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72–736 2001

S. HRG. 106–994

ANTITRUST OVERSIGHT

HEARING

BEFORE THE

SUBCOMMITTEE ON ANTITRUST,

BUSINESS RIGHTS, AND COMPETITION

OF THE

COMMITTEE ON THE JUDICIARY

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

MARCH 22, 2000

Serial No. J–106–71

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY

ORRIN G. HATCH, Utah, Chairman

STROM THURMOND, South Carolina

CHARLES E. GRASSLEY, Iowa

ARLEN SPECTER, Pennsylvania

JON KYL, Arizona

MIKE DEWINE, Ohio

JOHN ASHCROFT, Missouri

SPENCER ABRAHAM, Michigan

JEFF SESSIONS, Alabama

BOB SMITH, New Hampshire

PATRICK J. LEAHY, Vermont

EDWARD M. KENNEDY, Massachusetts

JOSEPH R. BIDEN, JR., Delaware

HERBERT KOHL, Wisconsin

DIANNE FEINSTEIN, California

RUSSELL D. FEINGOLD, Wisconsin

ROBERT G. TORRICELLI, New Jersey

CHARLES E. SCHUMER, New York

MANUS COONEY, Chief Counsel and Staff Director

BRUCE A. COHEN, Minority Chief Counsel

SUBCOMMITTEE ON ANTITRUST, BUSINESS RIGHTS, AND COMPETITION

MIKE DEWINE, Ohio, Chairman

ORRIN G. HATCH, Utah

ARLEN SPECTER, Pennsylvania

STROM THURMOND, South Carolina

HERBERT KOHL, Wisconsin

ROBERT G. TORRICELLI, New Jersey

PATRICK J. LEAHY, Vermont

PETE LEVITAS, Chief Counsel and Staff Director

JON LEIBOWITZ, Minority Chief Counsel and Staff Director

(III)

C O N T E N T S

STATEMENTS OF COMMITTEE MEMBERS

Page

DeWine, Hon. Mike, a U.S. Senator from the State of Ohio ................................ 1

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa ..................... 27

Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin ....................... 3

Leahy, Hon. Partick J., a U.S. Senator from the State of Vermont .................... 4

WITNESSES

Klein, Joel I., Assistant Attorney General, Antitrust Division, U.S. Department of Justice, prepared statement .................................................................. 5

Pitofsky, Robert, Chairman, Federal Trade Commission, prepared statement

and attachments ................................................................................................... 12

(1)

ANTITRUST OVERSIGHT

WEDNESDAY, MARCH 22, 2000

U.S. SENATE, SUBCOMMITTEE ON ANTITRUST, BUSINESS RIGHTS, AND COMPETITION, COMMITTEE ON THE JUDICIARY,

Washington, DC.

The subcommittee met, pursuant to notice, at 2:12 p.m., in room

SD–226, Dirksen Senate Office Building, Hon. Mike DeWine (chairman of the subcommittee) presiding.

Also present: Senators Grassley, Kohl, and Leahy.

OPENING STATEMENT OF HON. MIKE DeWINE, A U.S. SENATOR

FROM THE STATE OF OHIO

Senator DEWINE. Good afternoon. Welcome to the Antitrust,

Business Rights, and Competition Subcommittee hearing. This

hearing is the fourth in a series of antitrust oversight hearings

held by our subcommittee. We are happy to have back here today

Assistant Attorney General Joel Klein from the Antitrust Division

and Chairman Pitofsky from the Federal Trade Commission. They

will testify about antitrust enforcement efforts being made by their

respective agencies.

As they are both aware, the merger wave that has engulfed our

economy for the last several years shows certainly no signs of abating. In fact, the mergers seem to be getting larger in size and scope

all the time. The most recent example is the proposed merger between AOL and Time Warner for $185 billion. Moreover, as the

American economy becomes more and more integrated with the

economies of other nations, it is likely that more companies will

propose mergers as a means to successfully compete in the global

marketplace.

These trends indicate that the antitrust enforcement agencies

will continue to play an important role in maintaining the competitive environment necessary for our economy to thrive both at home

and abroad. Indeed, as international trade and business contacts

escalate, it will be increasingly important for the antitrust agencies

to carefully police the actions of foreign companies to assure that

they are playing by the rules of fair competition.

The Antitrust Division has been particularly successful in its efforts to fight international price-fixing cartels. In fiscal year 1999,

the Antitrust Division collected over $1 billion in criminal fines,

most of which were the result of prosecution of foreign cartels. The

price-fixing activity targeted by the Antitrust Division, this particular activity would distort markets, undermine competition, and

2

unfairly raise prices for consumers, and I commend their vigilance

in prosecuting these crimes.

Part of our effort to combat anti-competitive actions abroad is the

use of antitrust cooperation agreements with foreign enforcement

agencies. These agreements have been fairly successful in some instances, but we have had some problems with their implementation

in other cases and we continue to face significant challenges with

regard to international enforcement in general.

Mr. Klein recognized these difficulties, and 2 years ago, the Justice Department appointed an advisory committee to examine these

issues and to offer recommendations. This group, the International

Competition Policy Advisory Committee, has recently issued its report and we look forward to discussing some of the recommendations in our hearing today.

Before I turn to Senator Kohl, I think it is important to discuss

one particular aspect of the merger wave, and that is the increasing consolidation in the entertainment, news, and media industries.

I have repeatedly expressed my concern that increased consolidation in these industries will decrease the number of information

and entertainment providers and may eventually erode competition

in the so-called marketplace of ideas. I know that this type of discussion is not part of the traditional antitrust analysis, but I believe that such mergers do raise important public policy and competition issues and I would like to discuss some of those issues

today.

On a related point, some have argued that the mergers in media

industries and other important industries, such as telecommunications, oil, railroads, and defense, have gotten to the point where

we need to rethink our general approach to antitrust analysis.

Some people have gone so far as to suggest that in reviewing the

so-called mega-mergers, antitrust enforcement agencies should be

examining the ripple effect of the deal. In other words, even if a

particular merger is not anticompetitive, the agencies, it is argued,

should consider whether that particular merger will kick off a

mini-wave of industry mergers that will decrease competition and

ultimately harm consumers.

I discussed this notion several years ago with our witnesses, the

same witnesses we have today, in the context of defense consolidation. Based on my experience as chairman of the Antitrust Subcommittee, I believe it is somewhat risky to attempt to predict the

future based on just one merger, and I think there is good reason

to maintain the current standard of reviewing mergers one deal at

a time. Nonetheless, this issue deserves some consideration, especially as we look towards a world where key industries at the core

of daily life are controlled by a handful of very large companies.

This is an exciting and important time in the arena of antitrust

enforcement. As consolidation increases, it is essential that the

antitrust agencies be able to handle the increased merger workload

while still maintaining their ability to detect and prosecute illegal

cartel behavior which harms American consumers. This subcommittee will continue to work with our witnesses to vigorously

address these new challenges and ensure that the marketplace remains competitive, both at home and throughout the world, and I

3

look forward to discussing with both of our witnesses today how we

can achieve these goals.

I turn to the ranking minority member of the committee, Senator

Kohl.

STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM

THE STATE OF WISCONSIN

Senator KOHL. Thank you. Let me start by commending our

chairman, Mike DeWine, for ensuring the bipartisanship and effectiveness that has characterized our subcommittee’s work.

Today, we are privileged to hear from our two witnesses, Joel

Klein and Bob Pitofsky. We have been very impressed with your

leadership, gentlemen, and the talent and skills with which you

and your dedicated staffs, the unsung heroes of antitrust, have enforced the antitrust laws and promoted competition in our national

economy.

The past several years have been critical times. We have witnessed an incredible wave of mergers and acquisitions, touching

virtually every sector of our economy. In the space of just 8 years,

from 1991 to 1999, the value of mergers reviewed by the antitrust

agencies increased tenfold, from $169 billion to over $1.8 trillion.

Big is not necessarily bad, to be sure, but we must always be careful to ensure that increasing levels of concentration do not hurt the

folks that we represent.

Application of antitrust laws is not limited to corporate mergers,

of course. In industries as varied as computers, software, airlines,

and food processing, your agencies have moved swiftly and decisively to prevent anticompetitive conduct by companies that harm

consumers.

The resolution of these issues is ultimately for the courts, but let

me make plain that we are committed to ensuring that you have

sufficient resources to do your job, and we will reject any effort to

play politics with your budget in response to your action on any

specific case.

The great increase in merger activity has unquestionably burdened your agencies with a very heavy workload and we, therefore,

support sufficient funding for your budgets. But the thresholds

under which companies enter into mergers and acquisitions must

report their transactions to the FTC and Department of Justice

have not been adjusted even for inflation since the passage of HartScott-Rodino in 1976. This has led the agencies to review far more

transactions, many irrelevant, at least from an antitrust perspective, than Congress intended.

So we have authored, with Senators Hatch and DeWine, legislation to raise the pre-merger notification thresholds in most cases

from $15 million to $35 million. This overdue reform will enable

you to focus your efforts on the deals which are most likely to raise

competitive concerns. We intend to work closely with you to ensure

that nothing in the bill weakens your ability, Mr. Klein and Mr.

Pitofsky, to carry out your responsibilities.

Unfortunately, Senator DeWine and I do not have as much confidence in the FCC’s ability to get the job done, so we intend to

move quickly our legislation to put strict time limits on the FCC’s

merger review process.

4

In addition, we also have concerns about the increasing level of

concentration in agriculture, so we intend to focus on this issue because we are very concerned that farmers are getting the short end

of the stick. Senators Daschle, Leahy, and I will soon be introducing a bill on this subject and we would like for you to work with

us on it.

One more thing. For a long time, I have wondered how we ever

got to a system where we have two agencies administering exactly

the same program. In a perfect world governed by the efficiencies

that your agencies are asked to promote, I ask, would it not be better for all concerned if there was a single agency charged with

guarding against anticompetitive conduct?

Mr. Chairman, in this era of ever-quicker technological change

and ever-increasing corporate consolidation, the need for vigorous

enforcement of our antitrust laws has never been greater. Mr.

Klein and Mr. Pitofsky, you both have been equal to the challenge

and we are very fortunate that you are both occupying your offices

at this critical time.

Thank you, Mr. Chairman.

Senator DEWINE. Senator Leahy.

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR

FROM THE STATE OF VERMONT

Senator LEAHY. Thank you, Mr. Chairman. I would join in the

comments of the distinguished Senator from Wisconsin in praising

the way you have handled this, but I would include him in the

praise. He was too modest to include himself, but I would. I think

the both of you have set a fine standard. It has been very helpful

to all the other Senators who serve on Judiciary on both sides of

the aisle because of the leadership the two of you have given.

Mr. Klein, I want to thank you for appointing a special counsel

on agricultural matters. As Senator Kohl mentioned about the legislation that he and I and Senator Daschle and others will introduce soon, it is intended to enhance competition in rural America

and protect farmers and ranchers from sometimes deceptive and

unfair business practices of agribusiness.

One of the difficulties I have had is knowing who has bought

whom and when and why and how. A lot of companies are buying

other companies for free, in their thought, because they have got

highly-inflated stock, part of the exuberance, I suppose, that Chairman Greenspan speaks of.

Unfortunately, we start at a point where you have one merger,

and this is somewhat related to what Senator DeWine said, and

then you have a string of defensive mergers. A company will buy

another company to buy another company to stop a company from

buying them, and all that fueled by high stock prices. In the end,

you end up with one huge conglomerate and nobody can tell who

is in charge.

I sent a letter recently to Mr. Klein about a company that is in

a buying frenzy, Suisse Foods of Texas. I know you filed a complaint against them in Kentucky because you are concerned about

potential higher school milk prices. In the competitive impact statement filed by the Department of Justice in that case, you mentioned that Suisse acquired a company with a history of school milk

5

bid rigging, Flavoridge, and now you suddenly have a new company, but they own the old company that did the bid rigging.

