generally clarify and strengthen and modernize the laws.

Jeff Shinder:

Diana, we could go on and on and on, but we cannot. We will have you back though. There’s just too much to follow up on, but I want to close with actually two questions. The first is, you said something to the effect of, “We need to protect private enforcement and being a private enforcer. And we take pride in our private enforcement track record here at Constantine Canada”. I’m curious to know exactly what you mean by protecting private enforcement. So I just want to start there. And then the second question which we will close with is you’ve articulated a dizzying, and I say that in a complimentary way, array of comprehensive options to modernize, reform, improve the antitrust landscape. If you had to pick one, if Diana Moss were in charge, and you had one thing you could do to improve the competitive landscape in the United States amongst the array of options you’ve articulated, which one would it be? So let’s start with private enforcement and I’m dying to know how you would protect our ability to continue doing what we do.

Diana Moss:

Well, you guys are the experts. So I am just here to lend a perspective from the advocacy world. Every six months, AAI and I would really commend this report. We produce what’s called a class action update where we unpack developments in major antitrust consumer class actions. And we identify the issues and trends in the issues that we see over time. For example, class certification issues, standards for showing collusion, which I alluded to earlier, class action waivers, as you know, are a big issue. I mean, the list goes on and on. And the concern over the long term is that these restrictions and constraints on private enforcement are going to reduce the effectiveness of private enforcement as a major, the major vehicle for getting restitution for victims of antitrust violations. As you know, the feds, they can get dis discouragement, they can take penalties, they have a number of remedies at their disposal, but trouble damages is where the real pain is felt in private cases.

And so that mechanism, that mechanism of private enforcement is vitally important to deterrents of future anti-competitive conduct. And so that’s why AAI has for almost 25 years now been a huge supporter of private enforcement. We would also like to see, and we follow this very closely, follow on cases, reverse follow on cases related to public and private enforcement that complementary we think is very important to monitor and to foster. I would also say to anybody out there who’s listening that declining competition, rising concentration is really opening up some important potential avenues for private enforcers. So again, most private antitrust cases involve section one offenses. I would expect and would really encourage people to think about bringing more section two cases. But I would also note that after one big success, in the Dorskins case that private enforcers think hard about consummated section seven challenges.

Again, we have highly concentrated markets. We have tight oligopolies, we’ll just call them domestic cartels, operating in some of those markets and dominant firms that have been created. Say, take Live Nation Ticketmaster. It was a really good example of a merger that reinforced a monopoly in the ticketing market. So I would really encourage folks in the private enforcement community to think about consummated section seven challenges. So we monitor all of this very carefully and we have very strong advocacy on the importance of private enforcement and certainly commend all the work that you and others are doing in this area. It all boils down to providing restitution to victims of pretty significant antitrust violations and promoting the welfare of consumers and of workers and small businesses.

Jeff Shinder:

I can’t let you get off the hook. I asked the second question. One thing, what is the one thing that you would do if you could, amongst everything you’ve talked about today or anything else?

Diana Moss:

Right. That’s a very tough question. I thought I was going to get off the hook on that one. I think if you’re talking about policy changes that would really have out sized impact in terms of competition outcomes… Well, there’s a couple things. You said one thing, but I’m going to say two things, and I know this sounds very wonky and esoteric, but it’s enormous. One is the burden shift. This gets back to the out sized burden that is placed on government plaintiffs, especially in merger cases to essentially prove harm from an anti-competitive merger. And again, merger activity drives concentration. And that’s where we get to the section two cases and the section one cases, because of highly concentrated markets that have become that way largely through M&A. So shifting the burden, I think is really critical. I think if there was a legislative burden shift, putting more burden on the defendants to show that their mergers are not harmful, we would actually see the government prevail in more merger cases.

And there’s a really interesting reason for that and it is this. Most claims of efficiencies in merger cases, whether they’re cost savings or whether they’re more dynamic, consumer benefits and longer term types of benefits that are claimed to come out of mergers, most of that doesn’t see the light of day until the government goes to court because once the government has filed a complaint and they’ve born their burden of showing anti-com effects, then the burden switches to the defendant to roll out these efficiencies claims. And a lot of times defendants prevail in cases on efficiencies claims. A good example is AT&T Time Warner. The judge was very good about putting everything in the footnotes, but it’s pretty clear reading that opinion that the defendants prevailed on an efficiencies claim, and that has happened many, many times in litigated cases. And that threshold is too low for the defendants.

