# Presentation: 008374

## DOJ/FTC Joint Hearings on Sec. 2 of the Sherman Act

- Equitable Remedies In the Face of Technological Change
- by
- Marina Lao

## General introductory thought

- Remedies often treated as an afterthought.
- Unfortunately, proof of liability does not predict success in crafting remedy.
- Vision of remedy should be woven into case development.

## Antitrust and Fast-Changing High-Tech Markets

- Nature of high-tech markets:
- Reason for greater antitrust vigilance, or hands-off antitrust approach?
- Those who say less intervention argue:
- Rapid innovation creates short product cycles;
- Thus, durable dominance unlikely;
- Continuous opportunities for other firms to topple dominant firm.
- Dominant firm must constantly innovate to stay dominant
- Serial races for dominance.

## Arguments for greater antitrust vigilance

- But nature of high-tech markets can cut the other way
- Network effects
- Significant entry barriers;
- More susceptible to monopolization
- Case in point: *Microsoft.*

## Network Effects

- Consumers attracted to product with largest market share;
- Network “tips” to that product;
- Consumers become locked in.
- Entry or expansion by competitors very difficult.
- Cannot reach critical mass of customers.
- Technology or product is entrenched.

## Computer Platforms

- Economies of scale in production (generally true for products w/ IP as major input);
- Economies of scale in development of applications.
- Compatibility w/ other users valued;
- Strong path dependence due to large installed base.

## Implications of Network Effects?

- Dominant firm can much more easily exclude even superior technologies,
- if it can ensure that rival technologies remain incompatible.
- Because of natural benefits of network effects, dominant firms can more easily use tying and other predatory techniques to preserve dominance.
- Can control research avenues, up to a point.

## With respect to remedies --

- Fast moving technology market:
- What is more appropriate?
- Milder remedies?
- Broader remedies?
- My conclusion:
- Broader remedies warranted, esp. where entrenched monopolist enjoys substantial network effects.
- Needed to restore competition

## Those favoring mild remedies in rapidly changing markets

- Self-correcting market rationale:
- Bad effects from monopolists’ conduct will be dissipated by market forces without antitrust intervention.
- Possibility of unintended detrimental consequences on market:
- Remedies adopted today may not be sensible a few years hence.
- Chill innovation and competition from dominant firms.

## Are high-tech markets more likely to self-correct?

- No; if network externalities exist
- Self-correcting market requires ease of entry.
- But network effects raises entry barriers and reduces access to network.
- Dominant firm can set path of tech change, even if superior alternative path is available.
- Innovation, both in that market and in complementary markets, might follow DF’s technology, even if it is not optimal ex post.

## Uncertainty about future market conditions

- Argument that remedies imposed today may not be sensible tomorrow
- Means more care should be taken in defining future boundaries of relevant market, identifying potential market participants, and in crafting remedy.
- Or continuing jurisdiction clause so that either party can return to court for modification.
- Doing too little, too late carries risks too.

## Potential chilling effects?

- Often said that compulsory license of IP rights and other affirmative remedies, in particular, may diminish dominant firm’s incentives to innovate and compete.
- E.g. *Trinko* language
- But remedy can unleash innovation from fringe firms.
- E.g. the AT&T divestiture experience: unprecedented innovation, enhanced service

## Note: issue is remedy, not liability

- Plaintiff has *already* satisfied demanding burdens of proof concerning market power, conduct, and anticompetitive effects called for in sec. 2 litigation.
- Question is what remedial actions would
- “terminate the illegal monopoly”
- “ensure that there remain no practices likely to result in monopolization in the future.”  *United Shoe*.

## Some problem areas for markets with fast moving technologies 

- Extremely difficult to revive competition after its loss.
- E.g. Netscape unlikely to ever regain market momentum.
- Convergence of factors conducive to an earlier viable challenge to dominant firm may not reappear.
- E.g. new demand for internet access (browsers) no long exploding;
- Bundling of Microsoft substantial inherent benefits: higher transaction costs for consumers to use non-Microsoft complementary products.

- Narrowly focusing remedy on specific conduct found to be unlawful may not return competition to status quo ante.
- Difficulty of fashioning forward-looking remedies, which may be needed.
- Conduct remedies do not by themselves unravel accumulated market power.

## Crafting forward looking remedies

- Must analyze :
- Likely evolution of market;
- Innovations most likely to emerge, and how they will change market path.
- Unless we can reasonably predict above,
- Difficult to determine what remedial actions would break down barriers to entry and facilitate competition, and what would not.

## Implications

- Injunction might constrain conduct that defendant no longer needs to engage in;
- Injunction may fail to do anything to erode defendant’s monopoly power.
- E.g. first *Microsoft* consent decree
- Prohibits “per processor” licensing
- But Microsoft no longer needed strategy to exclude competing OS: IBM’s OS/2 and DR-DOS were already defunct.

## Potential to circumvent decree

- Must anticipate how dominant firm may circumvent constraints imposed and still achieve anticompetitive ends.
- Then block alternate paths as well
- But DF enjoys information asymmetry over govt.
- E.g. first Microsoft consent decree:
- Ban on tying imposed;
- Microsoft sidestepped ban by commingling code of browser to Windows.