I remember that case well because I had introduced a bill to ensure that dairies which are convicted of school lunch bid rigging

would be debarred from continuing to participate in the school

lunch program. I did this from the Agriculture Committee because

we try to fund the school lunch program, but there is only so much

money and we need competition to make sure that we get what we

pay for. That bill became the law of the land with very strong bipartisan support.

The dairy farmers in my part of the country are concerned about

the unyielding market power of Suisse Foods, but I think the concern would be any part of the country, whether it is in the Midwest, the West, anywhere else. You want to make sure that there

is still competition.

Senator John Sherman, who over a century ago did the Sherman

Antitrust Act, said that we will not endure a king over the production, transportation, and sale of any of the necessities of life, and

I think we all still feel that way.

Chairman Pitofsky, I am glad you are here. As I mentioned to

you before we started, the FTC has been quite busy these days. Of

course, you have superb people over there, which helps a lot, and

especially with your very hands-on leadership. You are going to

have the fun of looking at the AOL-Time Warner merger, something that we discussed in this committee. But the issue at stake

is not just what it does for a company’s shareholders but what kind

of choice we as consumers have. Your consumer privacy workshops

have been very good, and I do want to sit down and talk with you

at some point about that. Finally, I am also interested in the views

of both of you on the need for reform for the Hart-Scott Rodino Act.

I have concerns over the limitations in document production

under the reform bill introduced by Chairman Hatch and Chairman DeWine and Senator Kohl, but I agree with them that we

should increase the size of the transaction thresholds and adjust

the fee structure, and that is something I want to work more on.

Thank you very much.

Senator DEWINE. We will turn to our panel. Joel Klein is, of

course, the Assistant Attorney General for the Antitrust Division

at the Department of Justice, a post he has held since July of 1997.

He is certainly a very familiar face at this committee’s hearings

and we welcome you back, Attorney General Klein.

Robert Pitofsky was sworn in as Chairman of the Federal Trade

Commission in April 1995. He has also testified many times before

this committee and we welcome him back, as well.

Mr. Klein, we will start with you this afternoon, if you could just

make any opening statement that you wish. Your written statement, of course, will be made a part of the record.

STATEMENT OF JOEL I. KLEIN, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, U.S. DEPARTMENT OF JUSTICE

Mr. KLEIN. Thank you very much, Mr. Chairman, Senator Kohl,

Senator Leahy. I appreciate your kind remarks, and more importantly, I want to note that I think the way this subcommittee has

operated is truly exemplary in terms of legislative-executive relaVerDate 11-MAY-2000 11:26 Sep 17, 2001 Jkt 072736 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 E:\HR\OC\B736.XXX pfrm11 PsN: B736
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tionships. Your oversight has been tough, it has been constant, it

has been vigilant, but it has always been fair, and most importantly, I believe the commitment of you and Senator Kohl to appropriate antitrust enforcement to protect America’s consumers, America’s businesses, and ultimately America’s economy, because our

economy is the strongest in the world in large measure because it

is the most competitive in the world. And for that, while I know

on specific cases, like any other matter, we may have a difference

of views, I think the relationship has really been extraordinary and

I want to thank both you and the ranking member for that, Mr.

Chairman.

Let me just say very briefly, since I think a large part of opening

remarks actually you already read, so I can be mercifully brief

here. I do think a lot of great significance is going on, both in the

American economy—I think this really is a watershed time in history. I think one could go back and look at the industrial revolution

and the agricultural revolution and we are now at the third of

those great historic moments, the technology revolution, coupled

with globalization, that are related.

I think the significance of antitrust enforcement to those changes

is absolutely critical and I think it has now been well demonstrated

that the role of antitrust in the new economy is going to be every

bit as important as it was in the old economy, and our 100-year

history in this endeavor has demonstrated to the rest of the world

that they have to play catch-up, a point that you have noted many

times, Mr. Chairman.

Let me say, with respect to our enforcement efforts, I think first

and foremost, what has happened in international cartel enforcement is truly extraordinary. You mentioned the $1 billion-plus dollars we brought in in fines last year. That is on a criminal enforcement budget that is significantly less than $50 million. So those

who said we have questioned the private market, I propose that we

be allowed to take the Antitrust Division private. I think those

kind of margins would do us well.

More important, we cracked open last year the single largest cartel in history, the vitamins cartel, and this has had enormous consequence for America’s farmers, who have to buy these vitamins.

These are vitamins they feed to their wildlife. What is significant

about this is not just that it was such a huge conspiracy, but that

the hub of this conspiracy, the dominant players were all major European companies and it took an American enforcement effort to

bring down Hoffman-LaRoche, BASF, and ultimately Rhone

Poulenc, who cooperated with us, and I think that has affected a

major shift in global attitude.

Second, last year, as part of our enforcement effort, we prosecuted two very high-level executives at the Archer Daniels Midland Company, successfully prosecuted, and they are now serving

time in prison in Illinois, significant prison terms, and I think that

America has been successful in cartel enforcement because we have

individual liability and prison terms. We currently have two Europeans serving time in American prisons in the vitamin cases and

those are ongoing investigations.

Second, our civil enforcement program has been, I think, very,

very robust and I think it raised several key cases with respect to

7

monopoly practices, the Microsoft case, the Visa-MasterCard case,

and the American Airlines case, each of which, I think, raised important issues about antitrust in the new economy. We are enormously gratified by the Federal District Court’s ruling on findings

of fact in the Microsoft case. We have a trial scheduled in a couple

of months in the Visa-MasterCard matter, and later toward the end

of this year in American Airlines. I think these cases are going to raise some of the key issues

about market power in network economies. In each of the three

cases I have mentioned, what the real barriers to entry are all

about there are these network effects, these increasing returns to

scale, which is very different from the kind of things we saw during

the industrial revolution.

Finally, you and Senator Kohl have both gone on at some length

about the merger wave we are experiencing. I do think no matter

how enormous the numbers are, we cannot fully appreciate the real

sea change in our economy to see what is going on. We have had

a strong merger enforcement program. We blocked, as you know,

Senator DeWine, the Lockheed Martin-Northrup Grumman shortly

after those hearings we had on defense consolidation, and I think

that sent an important signal in the defense industry.

You talk about media consolidation. We blocked the Primestar

acquisition of the Rupert Murdoch assets with respect to satellite

transmission and we facilitated a close to $2 billion divestiture of

the Internet backbone assets in the Worldcom-MCI merger.

In the farming area, we have had several key cases, one of which

I would simply mention, the Cargill-Continental case, not just because of the significance on farm producers in the United States,

but also because that is one of two cases we brought in the past

several months where, for the first time in a long time, we asserted

a buyer power, not a seller power, but a buyer power theory. That

is, the producers who have to sell to these large conglomerates

could have been hurt in an anticompetitive fashion, and I think

that marks a step that reflects our vigilance and concern in this

area. In addition, we took an action with respect to a tractor merger, and finally with respect to two big agribusiness biotechnology

issues involving the Monsanto Company.

Lastly, Mr. Chairman, let me just note that your concerns about

international enforcement and our relationship with our trading

partners throughout the world continues to be a great concern to

us. We are analyzing the ICPAC, the Competition Policy Advisory

Committee’s report, and I will say here now we have had some success with respect to the Saber matter on a positive comity referral

and this committee has been tough with us on positive comity, but

I think your suggestions and your recommendations have helped

strengthen the process and I want to thank you for that, as well.

Senator DEWINE. Mr. Klein, thank you very much.

[The prepared statement of Mr. Klein follows:]

PREPARED STATEMENT OF JOEL I. KLEIN

Good afternoon, Mr. Chairman and members of the Subcommittee. It is a pleasure

for me to appear again before you today on behalf of the Antitrust Division of the

Department of Justice. I would like to say a few words about the current environment in which we enforce the antitrust laws, and then highlight some of our recent

enforcement initiatives.

8

As members of this Subcommittee appreciate, sound antitrust enforcement is vital

to America’s economic health. Competition is the cornerstone of this country’s eco- nomic foundation. American consumers and businesses all benefit from the kind of

robust free-market economy that antitrust enforcement promotes and protects. Effective antitrust enforcement helps consumers obtain more innovative, high-quality

goods and services at lower prices, and enhances the competitiveness of American

businesses in the global marketplace by promoting healthy rivalry, encouraging efficiency, and ensuring a full measure of opportunity for all competitors.

Antitrust enforcement has rightly enjoyed substantial bipartisan support through

the years, and we appreciate the active interest and strong support this Subcommittee has shown toward our law enforcement mission.

Our economy is in the midst of dramatic changes, with increased globalization

and rapid technological innovation, and deregulation creating an environment in

which many firms are choosing to merge or undertake other types of strategic business alliances. While most of these arrangements foster efficiency to the benefit of

consumers and businesses alike, some can result in market power that decreases

competition. That is why we must look at these arrangements carefully, so that we

can take appropriate steps to protect American consumers and businesses from

those that threaten competition.

RESPONDING TO CURRENT CHALLENGES

Before I turn to some of our recent enforcement actions, let me talk for a minute

about what the changes in the marketplace mean for antitrust enforcement, and

how we are responding.

Globalization of markets

We are responding to the fact that we live in a global marketplace. Our legal authority under the antitrust laws reaches anticompetitive conduct that take place off

U.S. soil if it has significant effects here, as reaffirmed most recently in the Nippon

Paper Industries Co. case. But to make effective use of that authority, we often need

help from foreign competition authorities to obtain crucial evidence. We have negotiated numerous mutual assistance agreements with our foreign counterparts to facilitate this kind of cooperation, including one agreement thus far, with Australia,

under the International Antitrust Enforcement Assistance Act of 1994, which allows

us to share certain confidential information under appropriate protections.

There are an increasing number of mergers that cross international boundaries

and are subject to review by more than one country’s antitrust authority. To minimize the burden of multi-jurisdictional review on merging parties, and the conflicts

that can result from differing conclusions regarding a merger, we have worked hard

to cultivate good relations with foreign enforcers so that we understand each other’s

merger enforcement policies and practices, and to coordinate where it makes sense,

bearing in mind each country’s understandable interest in conducting its own review

of mergers that impact its markets. We learned some valuable lessons from the Boeing/McDonnell-Douglas merger, where the FTC and the EC reached differing conclusions. I believe the more recent MCI/WorldCom and Dresser/Halliburton mergers

are a good model for how close consultation in international merger enforcement can

and should work. The parties agreed to waive confidentiality, enabling us and the

EC to share our independent analyses as they evolved, and we ultimately reached

essentially the same conclusions. We’ve formed a U.S.–EU merger working group,

along with the FTC, to build on our experiences in these cases.

At times, due to jurisdictional and practical limitations, it may make more sense,

if a foreign country’s markets are most directly affected, for the antitrust authority

in that country to investigate a matter in the first instance. To that end, we have

included so-called ‘‘positive comity’’ provisions in bilateral cooperation agreements

with several of our major trading partners, including the European Union, Canada,

Japan, Israel, and Brazil—as well as a special enhanced positive comity agreement

with the EU. Our one formal positive comity experience to date—the referral to the

European Commission of possible anticompetitive conduct by several European airlines with respect to computer reservation systems—has thus far been successful.

The Subcommittee has played an important constructive role in our thinking about

how to make positive comity an effective tool in international antitrust enforcement.

Rapid technological change

We have also responded to the challenges posed by the rapid technological advances evidenced in many industries. We spend significant time and energy developing the expertise needed to understand the competitive impact of the new technology. We are mindful that technological change can bring industries previously

considered separate and distinct into the same competitive marketplace. And we

9

critically evaluate the increasingly frequent claim by the parties we are investigating, that technology is changing their industry so rapidly that we should not

be concerned. We know, however, that in some cases rapid technological change can

actually increase barriers to entry through network externalities and first mover advantages that may cause the market to tip quickly toward a dominant supplier and

thereby make new entry extremely difficult.