So if the burden shift is made more clear and stronger, and there’s a higher hurdle to get over, I think we would start seeing some really important success on the merger front. And then I think the second wish that I would have is to get more codified presumptions in merger cases. And that’s more than just a horizontal structural presumption. That’s as I said earlier, the vertical presumptions and also the acquisitions of nascent competitors. And I’ll just finish with one last comment and AAI’s comments on the merger guidelines, RFI. We talked a lot about evidence and the importance of evidence, and that is going to be a really important area to watch when revised guidelines come out. The whole business of evidence, it can be very confusing and can be very muddled. There’s direct evidence. There’s indirect evidence. There’s there’s circumstantial evidence.

There’s all sorts of evidence. And AAI is really making the case for developing a more clear, workable lexicon of what kinds of evidence are considered in these cases. But even more important, we believe very strongly that public enforcers need to consider the record of past antitrust violations when it comes especially to merger control. And that includes remedies. So for example, divesting assets to a known cartelist should not be good policy for the DOJ and the FTC. Looking at the record of past antitrust violations, especially criminal violations for example, in a merger proceeding should be important information for public enforcers to consider. So you asked me for one and I gave you three.

Jeff Shinder:

Well, that was fabulous, Diana. Thank you very much for a fascinating conversation. We had a lot to follow up on. So we’d love to have you back. Before we can conclude today, you have your own podcast over at the AAI, and I’m happy to have our listeners go discover it. There’s no better place for antitrust thought leadership than the AAI, which should have been dramatically demonstrated to everyone in the last hour. So if you want to put in a plug, please do so before we can conclude and tell people where to find it.

Diana Moss:

Absolutely. AAI’s podcast, which right now is top ranked in competition podcast out of, I think about 10 or 12. And I’m sure your podcast is on there as well, Antitrust Matters. We have been around with our podcast for about two years now and we cover everything. I just did a recording with the Texas Corn Growers Association and somebody from Texas A&M on rising fertilizer prices. There is a fertilizer cartel, and that directly affects prices of corn and raises other competitive issues. We’ve done podcasts on beef. We’ve done podcasts on litigation funding. I have interviewed Senator Klobuchar and Bill Behr on these podcasts. There’s really something for everyone on there. And I’m just thrilled that you guys are doing this because I think it adds an important voice and very important perspective and expertise to this big conversation we’re having in the United States about the importance of competition in the antitrust laws. So the more the merrier.

Taline Sahakian:

Thank you.

Jeff Shinder:

Touche. Thank you very much. And we’ll talk to you soon. Thanks Diana.

Diana Moss:

Thank you both. It’s been a pleasure.

Jeff Shinder:

That’s all for our show today. If you like the podcast, make sure to subscribe to Antitrust Matters and leave us comments on how we were doing or on the topics you would like us to cover going forward. You can also follow us on or follow the 91pornantitrust team on . Until next time, be well, and remember antitrust matters.

Read Antitrust Matters Episode 7: Discussion with the AAI’s Diana Moss at constantinecannon.com

Antitrust Matters provides engaging and timely conversations about competition policy in the digital age. Antitrust has always mattered to consumers and businesses, and to antitrust lawyers and economists, but today it also is in the political and public discourse more than ever. From the prices we pay for food, travel, financial services, payments to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. Antitrust Matters brings you you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going and why it is so important to our current political discourse.

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Episode Transcript and Show Notes:

Jeff Shinder:

Welcome to Antitrust Matters, a 91pornpodcast, where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder, and I’ll be your host. Antitrust is always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates, to how we travel, to the way we interact daily, using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more ever before.

Good morning, everyone. We are today going to discuss an industry that has seen a lot of antitrust attention over the years. And that’s the NCAA and college athletics. This is a topic that has engendered a lot of discussion and commentary going back decades. The Supreme Court weighed in the 1980s, establishing general pro-competitive justification for the NCAA’s conducts under the guise of the student athlete and amateurism and cases over the last 30 to 40 years have relentlessly, and to some degree chipped away at that the veneer, exposing a competitive problem, a social problem, and the exploitation of college athletes and all of the issues and ill associated with the NCAA’s practices. So we’re here to discuss those issues today, I’m joined by my partner, David Scupp, David welcome. And our guest today is Professor Ellen Staurowsky. Ellen is a professor in sports media, in the Roy H. Park School of Communications at Ithaca College.