- Block alternate paths toward the same anticompetitive objective, and not merely specific acts that may turn out to be non-essential for anticompetitive ends.
- Doesn’t require anticipating every permutation of anticompetitive practice.
- The challenge: drafting remedy with appropriate level of abstraction, and yet w/ requisite degree of specificity.

## Information asymmetries problem

- Solution:
- Be educated by dominant firm’s customers, and competitors or potential competitors.
- Relying on competitors for information is not equivalent to “capture.”
- Consistent with “protecting competition, not competitors” principle.

## Importance of creative affirmative obligations

- Simply stopping exclusionary practices and preventing their recurrence does not unravel market power.
- If rivals and potential rivals have already been excluded, banning the bad acts alone may not resuscitate competition.
- Helpful: affirmative duties effectively ***lowering*** rivals’ costs.

## Some examples of affirmative duties

- Compulsory licensing of IP rights w/ or w/o royalty fees
- E.g. FTC v. Xerox, in 1975
- Microsoft: disclosure of APIs and communications protocol.
- Obligation to sell to all customers on non-discriminatory basis.
- Kodak, 9th Cir. 1997

## More examples --

- Unbundling of products
- United Shoe (machinery and repair service)
- Requiring creation of products to comply with industry standards, not proprietary standard.

## Compulsory Licensing of IP

- Quasi-structural in that it can potentially change structure of market.
- Distinguishable from refusal to license IP as an antitrust offense.
- Similar in principle to compelled divesture of physical/productive assets used in more traditional markets.

- Objective:
- Facilitate competition in market impaired by anticompetitive acts.
- Open up system to make it conducive to competition
- Be creative in efforts to erode barriers to entry, and facilitate competition.

## Korean Microsoft case

- Microsoft market or monopoly power found in:
- Server Operating System (78% market share)
- PC Operating System (90% market share)
- Violations found:
- Tying Windows Media Service to Windows Operating OS
- Tying Windows Media Player to Windows PC OS
- Tying instant messaging program to Windows PC OS

## KFTC remedies

- Tying media service to Service OS:
- Unbundle products
- Tying Microsoft Media Player and instant messaging program to Windows PC OS:
- Provide stripped-down version of Windows
- Provide version of Windows that includes “Media Player Center” and “Messenger Center”
- Links to webpages to facilitate consumer downloads of media player and messenger products

## What “centers” accomplish

- Allows consumers to easily select media player or instant messenger of their choice.
- Select link to the product’s website, and download.
- Microsoft’s products included among the selections.
- Neutralizes any inherent benefit Microsoft has in complementary markets due to its control of Windows PC OS.

## Assessment of remedy

- “Centers” serve as portal to different complementary offerings.
- Facilitates consumers’ downloading of media player and instant messaging program of their choice.
- Facilitates choice based on merit, not on ease of physical adoption.
- Proportionality?
- Administrability?

## “protect competition, not competitors”

- Protecting competitors is often intertwined with protecting competition in new economy markets.
- Without protecting competitors with nascent technologies, new technologies may not have a chance to emerge.
- Without competitors, no way to know if DF’s product is the best that technology can produce, or better alternatives are capable of being developed were it not for DF’s actions.

## Compared to comparable U.S. remedial term

- U.S.
- no unbundling.
- Simply permits OEMs to remove end-user access to IE (hide functionality)
- But Microsoft allowed to provide mechanism for consumers to easily re-enable access.
- Does not remove disincentive to OEM installing competing middleware, because increase in support costs would still be present.

- Korean:
- More aggressive than consent provision.
- But milder than “must carry” remedy originally sought by govt.
- Initial interim conduct term: Microsoft must distribute Netscape Navigator with Windows for 3years.

## Compared to comparable EC remedy

- EC:
- Unbundling ordered.
- But, no requirement that stripped version be licensed at lower price.
- Priced equally, there is no real choice.
- Still raises rivals’ costs to gain access to Windows.
- Korean:
- Seems more creative and tailored to problem.

## Importance of continuing jurisdiction in fast moving markets

- Allows court to assess future development
- Purpose:
- Not to simply ensure compliance with decree itself;
- But to ensure movement toward ultimate objective set by court.
- Have benchmarks in decree to evaluate effects, i.e. measure success.

- Definition of success of remedy:
- Not simply whether defendant has complied with specific terms of decree, though that is also important
- But whether decree is doing anything to make market more competitive.

## With continuing jurisdiction --

- If decree is not having market effect within a reasonable time,
- Court can pursue other avenues.

## Final Note

- There is value to section 2 enforcement, even if no effective judicially-imposed remedy.
- Defendant may at least temporarily moderate its behavior toward entry or expansion by rivals or potential rivals.
- Or even voluntarily discontinue some of the challenged practices, thus
- Provide fringe firms opportunity to gain foothold.

- E.g., Microsoft relaxed enforcement of exclusive dealing contractual agreements with OEMs during course of litigation.
- Might temper its conduct in response to the next generation competition (search engine market perhaps?)

## Public policy reason

- Even if “irremedial,” it is bad policy to take no action if conduct harms consumer welfare; sends wrong signal.
- Taking action can deter the Microsofts of the future, e.g. Google.