The more important that innovation becomes to society, the more important it is

to preserve economic incentives to innovate. Timely and effective antitrust enforcement may be essential to preserving the kind of environment in which companies

new and old, large and small, can be confident that there will be no anticompetitive

barriers to bringing their new products and services to market.

Deregulation and the introduction of competition

In recent decades, legislative and regulatory changes in the United States have

reversed a generation of pervasive government regulation and deregulated such

basic industries as telecommunications, energy, financial services, and transportation. As competition displaces regulation as the industry norm, antitrust enforcement becomes important to ensuring that the procompetitive goals of deregulation

can be achieved. In telecommunications, we are seeing the effects of the 1996 Act

unfold. When successfully implemented, that Act will significantly restructure the

industry and bring enormous competitive benefits to consumers and the economy;

but bringing competition to segments of an industry in which regulated monopolies

have long held sway will not be fully accomplished overnight. In addition the role

we play in advising the Federal Communications Commission on section 271 longdistance entry applications, helping to ensure that the local market is open to competition before long distance entry is granted, we are also paying close attention to

mergers and alliances being undertaken in response to deregulation, to ensure that

competition is able to spread and flourish.

For example, we challenged the proposed acquisition by Primestar, a joint venture

controlled by five of the largest cable companies in the U.S., of the direct broadcast

satellite assets of News Corp. and MCI, because we were concerned that it would

allow those cable companies to prolong their monopoly in multi-channel video programming distribution. The assets in question included a satellite at the last orbital

slot available to independent DBS firms for reaching the entire continental U.S.,

and allowing it to be transferred to the dominant cable companies would have eliminated one of the most important avenues of new competition to cable. In the face

of our challenge, Primestar abandoned the acquisition.

The electric power industry is beginning to follow a similar path from regulation

to competition, and we and others in the Administration look forward to working

with Congress to ensure that regulatory restructuring at the federal level is consistent with fundamental competitive principles, and that competition is protected

and nurtured as restructuring in the industry proceeds.

RECENT ENFORCEMENT INITIATIVES

I would not like to highlight a few of our important enforcement initiatives over

the past year or so, first in criminal enforcement, then in merger enforcement, and

finally in civil non-merger enforcement.

Criminal enforcement

In the area of criminal enforcement, we are continuing to more forcefully against

hard-core antitrust violations such as price-fixing and market allocation. In the past

few years, a significant number of our prosecutions have been against international

price-fixing cartels that have directly impacted substantial volumes of U.S. commerce. We have found that many of these international price-fixing cartels were

highly sophisticated, involved leading firms in the industry, and affected a wide variety of goods sold to business and individual consumers. They are also often particularly brazen.

The past fiscal year set yet another new record in terms of criminal antitrust fines

secured, on top of several previous record-breaking years—a total of $1.1 billion.

One single fine, the $500 million fine against Swiss pharmaceutical giant F. Hoffman La Roche in relation to the international vitamin cartel, was the largest criminal fine in the entire history of the Department of Justice, antitrust or otherwise.

You should not presume that we will continue breaking records every year. The

order of magnitude of criminal antitrust fines since fiscal year 1997 is unprecedented—in the previous decade, they averaged $29 million annually, and that average was itself higher than previous periods. In fact, the amount of fines obtained

since fiscal year 1997 is many multiples higher than the sum total of all criminal

fines imposed previously for violations of the Sherman Act, dating all the way back

10

to the Act’s inception in 1890. The fiscal year 1999 record was itself an almost fourfold leap over the record set the previous year. But the recent fine levels are a direct

result of our sustained effort to crack not just domestic price-fixing schemes, but

also to focus our resources on the biggest international cartels that victimize American consumers and businesses, to bring the violators to justice, and to send a

strong deterrent message throughout the world—and effort that we will continue.

International cartels typically pose an even greater threat to American businesses

and consumers than domestic conspiracies, because they tend to be extremely broad

in geographic scope and amount of commerce affected, as well as highly sophisticated, characterized by precise and elaborate agreements among the conspirators to

carve up the world market by allocating sales volumes among themselves and agreeing on what prices would be charged to customers around the world, including in

the United States.

International cartels victimize a broad spectrum of U.S. commerce, costing American businesses and consumers hundreds of millions of dollars a year.

The record-setting fine I mentioned a minute ago resulted from a major investigation into an international cartel organized to fix prices and allocate market shares

for vitamins. The conspiracy affected $5 billion in U.S. commerce, involving vitamins

used not only as nutritional supplements and food additives, but also as important

additives in animal feed; it may well be the most harmful conspiracy we have ever

uncovered. The victims who purchased directly from the cartel members included

companies with household names such as General Mills, Kellogg, Coca-Cola, Tyson

Foods, and Proctor and Gamble. As a result, for nearly a decade, every American

consumer—anyone who took a vitamin, drank a glass of milk, had a bowl of cereal,

or ate a steak—ended up paying more so that conspirators could reap hundreds of

millions of dollars in additional, ill-gotten revenues.

Last May, two firms, F. Hoffman-La Roche and a German firm, BASF Aktiengesellschaft, agreed to plead guilty, with Hoffman-La Roche to pay a fine of $500

million and BASF to pay a fine of $225 million. These prosecutions are part of an

ongoing investigation of the worldwide vitamin industry in which there have been

14 prosecutions to date. It has resulted thus far in convictions against Swiss, German, Canadian, and Japanese firms, with over $875 million in criminal fines

against the corporate defendants, and in convictions against seven American and

foreign executives who are now serving time in federal prison or awaiting potential

jail sentences along with heavy fines.

Other industries where we have brought major criminal prosecutions recently, in

addition to vitamins, include: graphic electrodes used in electric arc furnaces in steel

mills to melt scrap steel; sorbates used as chemical preservatives to prevent mold

in cheese, baked goods, and other food products; marine construction and transportation services; point-of purchase display materials such as plastic and neon signs;

the livestock feed additive lysine; citric acid; the industrial cleaner sodium gluconate; commercial explosives; real estate foreclosure auctions; and metal buildings insulation.

International enforcement of our criminal antitrust laws is a top priority of the

Antitrust Division. At present, more than 35 sitting U.S. antitrust grand juries are

looking into suspected international cartel activity. We are determined that international cartels not be permitted to prey on American businesses and consumers

with impunity. An equally important goal is to ensure that every business person

around the world who contemplates price-fixing behavior that could adversely impact American businesses and consumers will choose to forgo such illegal activity

because of concern that we will find out about it and prosecute to the full extent

of the law. Our efforts to achieve that goal will continue unabated this year and

for years to come.

Merger enforcement

We are in the midst of a continuing merger wave throughout our economy. A

record $1.4 trillion in U.S. merger transactions took place in 1999. In each of the

last two fiscal years, more than 4600 transactions were reported to us under the

Hart-Scott-Rodino Act, the most in our history, and more than double the number

being filed per year just a few years ago. And in the first five months of fiscal year

2000 there have been more than 2000 reported transactions, an approximately 18-

percent jump over the same period in the previous fiscal year.

We have devoted tremendous energy to staying on top of this merger wave, so

that we can challenge the mergers that would harm competition while minimizing

any delays and disruptions in competitively beneficial or benign business combinations, which constitute the overwhelmingly majority.

In the last fiscal year, we brought 47 merger challenges, the highest level of merger enforcement in our history. So far this fiscal year, we have brought 12 more.

11

While most of our merger challenges have been resolved by consent decrees, we

have not hesitated to seek to block transactions in their entirety when necessary

to preserve competition. Both the Lockheed Martin/Northrop Grumman and the

Primestar transactions were abandoned after we filed complaints and were well into

discovery, and parties have abandoned other transactions, such as Monsanto/Delta

& Pine Land, after learning of our intention to sue. Since July 1, 1997, we have

gone to court nine times to full-stop block merger transactions; and on seven other

occasions we have been prepared to go to court to full-stop block a merger, but the

parties abandoned the transaction prior to our filing a lawsuit.

Our important merger enforcement actions of the past year include the Cargill/

Continental Grain merger, where we insisted on divestitures in a number of grain

storage facilities throughout the Midwest and in the West, as well as in the Texas

Gulf, to protect competitive options for grain and soybean producers and to protect

competition in the delivery points for the corn and soybean futures markets. This

was a particularly important case in that it demonstrates that antitrust enforcement is concerned not only with market power in the possession of sellers, but socalled ‘‘monopsony’’ power in the possession of buyers. In this case, the concerns

that led to our challenge had to do entirely with the creation of monopsony power

in the mergers firm as buyers of grain and soybeans.

In addition to Cargill/Continental and Primestar, other recent merger challenges

include:

• Lockheed/Northrup Grumman, where the merger would have resulted in unprecedented vertical and horizontal concentration in the defense industry, substantially lessening and in some cases outright eliminating competition in major product

markets critical to our national defense. In the face of our challenge, the parties

abandoned the merger.

• Northwest/Continental, where the proposed transaction would allow Northwest

to acquire voting control over Continental, substantially diminishing the incentives

for the two airlines—the nation’s fourth and fifth largest—to compete against each

other. This case is pending and is currently scheduled for trial in October.

• Monsanto/Dekalb Genetics, where the merger as proposed would have substantially lessened competition in biotechnological innovation in corn. Monsanto agreed

to spin off claims to an important cutting-edge technology used to introduce new genetic traits into corn seed, and to license its proprietary Holden’s corn germplasm,

to numerous seed companies so they could develop their own special hybrids.

Civil non-merger enforcement

Civil non-merger enforcement has become especially important in this era of rapid

technological change and the growth of network industries, and we have also been

very active in this area to ensure that antitrust enforcement keeps up with these

changes to protect competition in a variety of industries important to our economy.

Perhaps our best-known recent civil non-merger case is our pending case against

Microsoft under sections 1 and 2 of the Sherman Act for its efforts to use exclusionary practices to protect its monopoly in personal computer operating systems

and to extend its monopoly power into the Internet browser market. As you know,

Judge Jackson issued findings of fact in November, the parties have filed briefs as

to proposed conclusions of law and concluded oral arguments, and we are now

awaiting the court’s conclusions of law.

The Microsoft case is obviously one of our top priorities, and we consider it to be

very important for our economy. But let me turn briefly to a few of our other important civil non-merger cases.

First let me say a few words about our pending case against American Airlines

under section 2 of the Sherman Act for monopolizing airline passenger service on

routes emanating from its hub at Dallas/Ft. Worth International Airport. As the

complaint we filed sets forth in detail, American repeatedly sought to drive small,

start-up airlines out of DFW by saturating their routes with additional flights and

cut-rate fares. After it succeeded in driving out the new entrant, American would

re-establish high fares and reduce service. Passenger traffic surged when the lowcost airline began operations and more people could afford to fly, and then fell back

dramatically after American had driven out the upstart and resumed monopoly pricing. American knew this strategy was a money-loser in the short term, but expected

to make that up by preserving its ability to set fares at monopoly levels.

American, like anyone else in our capitalist economy, is free to compete, and compete aggressively. But is crossed a fundamental line into predation. This is the first

predation case brought against an airline by the Antitrust Division since the industry was deregulated in 1979. I think it will be tremendously important for our traveling public throughout the country, who deserve the lower fares and expanded

choices available in a competitive airline marketplace.

12

Out case against VISA/MasterCard is also an important civil non-merger enforcement action. We are charging VISA and MasterCard, the two dominant general purpose credit card networks, with restraining competition among themselves through

overlapping governance arrangements among the large banks that own and control

them, as well as adopting rules to prevent their member banks from dealing with

other credit card networks. The result is that competition and innovation are severely impaired. This case is also pending, and trial is expected this summer.

A third civil non-merger case I’ll mention is our case against Dentsply International for unlawfully maintaining a monopoly in the market for artificial teeth in

the U.S. Dentsply entered into restrictive dealing arrangements with more than 80

percent of the nation’s tooth distributors, preventing them from selling products

made by its competitors. Dentsply’s efforts to deprive its rivals of an effective distribution network have resulted in increased prices for artificial teeth; they have reduced innovation; they have prevented other firms from competing effectively; and

they have deterred new entry into the market. Trial in this case is expected sometime this year.