She is internationally recognized as an expert on social justice issues and sport, which include gender equity and Title IX pay equity, and equal employment opportunity, college athletes rights, and the exploitation of college athletes. The faculty role in reforming college sport, representation of women in sport, media and the misappropriation of American Indian imagery in sport. She is co-author of the book, College Athletes for Hire: The Evolution and Legacy of the NCAA’s Amateur Myth and editor and author of Women and Sport: A Continuing Journey from Liberation to Celebration. Ellen, welcome to Antitrust Matters. It’s a pleasure to have you on the pod.

Ellen Staurowsky:

It’s a pleasure to be here. Thank you so much for the invitation.

Jeff Shinder:

And David, the floor is yours to open the discussion.

David Scupp:

Ellen, it would be great if you could tell the listeners a little bit more about your background, including your background in college athletics and what your work in academics is focused on.

Ellen Staurowsky:

I’m happy to do that. I started out my career as a college coach, I moved on to become a director of athletics. And then I was fortunate enough with an inquiring mind and got on the cusp of an EdD, to get recruited to Ithaca, actually to work on the academic side where I coordinated their sports music program for about 20 years. And in the course of that work, I was able to take a lot of the lessons that I had learned, and a lot of the things that were of interest to me in terms of college sport. And I was able to put that into my classroom teaching and into my research. And one of the things, especially for the book College Athletes for Hire: The Evolution and Legacy of the NCAA’s Amateur Myth, I worked with Allen Sack who had played formally at the University of Notre Dame and also was on the academic side of things. And we visited the NCAA archives and did a lot of our research around NCAA practices there. And that really laid the foundation for the work that’s continued now over the past three decades.

Jeff Shinder:

Thanks Ellen. So let’s open the discussion by setting the table for the listeners to understand some of the NCAA restrictions starting with what you would characterize historically is the most pernicious and problematic restrictions, what they are, how they work, their impact, and then we’ll go from there.

Ellen Staurowsky:

To start with, we’ve got the compensation issues, which have been the subject of a number of antitrust lawsuits going from O’Bannon to Alston onto House. So those really stem from the 1950s forward with the creation of the athletic scholarship and the codification of that by the NCAA and the intentionality of what they were trying to do there and how that became a regulatory mechanism in terms of athlete behavior by the 1970s, for example, the athletic scholarship, the regulations were such that coaches could award them on a year to year basis. So that became a tool of control in terms of your personnel, either you could push somebody out of the program or you could demote them, or you could threaten them if they were not in line. And there were other kinds of rules that also actually still on the books in terms of misconduct, and what’s called fraudulent misrepresentation and fraudulent misrepresentation effectively.

It explains a lot about why in the 1960s, when college athletes on campuses across the country were protesting, why all of that protest got shut down because fraudulent misrepresentation effectively says, “If you don’t come to practice, then you’re going to lose your scholarship because you fraudulently misrepresented yourself in terms of agreeing to play here.” And so for many, many years, for decades, athletes remain incredibly quiet and I’m not really sure in the age of social media that most athletes are aware of the fact that rule is still on the books today.

So we have that set of rules that really has had a profound effect on athletes. And then along with that, and of course, some of these things are changing over time, but we’ve also had the transfer rules, which really have been a mechanism for controlling the flow of personnel across schools, under what conditions under what circumstances. So those two things in tandem really tell us that this is an industry that’s incredibly invested in controlling a labor force, describing the terms and conditions under which they work and what kind of access they have to opportunity. So I’ll leave it there. And there are other ones as well, but I think for our purposes, those two are probably the most important.

David Scupp:

And one thing that I’m very much interested in hearing you explain Ellen is, I know a lot of your work is focused on Title IX and gender equity issues in college athletics. And can you explain how historically the rules that you just discussed relating to athletic compensation to athletes, the transfer rules, that whole package that you just laid out for us, in what way does that impact gender equity issues in college sports?

Ellen Staurowsky:

I have to say that we’re having this conversation and in 2022, it’s the 50th anniversary of Title IX, coming up in June. And one of the things that I’ve found profoundly disturbing about these conversations around how to make the industry more responsive and more supportive of athletes is that Title IX is oftentimes used as a tool to deflect attention from what the real issues are. This is a system that both exploits men and women athletes, and it also has had license to violate Title IX on a regular basis. But also to throw up a kind of a distraction sometimes when athlete compensation comes up by saying that women are going to be hurt by this. And there’s just no truth to that. And in point of fact, when we look at what’s actually going on, women have everything to gain by unlocking this set of regulations that has suppressed player value.

