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####  **DEPARTMENT OF JUSTICE**

**THOMAS O. BARNETT**

**Assistant Attorney General**

**Antitrust Division**

### **U.S. Department of Justice**

### **Remarks at the**

**Bundeskartellamt Ceremony**

**Celebrating Fifty Years of the German Competition Act**

**Bonn, Germany**

**January 15, 2008**

Today we celebrate the 50th anniversary of the entry into force of
German=s Act Against Restraints of Competition (ARC). I am greatly
honored that Dr. Heitzer and the Bundeskartellamt (BKA) invited me to
Bonn to join your celebration. In my time today, I want to look first to
the past by providing an American perspective on the significance of the
BKA=s contribution to global competition policy during the half-century
of its work. Then I will turn toward some of the future challenges we
will face together, in particular one of the most difficult and
contentious areas of modern antitrust B the rules governing single-firm
conduct by firms that are Adominant@ or possess what we would call
Amonopoly power.@ In this area I will offer some thoughts on how safe
harbors can help business to conform to and understand the rules,
provide guidance to enforcement authorities, and minimize the risk of
costly errors that may chill the vigorous competition and the spirited
innovation that are of most long-term benefit to consumers.

Most of you are well aware that Germany=s robust tradition of antitrust
enforcement began much earlier than 50 years ago. The Weimar Republic=s
Regulation Against Abuse of Economic Power Positions in 1923 was Athe
first general legislation in Europe aimed specifically at protecting the
competitive process.@[^1] Three decades later, the German federal
parliament enacted the ARC after many years of debate, building upon the
de-cartelization and de-concentration laws introduced in Germany by the
U.S. authorities in 1947. The year 1958 is a major milestone in the
history of antitrust, with the adoption of the ARC in Germany and the
signing of the Treaty of Rome establishing the European Community, with
its famous articles 85 and 86 (since renumbered as 81 and 82). Both
legal regimes became effective on January 1, 1958.

Dr. Franz Böhm, a prominent German thinker and champion of the ARC, once
observed that Aa free market economy resembles a monarchy in that the
consumer is the king.@[^2] In substance, this sentiment closely mirrors
the U.S. commitment to consumer welfare as the foundation of a free
market.

With the adoption of the ARC, the newly-established BKA instantly became
the preeminent model of an independent, court-like expert administrative
body. The BKA=s first President, Dr. Eberhard Günther, held his post for
eighteen years \-- an extraordinarily long tenure \-- and set the BKA on
a firm foundation. One of the great strengths of the German antitrust
regime has been that the BKA is insulated from political considerations.
Any ministerial overruling of its decisions on non-competition grounds
is open and transparent, clearly exposing the trade-off between
competition and other policies for healthy debate. This has surely been
an important confidence-building measure for German consumers and
businesses alike.

From an early date, the German authorities have been reliable partners
in cooperation with the U.S. Department of Justice, to our mutual
benefit. Our first bilateral antitrust agreement dedicated to
enforcement cooperation was signed with Germany, in 1976. Especially in
the field of anti-cartel enforcement, we have had a long and productive
relationship involving legal assistance, extending well over a decade.
After years of negotiation, a Mutual Legal Assistance Treaty (MLAT) with
Germany has now been signed; when ratified by our respective federal
legislatures, it will be the first of the United States= 50-plus MLATs
to apply to administrative cartel investigations, giving the BKA
reciprocity in seeking U.S. Government assistance in cartel cases.

Germany has also played a leading role in the development of European
Community competition law as a source of highly-qualified enforcement
officials, having provided the first Commissioner responsible for
competition policy (Dr. Hans von der Groeben) and a stellar series of
Directors-General for Competition (including Drs. Manfred Caspari, Claus
Ehlermann, and Alexander Schaub). And last, but not least, while we in
the U.S. often think that we invented premerger notification, in fact
the German merger notification regime was established in 1973, three
years before our Hart-Scott-Rodino Act, and 16 years before the EC=s
Merger Control Regulation.

In addition, the BKA has consistently been a leader in the international
antitrust community. For many years it has hosted the prestigious
biennial Cartel Conference B one of the highlights of the international
antitrust calendar B first in Berlin, then in Bonn, and most recently in
Munich. A senior BKA official chaired the OECD=s Competition Law and
Policy Committee from 1987 to 1994, and BKA presidents have always been
members of the Committee=s guiding Bureau. The BKA was a founding member
of the International Competition Network (ICN) in 2001, and former BKA
President Dr. Ulf Böge was an outstanding ICN Steering Group Chair until
his retirement last year. Today, the BKA serves as co-chair, with the
U.S. Federal Trade Commission, of the ICN=s Unilateral Conduct Working
Group (UCWG). Co-chairing the UCWG is not an easy task, as the rules
governing unilateral conduct are perhaps the most difficult area of
antitrust law and policy.