ANTITRUST DIVISION BUDGET AND STAFFING

As you can see, our workload is expanding, its complexity is increasing, and its

importance to American businesses and consumers has never been greater. To continue to effectively carry out our mission, we need increased resources.

For the current fiscal year, the Antitrust Division’s budget is $110 million, providing for an appropriated staffing level of approximately 360 attorneys. In light of

our tremendous ongoing workload and its projected expansion, the President’s fiscal

year 2001 budget request for the Antitrust Division is $134 million, which includes

increases to handle cost-of-living expenses as well as to hire additional attorneys,

economists, paralegals, economic research assistants, and other critical support.

This increase is needed in light of our increasing workload and the clear importance

of competition to the nation’s economic health and prosperity. It will for the first

time in 20 years enable us to bring our staffing level back to where it was in 1980,

a time when the economy was significantly smaller, less complex, and less

globalized. I can assure you that we will put the additional resources to productive

and cost-effective use.

CONCLUSION

The Supreme Court has described the Sherman Act as the ‘‘Magna Carta’’ of the

free enterprise system. The responsibility we are given to enforce it is one we take

very seriously. We are working hard to carry out our enforcement mission to protect

competition in the marketplace against private efforts to thwart it. We are not in

the business of picking winners and losers. In a free market economy, that responsibility falls to consumers, who make that determination through their purchasing decisions. The job of the antitrust enforcement is to ensure that the benefits of the

competitive process are not blocked by private anticompetitive conduct. We look forward to meeting the ongoing challenge to ensure that businesses can compete on

a level playing field and that consumers and businesses are benefited by competition

that produces low prices, high quality, and innovative goods and services.

Senator DEWINE. Chairman Pitofsky, thank you very much for

joining us.

STATEMENT OF ROBERT PITOFSKY, CHAIRMAN, FEDERAL

TRADE COMMISSION

Mr. PITOFSKY. Thank you, Mr. Chairman.

Senator DEWINE. We are glad to have you back.

Mr. PITOFSKY. Thank you very much. Senator Kohl, Senator

Grassley, as always, I am very pleased to appear before this committee to discuss the FTC’s activities in antitrust enforcement.

In my years at the agency, we have worked in an exceptionally

constructive way with members of this committee and I want to

echo what my friend Joel Klein just said, that we appreciate the

support and the guidance that we have received in the oversight

process. In my experience, I have not seen as fine a relationship

13

between an oversight committee and a regulatory agency than we

have seen with this group.

This is an unusually interesting time to be engaged in antitrust

enforcement. There have been several mentions already of the

merger wave, and I am sure we will come back to that; rapid

globalization of trade, which changes the nature of measurement of

market power; rapid expansion of the high-tech sector of the economy, which means you have to be careful in applying old precedent

to very new structures; deregulation of vast sectors of the economy,

including telecommunications and electricity; and finally from our

point of view, because we are so committed to enforcement in this

area, a distribution revolution which has opened up markets to access and consumers to greater opportunities for choice. I have in

mind principally the online commerce sector, which was $15 billion

this year and is predicted to be $78 billion by 2003.

The challenge is to take this 19th century discipline which has

served this country so well and apply it to 21st century problems.

I know that we have to adjust in applying precedent in this area

and I hope we are in the process of doing so.

I would like to single out just three areas of the many that we

are involved in for a statement. First, the merger wave, 3 times as

many filings in 1999 as 1991, and now we find this year filings are

up another 18 percent. One cannot help asking where this will all

end, 10 or 11 times as many assets scooped up in mergers as 10

years ago.

My own view is that the merger wave is not the problem. It is

primarily a consequence, an inevitable consequence, of the most dynamic economy this country has seen in a generation. The problem

is, the mega-mergers that we see now, some of which are exceeding

$100 billion in value, among firms that already have great market

power and sometimes between firms that are direct competitors

with each other.

Nevertheless, the fact is that we thoroughly investigate only 3

percent of the mergers that are filed. We challenge a little over 1

percent. Ninety-eight or 99 percent of these mergers go through,

but the ones that do not, I think deserve very aggressive review.

On distribution, my own view is that the United States has the

most open wholesaling and retail sector of its economy of any country in the world. I think it has served the country well and I believe that one of the success stories of antitrust is the way it has

kept distribution open.

But now we find new challenges. For example, I mentioned online distribution. One of the more interesting cases in the last year

involved a pattern of behavior in which 25 conventional Chrysler

dealers went to the Chrysler Company and said, there is somebody

selling cars on the Internet at a very low price. Do something about

that company. Cut them back. Cut them down. Chrysler referred

their complaint to us and we entered into a consent order preventing that kind of behavior. It was a fairly conventional boycott.

I hope that our action in that area will convince other brick-andmortar distributors that that is not an appropriate way to deal

with the new competition offered on the Internet.

We challenged a proposed vertical merger between Barnes and

Noble, the number one book-selling chain in the United States, and

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Ingram, the number one retailer, because we were concerned that

small booksellers and new entrants in the Internet sector of book

selling would not have a secure wholesale source of supply. That

deal was abandoned before we got to court, but it seems to me,

again, it was an effort to keep markets open.

Finally, just a few weeks ago, we settled a case with McCormick

spice company. Our complaint alleged that they were providing discriminatory discounts in the nature of slotting allowances, shelf

space allowances, conditioned on the chain giving McCormick spice

70 or 80 percent of the shelf space in the store, injuring smaller

competitors in the spice market, disadvantaging smaller chains and

independents who did not receive the discount.

I believe the case was important. I am even more enthusiastic

about the fact that we will hold a workshop at the FTC in a month

or two in which we will invite private sector people, consumer people, academics, to discuss the role of slotting allowances in the

modern economy. I think that is in the tradition of my agency,

which is not supposed to be just a law enforcement agency but is

supposed to anticipate commercial problems and report findings to

Congress.

Finally, very briefly, we spend a lot of our resources on the

health care market because inflation in that area seems to be quite

pronounced, the usual merger concerns among pharmaceutical

firms. We have a case in court now in which the allegation is that

Mylan, a genetic pharmaceutical firm, cornered the market, allegedly, on a key ingredient for their product, and having cornered the

market, raised the price in January 1998, from $11.36 for 500 capsules to $377, and this was a product needed by many people who

are on rather fixed incomes. An unusual aspect of the case is that

we are seeking not just the conduct remedy, but disgorgement of

allegedly ill-gotten profits.

Finally, we brought a case just—well, two cases came up just 2

weeks ago, one we settled and one we are going to be in court on,

involving rather similar conduct, and that is a situation in which

a branded pharmaceutical, as it sees its patent winding down and

is threatened by a challenge by a generic, enters into an agreement

with the generic firm, paying millions of dollars per month for the

generic firm to stay out of the market or to delay its entry into the

market. We settled one case and we will litigate the other. The

question of competition between branded pharmaceuticals and

generics is one that we are paying a lot of attention to at the

present time.

Let me simply conclude where you started, Mr. Chairman. We

are extremely busy. I think we can handle the merger wave by reassigning people from one part of our agency to the other. I do

worry that there are conduct cases that are not being handled as

aggressively and as promptly as they should be because our resources have been moved so much in the direction of merger review.

Thank you very much, and I look forward to answering your

questions.

Senator DEWINE. Mr. Chairman, thank you very much.

[The prepared statement of Mr. Pitofsky follows:]

15

1Sandra Sugawara, Merger Wave Accelerated ’98: Economy, Internet Driving Acquisition,

Wash. Post, Dec. 31, 1999 at El. 2See Attachment 1.

PREPARED STATEMENT OF ROBERT PITOFSKY

Mr. Chairman and Members of the Subcommittee, I am pleased to appear before

you to present testimony of the Federal Trade Commission that will provide an

overview of our antitrust enforcement activities. Today I will review the Commission’s activities since I last testified for general antitrust oversight purposes. The

Commission is charged with the enormous responsibility of ensuring that consumers

receive the benefits of a competitive marketplace, a mission that we share with the

U.S. Department of Justice. We welcome that responsibility and believe that we are

fulfilling our obligation.

The Commission strongly believes in the bedrock principle that protecting competition by preventing improper creation, acquisition, or exercise of market power

enhances the welfare of consumers. Congress decided long ago that a competitive

economy is vastly preferable to an economy reliant on government regulation of the

conduct of firms with market power. Competition is the best way to ensure that consumers receive the benefits of lower prices, higher quality and quantity of goods and

services, and greater innovation. That approach has been validated throughout the

past hundred and ten years of antitrust enforcement.

These are dynamic times for the economy, and with these changes come many

challenges for the antitrust agencies. The economy is rapidly being reshaped, and

markets are being created or redefined, by numerous forces operating at the same

time, including: the explosion of electronic commerce; deregulation of critical industries such as telecommunications, financial services and electricity; convergence of

technologies and, indeed, of markets; and globalization. These forces result in a fastchanging, more complex economy, even with respect to basic sectors of the economy

such as electricity. While these changes carry the promise of tremendous benefits

for consumers, some may also create incentives and opportunities for anticompetitive behavior. The challenge for us, apart from the sheer magnitude of the amount

of activity, is to understand these changes and to know when antitrust intervention

is appropriate.

The Commission’s approach to antitrust enforcement is guided by two important

principles. First, we seek to enforce the antitrust laws with vigor, and protect consumers from abuses of market power in whatever form. It is the Commission’s re- sponsibility to protect consumers from anticompetitive consequences of private

agreements, the abuse of monopoly power, or illegal mergers. The Commission also

recognizes, however, the costs that government intervention can place on private

parties. For this reason, our second guiding principle is to avoid unnecessary intrusions and to minimize, to the extent possible, the burdens placed on businesses by

our efforts to protect consumers. We have an important responsibility to ensure that

antitrust policy makes sense and is sensibly and effectively applied.

I will begin this overview with a topic that is not new news, but is still big news— the astounding level of merger activity. We are busier than ever on that front. I will

review some recent merger enforcement actions that have had particularly immediate significance for consumers. I will then cover several other areas that receive

our close attention: competitor collaborations, retailing, and health care markets.

LEVEL OF MERGER ACTIVITY

The number of mergers reported to the FTC and the Justice Department pursuant

to the Hart-Scott-Rodino Act has more than tripled over the past decade, from 1,529

transactions in fiscal year 1991 to 4,642 transactions in fiscal 1999. Thus far in fiscal year 2000, filings are at a record pace; if this continues, filings for the year will

be approximately 18% above the record set in fiscal 1998.

Currently, more than two-thirds of our competition resources are dedicated to

merger enforcement, compared to an historical average of closer to 50 percent. The

merger wave strains the FTC resources to the breaking point. The Washington Post

recently characterized the merger wave as a ‘‘frenzy of merger madness, capping a

dramatic wave of corporate consolidation that has been gaining momentum through

much of the decade.’’ 1 The article quotes merger experts who note that a key force

driving merger activity is the new world of electronic commerce.

While the number of merger filings has more than tripled in the past decade, the

dollar value of commerce affected by these mergers rises on an even steeper trajectory, increasing an astounding eleven-fold during the past decade.2 But mere numbers do not fully capture the complexity and the challenge of the current merger

wave. Today’s merger transactions not only are larger, but often raise novel or comVerDate 11-MAY-2000 11:26 Sep 17, 2001 Jkt 072736 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 E:\HR\OC\B736.XXX pfrm11 PsN: B736
16

3 In addition, 19 merger filings were withdrawn before the Commission’s investigation was

completed. 4Telecommunications, especially in the areas of cable and video programming, also has been,

and continues to be, an area of substantial activity. See Prepared Statement of the Federal

Trade Commission, Presented by Robert Pitofsky, Chairman, Before The Committee on Commerce, Science, and Transportation, United States Senate, November 8, 1999. 5Federal Trade Commission v. BP Amoco, p.l.c., Civ. No C 000416 (SI) (N.D. Cal. Feb. 4, 2000)

(complaint). 6The complaint also alleges that the combination of BP’s and ARCO’s pipeline and oil storage

facilities in and around Cushing, Oklahoma, a major crude oil trading center, would enable the

combined firm to manipulate the market for crude oil futures contracts traded on the New York

Mercantile Exchange. Those contracts involve crude oil designated for delivery in Cushing. The

complaint alleges that the combination of BP’s futures trading business and existing pipeline

and terminal facilities with ARCO’s pipelines, oil storage infrastructure, and inline transfer

business would increase BP’s ability to manipulate crude oil futures trading by giving it access

to information and control over pipelines and other essential facilities.

plex competitive issues requiring more detailed analysis. In the past year alone,

companies filed notifications for 273 mergers with a transaction size of one billion

dollars or more, and many of these mergers involved overlaps in several products

or services.