Last year when we had the NCAA Tournament in San Antonio for the women, there were dramatic gender inequities that were revealed in the premier women’s basketball tournament in the world. Gender inequities along the lines of just basic food, access to training equipment, different kinds of COVID testing, health and safety issues, just an array of issues like that. And so that really says it all in terms of the system’s commitment to abiding by the requirements of Title IX. And we can get into the nuances of whether or not the NCAA is actually obligated under Title IX or not. And that’ll be a whole other show. But the bottom line is that when we’re talking about compensation, women have certainly been treated as second class citizens. And so they have everything to gain by unlocking this system that has suppressed all athletes and effectively in terms of equal opportunity has treated them all badly.

David Scupp:

And what’s the logic, what’s the NCAA’s logic when they say that unlocking the system, doing away with these restraints are going to hurt women.

Ellen Staurowsky:

Well, difficult for me to really know, because all you don’t need to look under the hood very closely to look at the numbers and to see, I’ve got a report coming out with the Women’s Sports Foundation in a couple of days, and there’s just massive inequities that are going on, documentable. But as a headline, what it does is it’s an effective tool to say, since there’s been a sensibility that women haven’t been treated very well when we’re talking about compensation for athletes, primarily football and men’s basketball, which has been the primary focus, it becomes an effective tool to just shut down these conversations and to scare the heck out of people who care about it. And I think it also targets people in Congress as well, who want to land on the right side of a discussion about treating women fairly. And so it just creates a whole lot of chaos in a conversation where the bottom line is that all athletes in the system are not being treated fairly, they’re not being protected and that this discussion has very high stakes for all of them.

Jeff Shinder:

Ellen, you have effectively invited yourself back to the pod to come back and discuss Title IX and the NCAA. And so congratulations.

Ellen Staurowsky:

Thank you.

Jeff Shinder:

So shifting gears, a touch to the history of antitrust and with respect to these issues. So there have been a series of recent cases that have chipped away at the NCAA restraints. You’re not a lawyer not asking you for legal opinions, but are close to these issues. So I’d like you to comment as someone who’s lived, breathed this stuff, your views on those cases and their impacts on these issues, have they been positive or not? Have they gone far enough or not? And what else needs to happen in your view, if anything? So those are big topics and we’ll open them up and we’ll see where we go.

Ellen Staurowsky:

Thank you for that. I’ll start with the first piece. And then we’ll proceed. I do really appreciate the box set of cases that we have in terms of O’Bannon, Alston and House. Because we’ve got those three cases that demonstrate that many of the NCAA’s claims around: Number one, the reason for why they had these regulations in place, that they were trying to protect athletes from exploitation. And in the course of those explanations, they reveal over and over and over again, that what they’re really doing, and this is embedded in their definition of what pay is within their manual, within the definition of what pay is.

It clearly says that, and I’m paraphrasing here that, The NCAA is not opposed to pay, it is opposed to pay that they don’t want to give. So it certainly, but surely these cases have really revealed that reality and that they know that paying athletes, that their justification somehow, that this is going to damage their industry or that athletes are somehow going to be harmed because of having the opportunity to have their value realized. Those assertions are just falling by the wayside because there’s nothing to them.

I think that the three cases are really helpful from that perspective and slowly, but surely we’re seeing some gains. We’re seeing the stipend that resulted out of O’Bannon, which closes the cost of attendance gap. We see the unlocking of educational expenses coming out of Alston. And now with House, the limits that have been put on athlete endorsements since June of 2021. Those are being challenged in House. So we’re seeing movement there. What I would argue is that these cases are incredibly important, and I think we need to keep going in that direction, but none of these things are really addressing what the central issue is.

And the central issue is that what we’re really talking about here is a labor force that has been trapped in regulatory system that has been unilaterally imposed in the absence of a players’ association that would represent the interest of the athletes. There’s no counterbalance to the decisions that are made within the NCAA and within the conferences. So I’ll leave it there to start with hope that I explained that well enough, and then maybe we can explore some other threats to this.

David Scupp:

Ellen, you mentioned limits on endorsements. I guess I was under the understanding that athletes could just go out now and get endorsements. I wasn’t aware that there were still limits rules and restrictions.