This brings me to my second topic: the application of competition law to
unilateral conduct. Let me start with our Supreme Court=s most
frequently cited recitation of the elements of a monopolization claim
under our Sherman Act: A(1) the possession of monopoly power in the
relevant market and (2) the willful acquisition or maintenance of that
power as distinguished from growth or development as a consequence of a
superior product, business acumen, or historic accident.@[^3]
Translating this general principle into operational rules and guidance
for the business community has been difficult, both for U.S. courts and
the U.S. antitrust agencies. In this regard I offer five broad
principles to inform our enforcement policy and to guide our
discussions.

-   ***Individual firms with monopoly power can act anticompetitively
    and harm consumer welfare***, and we should seek to identify and
    challenge such conduct.

-   ***Mere size does not demonstrate harm to competition or a violation
    of the antitrust laws***. The proper focus of antitrust law is on
    anticompetitive conduct and effect, not just firm size or market
    share.

-   ***Mere injury to a particular firm does not itself show that
    competition has suffered***. Indeed, a firm=s inability to garner
    sales may indicate no more than the superiority of its competitors=
    products. A successful firm should not be penalized for creating a
    product that is preferred by consumers. Further, the loss of sales
    can be an important incentive to other firms to improve their
    efforts to offer new and better products at the lowest possible
    price.

-   ***Consumers, the business community, and antitrust enforcers
    benefit from clear, administrable and objective rules*** that allow
    businesses to assess the legality of a practice before acting and
    enable enforcers and courts to judge challenged conduct predictably
    and correctly. This is particularly true in the context of
    unilateral conduct. Every time a firm is kept from engaging in
    aggressive conduct because it fears an unnecessarily expansive
    interpretation of the antitrust laws, competition is harmed.

-   ***A remedy that harms competition is worse than no remedy at
    all***. A remedy needs to be effective and administrable by courts
    and agencies without restricting competition.

In this brief summary of our overall approach to the appropriate role
for antitrust in relation to single-firm conduct, I emphasize the
importance of clear, administrable, and objective rules. I would like
now to focus on one example of such rules: safe harbors. Antitrust
enforcement agencies should consider employing safe harbors that
identify conduct that will never be the target of antitrust enforcement.
(I note that, if an absolute safe harbor is not feasible, it can still
be valuable to identify harbors that are unlikely to lead to enforcement
actions except under Aextraordinary circumstances.@) In the words of the
intellectual property guidelines issued by the Department of Justice and
Federal Trade Commission in 1995, safe harbors provide a Adegree of
certainty and thus \... encourage@ innovation and competition. The
conduct covered by the safe harbor may be entirely pro-competitive, or
may be overwhelmingly so, such that Aanticompetitive effects are so
unlikely that the arrangements may be presumed not to be anticompetitive
without an inquiry into particular industry circumstances.@[^4]

The rationale for most safe harbors is *not* that the conduct within the
safe harbor never can harm competition, but rather that the conduct
poses an insufficient risk of harm to warrant further consideration in
view of the administrative costs of proceeding, the potential harm from
erroneous condemnation of the conduct, and the chilling effect of
business uncertainty on legitimate conduct.

An antitrust regime could, for example, establish a market share below
which a competitor is conclusively presumed not to possess market power
(nor to be dominant), and thus may compete for business secure from any
concern about an antitrust challenge to its unilateral conduct. But such
a safe harbor significantly enhances legal certainty only if the
market-share threshold adopted is high enough that it affords safety to
competitors that had perceived a non-trivial risk of being found to
possess monopoly power. Indeed, adopting a safe-harbor market share that
is very low actually could increase business uncertainty by suggesting B
unintentionally B an increased likelihood that competitors just outside
the safe harbor will often be found to possess monopoly power.

In the United States, the vast majority of competitors in the vast
majority of markets do not possess monopoly power. Courts in the United
States have consistently held that a market share below 50% does not
support the inference of monopoly power, effectively establishing a safe
harbor for firms with less than a 50% market share, and the leading
treatise suggests that a share of at least 70B75% for five years is
required to infer monopoly power.[^5] Modern case law also holds that
Amarket share is only a starting point for determining whether monopoly
power exists, and the inference of monopoly power does not automatically
follow from the possession of a commanding market share.@[^6] Courts in
the United States require proof that entry or expansion would not
effectively discipline a competitor alleged to possess monopoly power,
and firms with market shares well in excess of 50% have been found not
to possess monopoly power because their power over price was
insufficiently durable.

Agencies and courts can also articulate safe harbors for particular
categories of conduct. They could, for example, establish that a
competitor, even a monopolist, engages in lawful competition on the
merits (i) when it prices aggressively but does not price below some
measure of cost, (ii) when it makes investments that reduce its own
costs, (iii) when it introduces a new product, or (iv) when it does
nothing more than exercise unilaterally and unconditionally its right to
refuse to license an intellectual property right.