There are many reasons for the current merger wave. A large percentage of these

transactions appear to be a strategic response to an increasingly global economy.

Many are in response to new economic conditions produced by deregulation (e.g.

telecommunications, financial services, and electric utilities). Still others result from

the desire to reduce overcapacity in more mature industries. The rapidly evolving

world of electronic commerce has a substantial impact on the merger wave, because

consolidations often quickly follow the emergence of a new marketplace. These factors indicate that the merger wave reflects a dynamic economy, which on the whole

is a positive phenomenon. But some mergers, as well as some other forms of potentially anticompetitive conduct, may be designed to stifle competition in important

sectors of this dynamic economy.

Out of necessity, our scarce resources are directed at preserving competition in

the most important areas of the economy. The Commission dedicates the bulk of its

antitrust enforcement to sectors that are critical to our everyday lives, such as

health care, pharmaceuticals, retailing, information and technology, energy, and

other consumer and intermediate goods. Rather than recite a litany of cases, I will

focus on some cases that underscore the importance of the Commission’s antitrust

enforcement as we move forward in this new century.

MERGER ENFORCEMENT

In the last two fiscal years and fiscal 2000 to date, the Commission has brought

over 60 enforcement actions in industries ranging from food retailing to basic industrial products.3 Retailing, energy, and pharmaceuticals commanded the most enforcement resources.4

The Commission has committed considerable resources to addressing the wave of

consolidation in the petroleum and gasoline industry. In fiscal years 1999 and 2000

to date, the FTC’s Bureau of Competition used a staggering one-third of its enforcement budget to address issues in energy industries. In February of this year, we

filed an action in federal district court in San Francisco seeking a preliminary injunction against the proposed merger of BP Amoco p.l.c. and Atlantic Richfield Company (‘‘ARCO’’).5 The complaint alleges that the merger would combine the two largest firms exploring for and producing crude oil on the North Slope in Alaska; that

BP already exercises market power in the sale of crude oil on the West Coast; and

that by acquiring ARCO, BP would eliminate as an independent competitor the firm

most likely to threaten BP’s market power. ARCO, the pioneer on the North Slope,

has been the most aggressive explorer for oil in Alaska’s history.6 The Commission’s

suit has been joined by suits filed by the States of California, Oregon, and Washington. This is the latest of a number of enforcement actions in which the Commission worked with various states in pursuit of our common interest in protecting

American consumers. Last week, the Commission, the states and the parties obtained an order from the Court adjourning the preliminary injunction hearing while

the Commission evaluates the parties’ proposal to sell all of ARCO’s Alaska operations to Phillips Petroleum Co.

The BP/ARCO case comes on the heels of the Commission’s investigation of the

merger between Exxon and Mobil. After an extensive review, from oil fields to the

gas pump, the Commission required the largest retail divestiture in FTC history—

the sale or assignment of 2,431 Exxon and Mobil gas stations in the Northeast and

17

7 Exxon Corp., FTC File No. 991 0077 (Nov. 30, 1999) (proposed consent order).

8 British Petroleum Company p.l.c., C–3868 (April 19, 1999) (consent order). BP/Amoco involved very large companies but relatively few significant competitive overlaps. The Commission

ordered divestitures and other relief to preserve competition in the wholesaling of gasoline in

30 cities or metropolitan areas in the eastern and southeastern United States, and in the

terminaling of gasoline and other light petroleum products in nine geographic markets. 9Shell Oil Co., C–3803 (April 21, 1998) (consent order). The Shell/Texaco transaction raised

competitive concerns in markets for gasoline and other refined petroleum products in the Pacific

Northwest (Oregon and Washington), California, and Hawaii, for crude oil in California, and in

the transportation of refined light petroleum products to several southeastern states. The Commission required the divestiture of a refinery in Washington, a terminal on the island of Oahu,

Hawaii, retail gasoline stations in Hawaii and California, and a pipeline interest in the Southeast. 10PacifiCorp, FTC File No. 971 0091 (consent order accepted for public comment, Feb. 17,

1998). This order was withdrawn when the parties abandoned the transaction. 11Dominion Resources, Inc., C–3901 (Dec. 9, 1999) (consent order). 12 CMS Energy Corp., C–3877 (June 2, 1999 (consent order).

Mid-Atlantic, and California, Texas and Guam.7 The Commission also ordered the

divestiture of Exxon’s Benicia refinery in California; light petroleum terminals in

Boston, Massachusetts, Manassas, Virginia, and Guam; a pipeline interest in the

Southeast; Mobil’s interest in the Trans-Alaska Pipeline; Exxon’s jet turbine oil

business; and a volume of paraffinic lubricant base oil equivalent to Mobil’s production. The Commission coordinated its investigation with the Attorneys General of

several states and with the European Commission (about 60 percent of the merged

firm’s assets are located outside the United States).

There are several particularly noteworthy aspects of the Exxon/Mobil settlement.

First, the divestiture requirements eliminated all of the overlaps in areas in which

the Commission had evidence of competitive concerns. Second, while several different purchasers may end up buying divested assets, each will purchase a major

group of assets constituting a business unit. This is likely to replicate, as nearly as

possible, the scale of operations and competitive incentives that were present for

each of these asset groups prior to the merger. Third, these divestitures, while extensive, represent a small part of the overall transaction. The majority of the transaction did not involve significant competitive overlaps. In sum, we were able to resolve the competitive concerns presented by this massive merger without litigation.

The Commission also required divestitures in the merger between BP and

Amoco,8 and in a joint venture combining the refining and marketing businesses of

Shell, Texaco and Star Enterprises to create at the time the largest refining and

marketing company in the United States.9

The Commission challenged potentially anticompetitive mergers in other energy

industries as well. Three recent matters served to protect emerging competition in

electric power generation. Two of these cases were so-called ‘‘convergence mergers,’’ where an electric power company proposed to acquire a key supplier of fuel used

to generate electricity. One involved PacifiCorp’s proposed acquisition of The Energy

Group PLC and its subsidiary, Peabody Coal. PacifiCorp’s control of certain Peabody

coal mines allegedly would have enabled it to raise the fuel costs of its rival generating companies and raise the wholesale price of electricity during certain peak demand periods. The Commission secured a consent agreement to divest the coal

mines, but the transaction was later abandoned by the parties.10 In another case,

Dominion Resources, an electric utility that accounted for more than 70 percent of

the electric power generation capacity in the Commonwealth of Virginia, proposed

to acquire Consolidated Natural Gas (‘‘CNG’’), the primary distributor of natural gas

in southeastern Virginia and the only likely supplier to any new gas-fueled electricity generating plants in that region. Dominion allegedly could have raised the

cost of entry and power generation for new electricity competitors. Working closely

with Commonwealth officials, the Commission required the divestiture of Virginia

Natural Gas, a subsidiary of CNG.11 In a third matter, the Commission challenged

CMS Energy Corporation’s proposed acquisition of two natural gas pipelines.12 CMS

itself was a transporter of natural gas, whose customers could purchase the gas

from other suppliers, either for their own use or to generate electricity. The Commission alleged that the acquisition would have enabled CMS to raise the cost of

transportation for its gas and electric generation customers. This case did not require divestitures, but the Commission’s consent order assures that CMS cannot restrict access to its pipeline network, thus allowing new entry that should maintain

a competitive market.

Another highlight from the past two years is the Commission’s successful challenge to the proposed mergers of the nation’s four largest drug wholesalers into two

firms. McKesson Corp. proposed to acquire AmeriSource Health Corp., and Cardinal

Health, Inc. proposed to acquire Bergen Brunswig Corp. The two surviving firms

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13FTC v. Cardinal Health, Inc., 12 F. Supp.2d 34 (D.D.C. 1998). 14 1992 U.S. Dep’t of Justice and Federal Trade Commission Horizontal Merger Guidelines,

reprinted in 4 Trade Reg. Rep. (CCH) ¶13,104 (April 2, 1992; as amended, April 8, 1997). 15 Albertson’s, Inc., FTC File No. 981 0339 (consent agreement accepted for public comment,

June 21, 1999). The Commission has also challenged a number of other supermarket mergers.

E.g., Albertson’s, Inc., C–3838 (Dec. 8, 1998) (consent order) (acquisition of Buttrey Food and

Drug Store Co.); Koninklijke Ahold N.V., C–3861 (April 14, 1999) (consent order) (acquisition

of Giant Food, Inc.). 16The merged firm might have been able to do so in a number of ways, including strategies

short of an outright refusal to sell to the non-Barnes & Noble bookstores. For example, Barnes

& Noble/Ingram could have chosen to (1) sell to non-Barnes & Noble bookstores at higher prices;

(2) slow down book shipments to rivals; (3) restrict access to hot titles; (4) restrict access to

Ingram’s extended inventory of older titles; or (5) price services higher or discontinue or reduce

services.

would have controlled over 80% of the prescription drugs sold through wholesalers.

These mergers allegedly would have increased costs to these wholesalers’ customers—thousands of pharmacies and hospitals. These two cases were among the

few that have led to litigation in recent years (although many more had to be prepared for trial). The district court granted a preliminary injunction against both

mergers, and the transactions were later abandoned.13 Another significant aspect of

these two cases is that the district court’s thoughtful and well-articulated opinion

helped to update merger case law in several respects, including market definition

and analysis of entry conditions, competitive effects, and efficiencies. This helps

make antitrust law more transparent, and provides more guidance to the business

community. The court’s analysis is consistent with the Commission’s analytical approach under the 1992 Horizontal Merger Guidelines, issued jointly by the Commission and the U.S. Department of Justice.14

Food retailing is another sector that is experiencing a period of consolidation. The

number of supermarket mergers has increased dramatically just in the last three

years. While the Commission has not challenged geographic expansion mergers,

many mergers among direct local competitors have raised competitive concerns. The

Commission has taken enforcement action where appropriate. Last June, for example, the Commission took steps to prevent undue market concentration resulting

from Albertson’s acquisition of American Stores—combining the second and fourth

largest supermarket chains in the United States.15 In Albertson’s the Commission

required the divestiture of over 140 stores in California, Nevada and Arizona—at

the time, the largest retail divestiture in Commission history (but now surpassed

by the Exxon/Mobil divestiture). In the last four years alone the Commission has

brought more than 10 enforcement actions involving supermarket mergers, requiring divestiture of nearly 300 stores in order to maintain competition in local markets across the United States.

Another major transaction the agency reviewed last year was Barnes & Noble’s

attempted acquisition of Ingram Book Group. Barnes & Noble was the largest book

retailing chain in the United States, and Ingram was by far the largest wholesaler

of books in the United States. Thus, it was largely a vertical transaction. While

many vertical transactions are likely to be efficiency-enhancing, and therefore few

are challenged, the Commission staff saw the Barnes & Noble/Ingram transaction

as a serious competitive threat to thousands of independent book retailers. The acquisition of an important upstream supplier such as Ingram might have enabled

Barnes & Noble to raise the costs of its bookselling rivals by foreclosing access to

Ingram’s services, or denying access on competitive terms.16 If rivals become less

able to compete, Barnes & Noble could have increased its profits at the retail level

or prevented its profits from being eroded by competition from new business forms

such as Internet retailing. The Commission did not take formal action on this merger, because the parties abandoned the transaction before the staff made a final recommendation.