Ellen Staurowsky:

I’m really glad you’re talking about this. And it’s really interesting from a media frightening perspective because the atmosphere right now is being referred to as the Wild West, laying the ground for athletes without the full support of what they need, I think that’s how they experience it, but this is hardly the Wild West in terms of a multi-billion dollar sport entertainment industry. What the NCAA has done with their interim policy is they’ve said athletes who have formally been denied the opportunity for endorsements, they now have the opportunity for endorsements. However, the schools that they attend may not compensate them, may not endorse them. So that’s one thing. And then the other key piece of it is that they’re very specific about the fact that athletes may not receive compensation specifically for their athletic performance. And so the House v NCAA lawsuit is challenging those restrictions as well.

Jeff Shinder:

Ellen, just to follow up on that with those continuing restrictions, is it the case that we still see very little and perhaps no significant athletic endorsements flowing to NCAA student athletes? Is that correct? Is that the current state of play?

Ellen Staurowsky:

There’s a wide spectrum. One of the stories that has been reported fairly recently is that there is an athlete that has received an $8 million deal. And there are other multimillion dollar deals that are occurring for both male and female athletes at this point. However, within the grand scheme of all of the thousands and thousands of endorsements that we’ve heard about on average, the average Division I athletes endorsement has been estimated to be about $500 for a Division III athletes. It’s on average, anywhere between 35 to $50. And that could also include just the sheer amount of merchandise that an athlete may receive, because there have been some companies that have been asking athletes to do something on social media, but they’ll give them some kind of a hat, t-shirt and other kinds of apparel. So it’s easy to get to that $50 mark with that kind of stuff.

So in the grand scheme of things, corporations have actually not gone after athletes to the degree that we might have expected largely because A: it’s difficult to get to athletes. If an institution is prevented from facilitating deals for athletes and the athlete doesn’t have a player’s association, they may be able to get an agent, but that mechanism for a corporation to reach out to an athlete is fairly impaired at this point in time. And then because of all of these uncertainties, for example, one of the discussions that has been going on is when, and if the NCAA may investigate schools, if they are not abiding by this interim policy. And so corporations are faced with this question of, “Well, do I really want to be endorsing an athlete if I come to find out later on that maybe the rules weren’t quite as clear as they should have been, and I’ve endorsed an athlete that some school got sanctioned for.” So there’s a lot of the uncertainty in this space right now, more so than what people fully understand I think.

David Scupp:

It sounds to me that net of some of these antitrust lawsuits, things are heading in the right direction. Whether or not where we need them to be yet. Is that a fair characterization?

Ellen Staurowsky:

I think that’s a very fair characterization.

David Scupp:

And do you think taking this example of athletes getting endorsements. Do you think the issues that you just identified are a result of just the fact that we’re still in the early days of this line of business and everyone’s still trying to find their way, or do you think that there still are these systematic restraints that are in place that still are in need of reform? Or is it some combination of both?

Ellen Staurowsky:

I think it’s some combination of both. I think we’re definitely growing into a market where the market’s trying to get its bearings and trying to figure out how to navigate this new space and what the opportunities are. And so you’ve got a lot of companies that have grown up to advise athletic departments about these things, which is also very interesting to me that this is an industry that refuses to give athletes a paycheck, but they’re now funding yet another whole industry that is profiting off of athletes again. So we are growing into this new sector, but at the same time to me, we still have not gotten to the core of the issue because just the idea of athletes having the opportunity to do endorsements, by itself should really be breathtaking. Because in my view, this is not about fundamental change or fundamental reform.

This is really about the restoration of rights that were denied to athletes over nearly 100 year period of time by an association that unilaterally imposed these rules on these athletes. And so to me, what the central issue is that we’re really talking about a labor force that has been denied recognition and has been denied the benefits of what flows from that recognition as an employee. And we’re seeing, coming out of the National Labor Relations Board, there was a memo last September or October from Jennifer Abruzzo, that was calling out schools before using the term student athlete, understanding that was an invention on the part of the NCAA to deflect attention away from the fact that they had created an employee relationship by compensating athletes with an athletic scholarship, and that schools were using it at their peril and in an inappropriate way.

And of course in the Northwestern case, Northwestern football case, which is not any antitrust case, but a case where football players moved to create their own union in effect, they were actually successful in doing that. The NLRB never said that athletes in Northwestern were not employees. They simply sidestep the issue by saying it would be too disruptive to the industry, but they never said that they were not athletic employees. So I think the central issue is one that has to be dealt with in order for real meaningful change to occur.