A good example of a safe harbor for specific conduct is the one created
15 years ago by our Supreme Court that distinguishes unlawful predatory
pricing from aggressive price-cutting. In *Brooke Group v. Brown &
Williamson Tobacco Corp.*[^7], the Court held that a successful
antitrust challenge to price-cutting requires proof Athat the prices
complained of are below an appropriate measure of the rival=s costs@ and
that the alleged predator had Aa dangerous probability \... of recouping
its investment in below cost prices.@ The Court expressly recognized
that its standard might permit some price-cutting that theoretically
could harm consumers. Specifically, the Court observed that above-cost
pricing could sometimes be used to Ainduce or reestablish
supracompetitive pricing,@ and implicitly acknowledged that, even absent
recoupment, below-cost pricing could allow a predator to establish
short-term market power by injuring and driving out its rivals (until
new competitors enter the market and drive the market price back down).

Notwithstanding those possibilities, the Court concluded that those
categories of anticompetitive price-cutting were Abeyond the practical
ability of a judicial tribunal to control without courting intolerable
risks of chilling legitimate price cutting.@ As the Court explained, a
broader standard would run the risk of imposing liability in cases
involving pro-competitive price-cutting, and Athe costs of \[such\] an
erroneous finding of liability are high,@ because such errors (or Afalse
positives@) would Achill the very conduct the antitrust laws are
designed to protect.@ And the risk that such Afalse positives@ will
occur under a broader standard is substantial, the Court explained,
because A\[t\]he mechanism by which a firm engages in predatory
pricing\--lowering prices\--is the same mechanism by which a firm
stimulates competition.@

Whatever measure is adopted for the safe harbor, it must be an objective
one. As Justice Breyer explained in an appellate decision before he
joined the Supreme Court, antitrust rules Amust be clear enough for
lawyers to explain them to clients@ and Amust be designed with the
knowledge that firms ultimately act, not in precise conformity with the
literal language of complex rules, but in reaction to what they see as
the likely outcome of court proceedings.@[^8] If the line between lawful
aggressive pricing and unlawful predatory pricing were to turn on a
subjective *ex post* assessment of the price (*i.e.,* is it too low or
unfairly low), large firms competing for sales would rationally err on
the side of caution, pull their competitive punches, and price less
aggressively. An amorphous and subjective standard would discourage the
competitive enthusiasm that the antitrust laws seek to promote and chill
the very conduct the antitrust laws are designed to protect.

Turning back to the occasion for our celebration today, I emphasize that
overall we have much in common. The BKA has long pursued anti-cartel
enforcement, has become a firm proponent of serious economic analysis,
and continues to expand the role and number of its economists.

The U.S. and German agencies face many common antitrust challenges
today, and we must continue to work closely together in the future.
International cartels disrupt the efficient working of our economies,
and we need to expand our cooperation even further, coordinating our
leniency programs and ensuring that our criminal and administrative
approaches work together to achieve maximum deterrence. The role of
private antitrust enforcement seems likely to grow in Germany, and the
European Union as a whole, and European courts thus will have to address
some of the procedural, jurisdictional and comity issues that have
already arisen in U.S. courts.

Competition in newly deregulated sectors, with problematic claims for
network access and misplaced demands for national champions and
increased state ownership, should be addressed in ways that preserve
competition, reward innovation, and promote consumer welfare. While the
U.S. and German antitrust agencies have some doctrinal differences to
sort out, with our 30-year history of cooperation and good will we can,
and surely will, bridge those differences and continue to converge on
the best policies in our bilateral relationship and in the many
multilateral settings where we work together so closely. We owe nothing
less to our respective consumers.

In closing, consumers have every reason to look forward with confidence
to another 50 years of healthy economic performance in a German economy
where competitive markets are capably defended by the BKA. Thank you.

[^1]: Organization for Economic Cooperation and Development, Germany:
    The Role of Competition in Regulatory Reform, page 8 (2004), *at*
    http://www.oecd.org/dataoecd/40/49/33841373.pdf.

[^2]: American Bar Association Section of Antitrust Law, Competition
    Laws Outside the United States (2001) Germany-page 9.

[^3]: *United States v. Grinnell Corp.*, 384 U.S. 563, 570-71 (1966).

[^4]: *Antitrust Guidelines for the Licensing of Intellectual Property*
    at &4.3, available at
    http://www.usdoj.gov/atr/public/guidelines/0558.htm.

[^5]: 3A Philip E. Areeda & Herbert Hovenkamp, Antitrust Law &801a, at
    319 (2d ed. 2002).

[^6]: American Council of Certified Podiatric Physicians & Surgeons v.
    American Board of Podiatric Surgery, Inc., 185 F.3d 606, 623 (6^th^
    Cir. 1999).

[^7]: 509 U.S. 209 (1993).

[^8]: *Town of Concord*, 915 F.2d at 22.