We have also challenged a number of other large mergers involving products and

services that are highly important to consumers, including pharmaceutical prodVerDate 11-MAY-2000 11:26 Sep 17, 2001 Jkt 072736 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 E:\HR\OC\B736.XXX pfrm11 PsN: B736
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17 E.g., Hoechst AG, FTC File 991 0071 (consent agreement accepted for public comment, Dec.

2, 1999) (acquisition of Rhone-Poulenc S.A.; direct thrombin inhibitor drug); Zeneca Group PLC,

C–3880 (June 7, 1999) (consent order) (acquisition of Astra AB; long-lasting local anesthetic);

Roche Holdings Ltd., C–3809 (May 22, 1998) (consent order) (acquisition of Corange Ltd.; cardiac thrombolytic agents and chemical used to detect the presence of illegal substances). The

Commission also took action to prevent competitive harm from a pharmaceutical manufacturer’s

acquisition of a company providing services as a pharmacy benefits manager. Merck & Co., Inc.,

C–3853 (Feb. 18, 1999) (consent order) (acquisition of Merck-Medco Managed Care, LLC).

18SNIA S.p.A., C–3889 (July 28, 1999) (consent order) (heart and lung machines); Medtronic,

Inc., C–3880 (June 3, 1999) (consent order) (non-occlusive arterial pumps); Medtronic, Inc., C–

3842 (Dec. 21, 1998) (consent order) (automated external defibrillator). 19 Reckitt & Colman plc, C–3918 (Jan. 18, 2000) (consent order) (household cleaning products);

Nortek, Inc., C–3831 (Oct. 8, 1998) (consent order) (residential intercoms); S.C. Johnson & Son,

Inc. C–3802 (May 20, 1998) (consent order) (soil and stain removers); CUC Int’l. C–3805 (May

4, 1998) (consent order) (timeshare exchange services). 20Fidelity National Financial, Inc., C–3929 (Feb. 25, 2000) (consent order) (title information

services); Unum Corp., C–3894 (Sept. 29, 1999) (consent order) (data for disability insurance);

Commonwealth Land Title Insurance Co., C–3834 (Nov. 10, 1998) (consent order) (title insurance); Landamerica Financial Group, Inc. C–3808 (May 20, 1998) (consent order) (title operations). 21The figure includes transactions that were withdrawn before the Commission’s investigation

was completed. Under the GPRA methodology, consumer savings estimates are based on the volume of commerce in the markets adversely affected by a merger, the percentage increase in

price that likely would have resulted from the merger, and the likely duration of the anticompetitive price increase. In the absence of case-specific evidence that indicates higher or lower

figures, conservative default parameters are applied to the volume of commerce: a one percent

price increase for two years. 22Staff of the FTC Bureau of Competition, A study of the Commission’s Divestiture Process

(1999).

ucts,17 medical devices,18 household products,19 and insurance services.20 In each of

these cases, our goal has been to protect consumers from the potential exercise of

market power by the merged firm, either unilaterally or in combination with others.

Under the methodology we use to determine consumer savings pursuant to the Government Performance and Results Act, we estimate that the Commission’s merger enforcement actions in fiscal year 1999 saved consumers from paying $1.2 billion

in higher prices.21 In contrast, the Commission’s budget for the competition mission in fiscal 1999 was only $55.7 million.

We have taken steps to ensure that these consumer savings are in fact realized,

by implementing changes that result in better remedies. Last year, the staff completed a major study of merger remedies based on the Commission’s merger cases

in the early 1990s.22 The study found that while most of the cases settled through

divestitures resulted in the establishment of a new competitor to replace the one

lost through the merger, there were some ways in which merger remedies could be

improved to avoid potential problems. One of the steps we have taken is to require,

in a greater number of cases, that the merging parties bring us qualified purchasers

for the divestiture assets before the transaction may be consummated. This procedure, referred to as the ‘‘up-front buyer’’ requirement, requires the merging parties

to find a suitable purchaser before the Commission accepts a settlement agreement.

This procedure has several benefits for consumers: we know before accepting a divestiture settlement that a suitable buyer exists and that the divestiture package

is an appropriate one, and we can restore the lost competition more quickly and

with greater confidence that the divestiture will succeed. It also reduces the burden

of uncertainty on the merging parties, because they know up front that they have

an acceptable candidate, and they can then devote their full attention to their newly

merged business.

While we are on the subject of mergers, we would like to offer a few observations

about Senate bill S. 1854, which seeks to amend various provisions concerning the

Hart-Scott-Rodino (HSR) process. First, the Commission supports efforts to raise the

size-of-transaction threshold for HSR reporting from $15 million to $35 million. Although the threshold would be higher, however, the fee structure proposed in the

bill is unlikely to meet the funding needs of the Commission in future years, and

therefore it would need adjustment to account for future funding needs. Second,

while the Commission agrees with the burden-reduction goals of S. 1854, we have

serious concerns about the procedures contemplated by the bill. We believe they are

impractical, would themselves cause substantial delay in the process, and would seriously hinder our efforts to protect consumers from anticompetitive mergers.

The extent of burdens on the parties needs to be put into an appropriate perspective. The vast majority of merger filings are cleared within 20 days. Fewer than 3

percent of reported transactions receive a request for additional information (the socalled ‘‘second request’’). The issuance of a second request is not undertaken lightly,

20

23 Many companies indicate a willingness to settle a case before completing their document

production. Other companies work with staff from the Commission or Department of Justice

(‘‘DOJ’’) to determine some subset of documents that will enable a ‘‘quick look’’ at certain issues,

so that resources can be focused on the topics of greatest debate. 24 ‘‘[The Guidelines] no doubt will make a net positive contribution as a statement of agency

thinking in this complex area of law.’’ Comments of Chamber of Commerce at 2. 25 ‘‘[The Guidelines] are quite good overall.’’ Hovenkamp Comment at 1. 26 Comment of Thomas F. Purcell, Lindquist & Vennum, St. Paul, Minnesota, at 1.

and the care we take in choosing when to issue them is illustrated by the fact that

a large majority of those transactions that receive second requests result in some

form of enforcement action. In addition, most second request investigations are resolved without major document production. Over 60 percent of the investigations result in productions of fewer than 20 boxes of responsive documents, and over 85 percent of the second request investigations are resolved without the parties’ having

to complete their document production (i.e., ‘‘substantially comply’’ with the second

request).23

Nevertheless, we believe that there can be significant improvements in this process. Thus, we are engaged in a dialogue with members of the private antitrust bar,

business representatives, and Members of Congress on how to reduce burdens by

streamlining the process. We believe this can be done without legislation. Both antitrust agencies and the private bar have a long history of cooperating in this fashion.

Cooperation will lead to effective reforms that will meet the worthy goals sought by

the proposed legislation, without the delays and impediments to thorough investigation that could result from the procedures contemplated by the legislation. Indeed,

the FTC has already undertaken a number of internal reforms to expedite merger

investigations and to provide parties with more complete information on the issues

that give rise to an investigation. We will continue our efforts to make the process

as efficient as possible and work with the business community to address their concerns.

In sum, we can all agree that the process can be improved, and we acknowledge

the concerns of Senators Hatch, DeWine and Kohl that are reflected in the proposed

legislation. Over the past several months we have been working with Congress, the

business community and members of the private bar to find common ground for improving the process. We continue to believe that the issues can and should be resolved without legislation.

COLLABORATIONS AMONG COMPETITORS

Let us now shift gears and briefly discuss conduct in which competitors do not

merge, but instead collaborate with each other. In today’s markets, competitive

forces are driving firms toward complex collaborations to achieve goals such as expanding into foreign markets, funding expensive innovation efforts, and lowering

production and other costs. Most of these collaborations are procompetitive business

arrangements that will benefit consumers; some, however, are not. Last October, the

Federal Trade Commission and the Antitrust Division of the Department of Justice

jointly issued draft ‘‘Competitor Collaboration Guidelines,’’ which describe an analytical framework to assist businesses in assessing the likelihood of an antitrust challenge to a collaboration among two or more competitors. The draft Guidelines were

placed on the public record for comment, and they have received praise from sources

as diverse as the Chamber of Commerce; 24 antitrust’s leading treatise author, Professor Herbert Hovenkamp; 25 and practitioners, who found that ‘‘[b]y synthesizing

the existing cases into an analytical framework, the Federal Trade Commission and

the Department of Justice will have made antitrust analysis vastly more accessible

to smaller law firms and their clients.’’ 26 At the same time, useful suggestions have

been made for clarifications and other changes to the Guidelines. The agencies are

now considering those suggestions before issuing final Guidelines.

RETAILING

As a result of global and innovation-based changes, consumers are becoming

aware that a ‘‘retail revolution’’ is underway. To remain competitive, retailers—

whether brick-and-mortar or online—are seeking new ways to market new and old

products. This dynamic is leading to much pro-consumer innovation in retailing. For

example, the Internet has changed traditional sales and distribution patterns for

products of all types, providing faster, cheaper, and more efficient ways to deliver

goods and services. A market study by Jupiter Communications estimates that annual consumer sales on the Internet will explode from $15 billion in 1999 to $78

billion by 2003. There appears to be tremendous demand for Internet-based services.

21

27 In addition, on the consumer protection side, we must maintain vigilance to protect consumers from fraudulent practices by the few unscrupulous providers of such services. Since the

agency’s first Internet case in 1994, the FTC, primarily through its Bureau of Consumer Protection, has bought over 100 Internet-related cases involving over 300 defendants. The Commission

has obtained injunctions stopping illegal schemes, collected over $20 million in redress for victims, and obtained orders freezing another $65 million in cases that are still in litigation. Most

of these cases have involved the migration to the Internet of traditional kinds of fraud, such

as business opportunity schemes, credit repair scams, pyramid schemes, and false claims for

health-related products, to name a few. 28Fair Allocation System, Inc., C–3832 (Oct. 30, 1998) (consent order). 29Toys ‘‘R’’ Us, Inc., Docket No. 9278 (1998), appeal docketed, No. 98–417 (7th Cir. Apr. 16,

1999). 30See ‘‘Slotting: Fair for Small Businesses and Consumers?’’ Hearing before the Committee

on Small Business, United States Senate (Sept. 14, 1999).

However, whenever there is great upheaval in the marketplace, traditional retailers sometimes respond by trying to forestall new forms of competition. Some of

those actions may be legitimate defensive maneuvers, but when conduct steps over

the lines of the antitrust laws, enforcement action is needed to ensure that anticompetitive practices do not deter development or procompetitive innovations.27 In

1998, for example, the FTC charged 25 Chrysler dealers with an illegal boycott designed to limit sales by a car dealer that marketed on the Internet. These brickand-mortar dealers allegedly had planned to boycott Chrysler if it did not change

its distribution of vehicles in ways that would disadvantage Internet retailers. The

competitive danger of such a tactic is obvious: a successful boycott could have limited the use of the Internet to promote price competition and reduced consumers’

ability to shop from dealers serving a wider geographic area via the Internet. An

FTC consent order prohibits the dealers from engaging in such boycotts in the future.28

The Internet is not the only place where we have seen popular new forms of retailing. Another example involves the Commission enforcement action against Toys

‘‘R’’ Us, the nation’s largest toy retailer, alleging abuse of market power. As alleged

by the Commission, Toys ‘‘R’’ Us used its market power to try to stop warehouse

clubs, such as Costco, from selling popular toys such as Barbie dolls in ways that

allowed consumers to make comparisons to the prices charged by Toys ‘‘R’’ Us.