Jeff Shinder:

I want to get to the core of the issue, but before we do that, and perhaps it’ll set up the core of the issue, you said something that is really interesting that I want you to dive deeper into, which is that we’re not talking about reform, but we’re talking about the restoration of rights that were taken from this labor force 100 years ago. So can you explain to the audience, what rights specifically are you talking about when you say rights were taken away 100 years ago.

Ellen Staurowsky:

The NCAA created a rule that barred athletes from having the opportunity that any other citizen in the United States has to be able to make money off of their name, image, and likeness. That they could endorse products, or they might be compensated for going to an event that they could sign autographs, that there might be personalized merchandise that they could sell, and they would gain the benefit from that. And the NCAA’s rules were such that they stripped athletes of that very fundamental right. So what’s being restored here in terms of this, the NCAA’s interim policy on names, images, and likenesses, it’s restoring the opportunity for athletes to benefit from that. Hopefully I’ve explained that well enough.

Jeff Shinder:

So let’s go to the core of the issue now. And I think you alluded to this earlier, but I’d like to really flush out what that would look like. I think you’ve made illusions to, there needs to be some kind of collective bargaining unit to protect the so-called student athlete. If it were up to you, how would that function, what athletes would be protected, would there be a multiplicity of unions protecting different athletes, you see differentiation, for example, from the college football and basketball versus the other college sports and how this would work. I know I’m throwing a range of questions, but let’s get to the crux, the core of the issue.

Ellen Staurowsky:

I’ll give you a partial answer to this because it is complicated, but I’ll start off with kind of a general thought about this. I do think that just as a matter of markets, FBS football is a different market from Division III Cross Country. There are just different kinds of issues associated with it at every single level. And one of the things that the NCAA has effectively done over the years even in terms of its relationship between Division I, II and III, is it’s tried to make the argument that all athletes are the same, and this is simply not true. It’s simply not true that Division I is the same as Division III. That division II is the same as the other two, there different issues. And the reason why I think that’s really important is I think that there are issues that need to be addressed across the landscape for all college athletes.

But I don’t think it’s productive to think about a player’s association that would represent all of them at once, because I think there are such dramatic differences across different sports for different kinds of reasons. And especially in this particular moment where we also have gambling interests, which are becoming increasingly integrated into all of our various forms of sports. And just within the past two days, there’s also been a shift with the NCAA opening the door more for that to happen at the college level. Then I think that what has historically been referred to as the revenue producers, I think they are in a different position. And so I think having players associations for football, for men’s and women’s basketball, I think that would be a starting point. I also want to connect this a bit to what’s happening internationally in terms of elite level athletes, in what we oftentimes think of as Olympic level sport, because at the Olympic level worldwide, there has been quite a movement in terms of trying to represent their interests better.

And that is echoing within all of the different governance structures that we have in terms of Olympic level sports. So what we may be looking at here is we may be looking at a player’s association for college football. We may be looking at a player’s association for men’s and women’s basketball. Maybe it’s combined, maybe not. And then maybe a player’s association for Olympic sports as well. And there might be arguments to even parse those out further. Is so in my mind, that’s how I see those players associations working, but what’s also happening within the industry. And just within the past day or two, the announcement was made that Mark Emmert, the president of the NCAA is stepping down. There has been a push for the Power Five to either create what I would call a college pro league to just take the Power Five conferences and just have football just as a separate entity completely separated away from the NCAA.

And there is already that in terms of how the money flows anyway, but there would be a greater distinction there and any kind of regulation between the NCAA and what this new college pro league might be, I think would be severed. That also factors into my thinking that if you’re going to have Power Five football league, that it makes sense at this point that you also have a player’s association alongside of it. And to come back to the gambling interest just for a minute, if we tear a page from labor and what happened in the NFL, what happened in Major League Baseball, all of the signs would suggest that the more of gambling interest there is in a sport, the more vulnerable the labor force is the more the industry itself is vulnerable because when players don’t have the value that they need, it creates more of an opportunity for gambling interest to affect the integrity of the game. So if there was a moment when this should be getting thought of in a more specific way now would be the time.

David Scupp:

I agree with everything you’ve said with players association. So how do we get there? Do you think that the landscape as it currently sits, could allow for players associations to emerge, or do you think there need to be some additional changes that are made?

Ellen Staurowsky:

I think there’s a lot of changes that need to be made primarily in terms of just will, just flat out will. But there has been some support for this in Congress, Senator Christopher Murphy proposed the CARO Act, which was a college athlete’s right to organize act and included in that act was an item that said that the NCAA would pay a certain percentage to create a player’s association. And that’s one of the pieces that’s missing right now is that how do we create the financial base for an organization like that to exist and have we create the infrastructure for it? So I think those are things that we need to be thinking through and working through in order to make that happen.

Jeff Shinder:

So if I may make a comment and then follow with a question and correct me if I’m wrong, but the gambling interest point you make is really interesting. And I would assume the vulnerability of a labor force in a sports context to gambling interests, undermining the integrity of the product would be dramatically heightened when that labor force is not compensated. And so I would imagine while that gambling interest swirl around all the professional sports, the college athletics would be rife for this. So that sets up some questions, is there any evidence that’s actually played out? And I asked the question with the appreciation and maybe happening without point shaving is not easy to catch. Is there any evidence of it happening? And to what extent has that argument that’s been made I guess so far in effectively to convince the NCAA to cooperate with reform?

Ellen Staurowsky:

Throughout the college sport history, there have been gambling scandals, whether it’s was at Boston College or a set of basketball schools back in the 1950s. This issue has periodically surfaced over time. To be honest about it. I don’t know how internally, how much this has been discussed within the hallways of power with the NCAA. I’m not sure about that. But the other piece of this, that I’ve actually just been looking at recently with a colleague and we’re just beginning to look at this and ask questions about it is that incredibly high profile sports of college football, men’s basketball and women’s basketball, there does not seem to be kind of like an industry wide standard in terms of security, security for the athletes. And when you watch games, you’ll see that there are law enforcement people that surround a coach, but you don’t really see that kind of security effort in terms of athletes themselves.

And we’ve started to ask questions about that because in my mind, that’s very much also connected to these other industry issues to the gambling issue, to just what happens when you put athletes out in front of hundreds of thousands of fans and of millions who are following on television. But now along with that, the gambling interest, along with that the infrastructure just does not seem to be there for the magnitude of the industry. So to me, just reading the tea leaves, it seems like those would be points of vulnerability that especially if you have a labor force which is undervalued, that it increases the likelihood of something to happen, but that’s as far as I’ve gotten in the analysis, I can’t put any numbers behind it per se.

David Scupp:

Going back to the now permissive rules on endorsements, at least to some extent, and we talked about an $8 million deal or a $50 deal. But I don’t want to say 10 years ago, five years ago, even a $50 deal could have landed an athlete in some serious hot water, right? I mean, I’ve heard stories about some pretty extreme measures that have been taken against athletes for letting someone buy a bag of groceries or along those lines. Forget about $8 million deals, even a $50 deal, but we’re starting to see these deals, which the NCAA prohibited under this justification of amateurism for the better part of the century. Are we seeing any negative effects in college sports of these deals in your opinion or have these deals just revealed the NCAA’s justifications is completely protectual, what are your thoughts on that?

Ellen Staurowsky:

I think the one point that is being put to rest just by living through these changes is that the additional compensation that the NCAA was saying would undermine the charm of the industry. That simply is just not true, that if an athlete receives any kind of compensation, whether it’s cost of attendance stipend, whether it’s an endorsement. People are still coming to the stadium, they’re still watching on television. There’s still an incentive to watch young people compete at a high level. That storyline doesn’t go away just because an athlete realizes their value. And there’ve been some recent studies that have also shown that public opinion is very much behind athletes receiving compensation, whether it’s college students themselves, or whether it’s the general population. So from that front, I think the NCAA is having a very difficult time out running the logic that they set in motion that they can’t really defend. On the other hand, in terms of some things that are things to think about and to be aware of, I’m teaching this course right now called personal branding for college athletes.

And we had the wonderful fortune of having a variety of people who are working in this space on the ground, come in and talk to us. And we had a compliance officer from SEC school who visited with us in one of our classes, and my students had this question. And so did I about kind of what’s the dynamic in the locker room. If we’ve got a couple of athletes who are getting endorsement deals, are they feeling pressure or does that create more pressure among other athletes on the team? And there was a recognition that there is a locker room dynamic that has to be managed, but the way in which it was represented to us was it’s no different than a professional locker room that anytime, or frankly, any of us who are working in any setting, there are some people in any workplace who are getting more money than others.