Warehouse clubs, as you know, are a relatively new retailing format that has grown

significantly in the past decade. Toys ‘‘R’’ Us’s concern was that warehouse clubs

were selling some toys at lower prices and beginning to take market share away

from traditional toy retailers. In response, Toys ‘‘R’’ Us allegedly pressured toy manufacturers to deny popular toys to warehouse clubs, or to sell them on less favorable

terms. The FTC issued an administrative order to stop these practices, and the matter is now on appeal to the U.S. Court of Appeals for the Seventh Circuit.29 Although the products were toys, and the rivalry was between two different kinds of

brick-and-mortar firms, the enforcement principles underlying the Commission’s action apply with equal—and perhaps even greater—force to the new world of online

retailing.

Of course, even more traditional retailing practices can raise competitive concerns.

Earlier this month the FTC and the Attorneys General from 56 U.S. states, territories, commonwealths, and possessions settled charges that Nine West, one of the

country’s largest suppliers of women’s shoes, engaged in resale price maintenance,

resulting in higher prices for many popular lines of shoes. To settle the charges with

the states, Nine West agreed to pay $34 million, which will be used to fund women’s

health, vocational, educational, and safety programs.

Slotting allowances are another retailing-related topic of current interest at the

Commission. The term ‘‘slotting allowance’’ typically refers to a lump-sum, up-front

payment that a supplier, such as a food manufacturer, might pay to a retailer, such

as a supermarket, for access to its shelves.30 These allowances can amount to tens

or hundreds of thousands of dollars. Slotting allowances can be either beneficial or

harmful. They can be beneficial if they fairly reimburse retailers for the costs and

risks of taking on an unproven new product, or when they result in lower prices

to consumers. On the other hand, slotting allowances can be harmful if they permit

one manufacturer to acquire a degree of exclusivity, across many retail outlets, sufficient to prevent other firms from becoming effective competitors. Still other situations fall in an intermediate grey area. To sharpen our understanding of the circumstances under which slotting allowances can be beneficial or harmful to competition and to consumers, the Commission will hold a two-day workshop in May 31 and

June 1. This session will bring together people from manufacturing, retailing, ecoVerDate 11-MAY-2000 11:26 Sep 17, 2001 Jkt 072736 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 E:\HR\OC\B736.XXX pfrm11 PsN: B736
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31FTC v. Mylan Laboratories, Inc., CV–98–3115 (D.D.C., filed December 22, 1998; amended

complaint filed February 8, 1999). The drugs in question are used for treatment of anxiety. 32 Hoechst Marion Roussel, Inc., Docket No. 9293 (complaint, March 16, 2000). 33 Under the Hatch-Waxman Act, the first company to file an Abbreviated New Drug Application (ANDA) with the FDA for a generic drug (in this case, Andrx) has an exclusive right to

market its generic drug for 180 days. Under the alleged Hoechst-Andrx agreement, Andrx could

not give up that exclusivity right. Thus, by allegedly agreeing not to market its drug, Andrx

prevented the 180-day exclusivity period from beginning to run, so that other sellers of generic

versions of Cardizem CD also could not enter the market.

nomics, and other relevant disciplines to discuss the issues involved in this very

complex subject.

The Commission recently examined charges of price discrimination in a related

retailing context. By majority vote, the Commission charged McCormick & Company, the world’s largest spice company and by far the leading supplier in the

United States, with engaging in unlawful price discrimination in the sale of spice

and seasoning products. Some retailers allegedly were charged substantially higher

net prices than were others, and discounts to favored chains allegedly were conditioned on an agreement to devote all or a substantial portion of shelf space to

McCormick products. McCormick agreed to settle the charges by accepting an order

that would prohibit the selling of spices at different prices to different retailers, except when permitted by the Robinson-Patman Act.

HEALTH CARE

Health care is an increasing part of overall consumer expenditures, and the significant rise in health care costs is felt by all consumers. For many years, the Commission has been at the forefront in bringing enforcement actions to protect the

competitive process in all types of health care markets, including services provided

by hospitals and health care professionals as well as products provided by the pharmaceutical and medical equipment industries. In the past two years alone, the Commission has brought more than a dozen enforcement actions involving health care,

pharmaceuticals, and medical devices.

In one of these cases the Commission, jointly with several states, sued Mylan Laboratories, one of the nation’s largest generic pharmaceutical manufacturers, charging Mylan and other companies with monopolization, attempted monopolization and

conspiracy to eliminate much of Mylan’s competition by tying up the key active ingredients for two widely-prescribed drugs, used by millions of patients.31 The FTC’s

complaint charged that Mylan’s agreements allowed it to impose enormous price increases—over 25 times the initial price level for one drug, and more than 30 times

for the other. For example, in January 1998, Mylan raised the wholesale price of

clorazepate from $11.36 to approximately $377.00 per bottle of 500 tablets, and in

March 1998, the wholesale price of lorazepam went from $7.30 for a bottle of 500

tablets to approximately $190.00. In total, the price increases resulting from

Mylan’s agreements allegedly cost American consumers more than $120 million in

excess charges. The Commission filed this case in federal court under Section 13(b)

of the FTC Act seeking injunctive and other equitable relief, including disgorgement

of ill-gotten profits. In July of last year the district court upheld the FTC’s authority

to seek disgorgement and restitution for antitrust violations. Trial is set for the

Spring of 2001.

Just last week, the Commission charged four other companies with entering into

anticompetitive agreements that allegedly delayed the entry of generic drug competition, potentially costing consumers hundreds of millions of dollars a year. The

administrative complaint issued against Hoechst Marion Roussel (now Aventis) and

Andrx Corporation charges that Hoechst, the maker of Cardizem CD, a widely prescribed drug for treatment of hypertension and angina, agreed to pay Andrx millions

of dollars to delay bringing its competing generic drug, or any other non-infringing

version, to market while Hoechst sued Andrx for alleged patent infringement.32

Cardizem CD is a form of diltiazem, and Hoechst accounts for about 70% of the

sales of once-a-day diltiazem products in the United States. Hoechst’s Cardizem

sales in 1998 exceeded $700 million (over 12 million prescriptions). The complaint

further alleges that, because the Hatch-Waxman Act 33 grants an exclusive 180-day

marketing right to Andrx, Andrx’s agreement not to market its product was also intended to delay the entry of other generic drug competitors.

The complaint against two other companies, Abbott Laboratories and Geneva

Pharmaceuticals, Inc, which the companies agreed to settle, involved allegations of

similar conduct in connection with a proprietary drug—called Hytrin—that Abbott

23

34 Abbott Laboratories, FTC File No. 981 0395 (proposed consent order, March 16, 2000); Geneva Pharmaceuticals, Inc., FTC File No. 981 0395 (proposed consent order, March 16, 2000). 35Summit Technology, Inc. and VISX, Inc., D. 9286 (Feb. 23, 1999) (consent order). 36 CBS Market Watch, Visx gets black eye from price cuts, Feb. 23, 2000 (<http://

cbs.marketwatch. com/archive>). 37FTC Bureau of Economics Staff Report, The Pharmaceutical Industry: A Discussion of Competitive and Antitrust Issues in an Environment of Change (March 1999).

manufactures, and a generic version that Geneva prepared to introduce.34 Hytrin

is used to treat hypertension and benign prostatic hyperplasia (BPH or enlarged

prostate)—chronic conditions that affect millions of Americans each year, many of

them senior citizens. BPH alone afflicts at least 50% of men over age 60. In 1998,

Abbott’s sales of Hytrin amounted to $542 million (over 8 million prescriptions) in

the United States. The complaint alleges that Abbott paid Geneva approximately

$4.5 million per month to keep Geneva’s generic version of the drug off the U.S.

market. This agreement also allegedly delayed the entry of other generic versions

of Hytrin because of Geneva’s 180-day exclusively rights under the Hatch-Waxman

Act. Abbott was charged with monopolization of the market, and both companies

were charged with conspiracy to monopolize. The proposed consent order enjoins

such practices.

Another recent enforcement effort was directed at an anticompetitive patent pool

between Summit Technology, Inc. and VISX, Inc. Summit and VISX compete in the

market for equipment and technology employed in laser vision correction. Most of

the approximately 140 million people in the United States with vision problems correct their vision with contact lenses or eyeglasses, but an increasing number are

turning to laser techniques. Until recently, VISX and Summit were the only firms

with FDA approval to market the laser equipment used for this surgery. The complaint charged that the two companies eliminated competition between themselves

by placing their competing patents in a patent pool and agreeing to charge doctors

a uniform $250-per-procedure fee every time a Summit or VISX laser was used. In

essence, this was price-fixing under the guise of a patent cross-licensing arrangement. After the Commission issued an administrative complaint charging that the

patent pool and related agreements were unlawful, the companies dissolved the patent pool and settled this portion of the case in August 1998, with an agreement not

to enter into such agreements in the future.35 The per-procedure fees charged by

VISX and Summit did not immediately change as a result of the settlement—an ex- ample of ‘‘stickiness’’ of prices in a tight oligopoly—but competition eventually prevailed. Last month, VISX announced that it would reduce its per-procedure fee from

$250 to $100 per eye, and Summit announced that it too would reduce its fee for

one of its laser products.36 Had the Commission not taken action, the millions of

consumers using this procedure likely would still be paying substantially higher

fees.

The Commission also plays an important role in studying the changing health

care marketplace. Last year the FTC’s Bureau of Economics issued a detailed report

on the rapidly evolving pharmaceutical industry.37 The report found that developments in information technology, federal legislation, and the emergence of market

institutions such as health maintenance organizations and pharmacy benefit managers have accelerated change in this industry. The report attempts to provide a

more complete understanding of the competitive dynamics of this market and discusses possible competitive problems and procompetitive explanations for pricing

strategies and other industry practices. These kinds of studies help inform regulators, enforcers, and Congress on the important public policy issues involving

health care.

CONCLUSION

In closing, we believe that antitrust enforcement by the Commission has demonstrable benefits for consumers—benefits that for outweigh the resources allocated to

our maintaining competition mission. We are concerned, however, that our growing

workload—largely the result of the continuing merger wave—has outstripped our

ability to keep pace. Over the past decade, the FTC has performed its mission in

the face of a rapidly changing marketplace, with staffing at about half the size it

was in 1979. We have done so primarily by stretching our resources, streamlining

our processes, and simply doing more with less. In no small measure, that is attributable to our dedicated, hard-working staff. We have also shifted resources from non

merger enforcement to mergers as a stop-gap measure. That has left us understaffed

in nonmerger matters, but still not at full strength in mergers. If we are to keep

up with the growing demands that will be imposed by the 21st Century marketplace, we need significantly more resources. The President’s proposed budget for fisVerDate 11-MAY-2000 11:26 Sep 17, 2001 Jkt 072736 PO 00000 Frm 00027 Fmt 6633 Sfmt 6621 E:\HR\OC\B736.XXX pfrm11 PsN: B736
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38The President’s proposed budget also includes additional resources for the FTC’s consumer

protection mission.

cal year 2001 asks for an additional 69 workyear, over the current fiscal year, for

our antitrust enforcement efforts.38 We ask the Committee’s support for additional

resources for this important mission.

Mr. Chairman and Members of the Subcommittee, we appreciate this opportunity

to provide an overview of the Commission’s efforts to maintain a competitive marketplace for American businesses and consumers. We would be pleased to respond

to any questions you may have.

25

26

27

Senator DEWINE. Before we move to the questions, I am going

to at this point call on Senator Grassley for any opening statement

that he would like to make.

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR

FROM THE STATE OF IOWA

Senator GRASSLEY. What I want to do, because I have to go to

a three o’clock meeting with a large farm group that has come from

my State, is submit for the record my statement, and then to each

of you, I would have a series of questions.

But I would like to take just a couple of minutes outside of my

comments and my questions to visit with my colleagues here as

well as with Mr. Klein about a bill that I introduced. The reason

I am a little bit uncomfortable visiting with you about it, Mr. Klein,

is because you have been responsive to our concerns about agribusiness mergers and you have put a person on staff to look into

those, and then you see that I introduced the bill that I have introduced and you might think, well, I do not think that you are at all

concerned about what is going on in rural America, and I feel that

you have tried hard to get an understanding of that and even to

respond to it in some way.