So being able to manage that conversation is something that has to happen. But to me, that’s just a healthy sign that the marketplace is working and that compensation scale was always there anyway. There are athletes who get full scholarships. There are athletes that get partial scholarships. There are athletes that get no scholarships. There’s always been a differential anyway. And we’ve resolved those issues. The other thing, which frankly, I honestly, I really struggle with this one because I don’t know if it’s true or whether it’s made up. And that is that some athletes are experiencing pressure in a way that’s affecting their mental health, either that managing the amount of demands on their lives, that this additional issue is something which is already adding to quite a bit of pressure to begin with. Or if athletes are not getting endorsements, then are they questioning their value, are they wondering if they’re doing something wrong?

They don’t know how to go about it because this infrastructure isn’t there, they don’t need the education to do it right. So I’ve heard that on a couple of occasions. And I vacillate because I’ve not really heard it directly from any athlete, I’ve not heard it from any specific athlete. And sometimes I think that it’s just being used to shut down the conversation. And at other times, to benefit other financial entities, for example, there was an article written by an individual who had created app to shut down social media and align that with college athlete endorsements. And I was kind of like, “Well, I understand that, but you’re not bringing any data to bear to show that there is actually a negative effect. You’re bringing no information to bear on that.” So I don’t quite know what to make of that, but it is on my radar screen as something to be thinking about.

Jeff Shinder:

That’s fascinating. And I’d follow up with you on the mental health issue, but the interest of time might want to close with a different topic and get your views on the following: just to express my own personal opinion, I’ve always been troubled by the association of such an exploitative system with higher education. We send our children to college, so intrinsic to their formative experience and the people they become and not just their economic potential, which it obviously influences, but who they are, our identities are formed by the college experience. And the rah, rah around college sports just has its positives perhaps. I say that as a sports fan. But what are your views on the impact of this system, it’s coexistence with higher education and how schools have been profiting from such an exploitative system, has it affected for lack of a better framing, the integrity of our schools? Thoughts on that question?

Ellen Staurowsky:

I really appreciate the question because people ask me why I’ve looked at these issues for as long as I have and spent so much time looking at them and investing so much time. And it really, it is that juxtaposition between an association that is made up of 1,200 colleges and universities around the country. This juxtaposition between what the role of a college and university is supposed to be within a democratic society, which is supposed to be one that elevates the society overall and protects the interest of the most vulnerable. That’s in theory what colleges and universities are supposed to be about. And here we have this entity that has been exploiting athletes for over 100 years. Even in terms of its defense, the pillar of its defense in every courtroom in America, when the NCAA has been sued, has been this principle of amateurism.

And to me, it is just shocking to me in the 21st century that any college administrator with any conscience would support a concept like that. Amateurism was designed specifically to control the flow of individuals who came into the sports system. It was designed to create a barrier in terms of the lower classes and the elites. So the very notion in the 21st century, the colleges and universities would aggressively go into court and use a concept like that over and over and over again is really profoundly disturbing to me. And I think if we’re really talking about reform and change, this is the heart of where the change has to come from. I think there’s got to be a real accounting for what has been done and compellingly, you were talking about who it’s being done to. These are young people who have optimism and trust, and there’s just too much evidence to show that this system has not served them well.

And anything that we may be talking about in terms of compensation, that’s connected to a whole set of issues, health and safety issues. Why is it that our all Americans are suffering so profoundly for mental health issues and being abused by their coaches? This is a system that’s been unregulated, it hasn’t been checked, and it hasn’t been held to account and it’s done in under the pretense of some happy narrative that it was all out of benevolence. And this system really needs to fess up to what they’ve been doing in terms of profiting off of the labor of athletes. So that’s what I think of that.

Jeff Shinder:

This has been a fascinating discussion that we can continue. So you’ve already invited yourself back to the pod. We have some Title IX discussion to continue, and this is an emerging, evolving issue. So we’ll be following it closely and we would love to have you back. Thank you for your time. This has been terrific. And I think, and I applaud the work that you’ve been doing. Keep on, keeping on, is necessary and good luck. Good luck with it.

Ellen Staurowsky:

Thank you so much. And it humbles me to hear you say that because I’ve been so aware of the work that 91pornhas been doing with whistleblowers for example, such tremendous work, and I’ve followed that avidly over the years. So it’s been deeply humbling to have been invited today. So thank you very much. And I look forward for further conversations.

Jeff Shinder:

As do we! On that note, we can conclude. Thanks again. That’s all for our show today. If you like the podcast, make sure to subscribe to Antitrust Matters, and leave us comments on how we were doing or on the topics you would like us to cover going forward. You can also follow us on or follow the 91pornantitrust team on . Until next time, be well, and remember antitrust matters.

Read Antitrust Matters Episode 6: The NCAA at constantinecannon.com