So I have introduced the Agricultural Competition Enhancement

Act and I see it as a starting point, hopefully to begin a constructive dialogue with both the Justice Department and the Federal

Trade Commission, as well as the Department of Agriculture, about

the best way to address farmers’ concerns. There are other members, in fact, I understand that before I got here that Senator

Leahy had addressed this issue, and so there are going to be bills

put in by other members, and so I would like to work with Senator

Kohl and I would like to work with Chairman DeWine on this

issue.

But most importantly, to Mr. Klein, we do not substantively

amend the antitrust laws. We do not change any of the powers of

the Justice Department. We do put the U.S. Department of Agriculture at the table in those instances where it affects the family

farm, and probably the one thing you will not like about the bill

is that if through the regular process of considering mergers the

Department of Justice would decide that they should not be challenged, we would allow, if the Agriculture Department feels disagreement with the Department of Justice after they have made

their decision, to allow the U.S. Department of Agriculture,

through special counsel, to go into court in narrow instances. The

process is a fairly dramatic departure from the practice of the last

110 years, but I do not believe that the antitrust laws are substantively changed in my legislation.

So I just throw that out for consideration to my colleagues, because I believe you felt the concerns of famers in September when

you were in Iowa. It is still there, and I think even if economic

times get better, it will still be there because there is just a feeling

that there is just a lack of competition and too much concentration.

So I just throw this out to you and to my colleagues for your consideration. I intend to move ahead with the bill, but I also know

that the reality of it is that there are a lot of other ideas that are

here regarding agriculture concentration, as well, and then probVerDate 11-MAY-2000 11:26 Sep 17, 2001 Jkt 072736 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HR\OC\B736.XXX pfrm11 PsN: B736
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ably a lot of people that think that nothing needs to be done. But

I feel strongly that something needs to be done.

Thank you, Mr. Chairman.

Senator DEWINE. Senator Grassley, thank you very much. Of

course, your full statement will be made a part of the record, as

will your questions, and they will be submitted to the two witnesses.

Let me also state that I intend to look at your bill, Senator

Grassley. I am anxious to take a good look at that, as well as Senator Leahy’s bill.

[The questions and answers of Senator Grassley were not received at presstime.]

[The prepared statement of Senator Grassley follows:]

PREPARED STATEMENT OF SENATOR GRASSLEY

Chairman DeWine, thank you for holding this hearing today. As you know, I’ve

been very interested in antitrust matters and how they impact my constituents,

such as whether the high price of airline tickets for Iowans is the result of anticompetitive business practices, or whether mergers and acquisitions in agribusiness

are not being reviewed as carefully as they should. In particular, I’ve been following

the merger mania trend, because so many of my constituents are concerned about

rapid consolidation in a number of industries, and the impact mergers have on rural

America. I’ve received phone calls and letters on practically every industry experiencing consolidation. From telecommunications to railroads, banking to meat packing, airlines to the entertainment industry, you name it, I’ve gotten constituent communication expressing concern. I am the first to say that mergers and acquisitions

can be beneficial, bringing efficiencies, innovation, and other benefits to our economy and to consumers. But these transactions need to be reviewed carefully to make

sure they do not stifle competition. I know that we have the antitrust laws to ensure

that the market functions properly, bad actors are stopped, and consumers are not

harmed. But many of my constituents are concerned that either the antitrust laws

are not being enforced, or they are not producing effective outcomes. Farmers and

small independent producers are particularly concerned about this issue, because

they believe that vertical and horizontal mergers and acquisitions occurring in agribusiness are not being reviewed appropriately for all possible ramifications in the

marketplace.

Earlier this week, I introduced a bill addressing agriculture competition issues,

and enhancing USDA’s role in reviewing and challenging agri-business transactions.

The Agriculture Competition Enhancement Act, the ‘‘ACE’’ Act, is just a starting

point, hopefully to begin a constructive dialogue with both the Justice Department

and Federal Trade Commission, as well as the Department of Agriculture, about

what is the best way to address farmers’ concerns. Other members are working on

agriculture competition proposals, so I’d also like to express my desire to work with

Chairman DeWine and Senator Kohl, as well as other interested members of the

Judiciary Committee, on this important matter.

I look forward to hearing from the Justice Department and Federal Trade Commission about their efforts to enforce the antitrust laws and to ensure competition

is not harmed by anti-competitive behavior or by bad mergers and acquisitions. I

am interested in hearing from Mr. Klein and Mr. Pitofsky about the concerns my

constituents have, and how they are being addressed. Thank you.

Senator DEWINE. Let me move, if I could at this point, to the

questions. This first question will be to either of you or both of you.

A recent Washington Post article mentioned a study that analyzed

the 700 most expensive mergers during the past 3 years and found

that 83 percent of these mergers failed to increase shareholder

value and more than half had reduced shareholder value.

Now, we certainly understand that shareholder gain in and of

itself is not the focus of antitrust review, but does this statistic indicate that some merging parties may be overselling the efficiencies

to be gained from their deals, and if so, how should these types of

29

concerns be addressed, if at all, during merger reviews? Mr. Klein,

Mr. Chairman, either one.

Mr. KLEIN. I think the way——

Senator DEWINE. It is an interesting statistic.

Mr. KLEIN. It is an interesting statistic. It is also a little hard

to know how you measure post-merger shareholder value versus

what it would have been had the company stayed separately. There

is no control group.

Senator DEWINE. That is true.

Mr. KLEIN. But having said that, I certainly take the point in the

following sense. From our point of view, Mr. Chairman, the focus

of our inquiry, first and foremost, is on the anticompetitive effect.

In other words, we look to see where the action is. Now, in that

process, we do look at efficiency claims, but I have actually spoken

to this and we and the Federal Trade Commission together actually

adopted some efficiency guidelines.

We know the minds of lawyers and the minds of economists can

be quite imaginative in the merger process, and so we are pretty

tough in analyzing efficiency claims. I would say, on a transaction,

we might get claims that there will be $100 million or $200 million,

and much more often than not, we cut those down in our assessment significantly. But even then, what we look at first and foremost is if there is any significant anticompetitive effect, that is

what drives the analysis. It is only when you see a very small anticompetitive effect and potentially significant efficiencies that you

are likely to come out the other way.

The second point I would make in terms of that study, Mr.

Chairman, is whether there are efficiencies or not, in a lot of mergers where there is no anticompetitive effect, the merger may not

take. The new company may not work well with the old company

and management styles may be different, particularly now when

we are seeing such dramatic stuff.

And so a lot of times, even though mergers have no competitive

impact in any significant way, in terms of shareholder value or

company benefit, they do not work out particularly well. That is

not an antitrust problem, that is really a kind of a business problem.

Mr. PITOFSKY. I agree with that. I, too, at times wonder about

some of the deals that we see going by. Someone mentioned inflated stock and inflated value of the acquired asset. I know it has

been said that there is some irrational exuberance in the stock

market. I sometimes think there is irrational exuberance in the

capital market, as well.

I take courage from the fact that a very similar thing happened

in the 1980’s. That conglomerate merger frenzy in the early and

mid-1980’s, in which everybody seemed to be buying one of everything, but subsequent studies showed that about, I think it was

about two-thirds of those mergers came apart.

Senator DEWINE. How many? I am sorry.

Mr. PITOFSKY. I think it was about two-thirds. I can get the number. Mike Sherer’s book discusses this matter. But if they are a bad

idea, then the market will exact its vengeance over foolish corporate acquisitions.

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I do not think the government should be blocking mergers because they are a bad idea. I think the government should be alert

to blocking mergers that have an anticompetitive or an anti-consumer effect, and that is where I think we ought to be putting our

resources.

Senator DEWINE. Let me follow up to something that Senator

Leahy said and Senator Grassley said. Mr. Klein, I also am very

glad to see that you appointed a counsel, special counsel to focus

on the antitrust issues involving the agriculture industry. I wonder

if this, in your opinion, has this appointment been useful and what

type concerns does the division have in this area that need to be

addressed?

Mr. KLEIN. Well, first of all, I do think the appointment is useful.

I think we have a very distinguished lawyer with a lot of prosecutorial experience.

Senator DEWINE. And that appointment was made how long ago?

Mr. KLEIN. I would say probably 3 months ago now.

Senator DEWINE. Three months ago?

Mr. KLEIN. And he has already had the opportunity to travel out

to the Midwest, a number of States, meet with affected groups. A

number of the groups that have been in town over the last several

weeks have had the opportunity to talk with Doug. He is a very

seasoned and distinguished lawyer with very long-term ties to the

State Attorneys General organization, which he worked with, as

well, which is obviously a critical liaison for us in that regard.

So I am delighted, and really, the Senate Agriculture Committee

as well as this committee encouraged this action and I am pleased

that we did it.

I think this is an important area in a variety of ways, and I just

want to sort of make a few comments, because a number of members of the subcommittee have raised the issue. I personally have

been very concerned, and I think Senator Grassley alluded to the

fact, I had the privilege to accompany him and Senator Harkin out

to Iowa to meet with a large group of farmers. I had the opportunity to go, as well, to Minnesota and meet with a large group of

farmers, and I have been privileged to have a large number of

these farm groups visit with me in my office here in Washington.

There are a mixture of concerns, some of which are antitrust related, a lot of which have to do with other phenomena and other

factors in the global market. Some of the Asian crisis had a huge

impact on demand for U.S. farm products. There are other issues

about the economy that are not antitrust issues.

Having said that, I think, and the Attorney General has said

this, I think it is appropriate for the Department to focus on these

concerns. Agriculture has been a mainstay of antitrust concern and

enforcement. As people have pointed out, if you go back to the

original Sherman Act, these issues were part of the genesis of why

we are here today.

I think, from our point of view, we have had a very, very powerful enforcement effort. I mentioned Continental-Cargill, in which

the farm community supported us strongly for the tough monopsony action we took. We took a similar—I remember being told at

one of these meetings that there were going to be—first, there were

red tractors, then yellow tractors and green tractors, and now it

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looked like the red and the green are going to merge and we are

going to have turquoise tractors and this and that, and we did

something significant on that merger, as well.

I think on cotton seeds and corn seeds, two very, very critical

products for farmers, we took strong actions with respect to Monsanto acquisitions, one of which, the Delta and Pine Land matter,

which was an important cotton seed matter. Actually, the parties

abandoned the transaction in the face of our efforts.

The other point we have made clear is from the Archer Daniels

Midland through the vitamins cartel cases that we have dealt with,

we are dealing with farm products in which there are inflated

prices, which is an input that farmers have to bear the cost and

suck it in on. So I think that we have done a lot, but I have personally said that given the concerns, I want to make sure every stone

is unturned. That is why we appointed Doug. That is why my chief

of staff, Adam Golodna, has probably devoted more time to agriculture issues than any other issue in the division, and that is why

I personally have promised the Attorney General that we are going

to stay alert in these matters. We will gladly review Senator Leahy’s bill, Senator Grassley’s bill, and engage on that, as well.

Senator DEWINE. We certainly would appreciate that.

Mr. Klein, have you put together internally any kind of document

that would summarize what you have done in the antitrust area

in regard to agriculture, or is there something you could supply

this committee that we could make a part of the record of this

hearing?

Mr. KLEIN. I would be delighted to do that, Senator.

Senator DEWINE. Thank you very much.

Senator Kohl.

Senator KOHL. Thank you, Senator DeWine.

Mr. Klein, an antitrust issue that has been the focus of enormous

public attention, as you know, is the government’s lawsuit against

Microsoft. I recognize that you are limited as to what you can say

regarding a pending court case, but this is a matter of high public

concern, so if I can, I would just like to pose a few questions to you.

First, do you believe it is likely or possible that you will be able

to reach an out-of-court settlement with Microsoft, or do you have

some sense of the possibility of this?

Mr. KLEIN. Senator, with respect to that particular question, I

think, as you may know, we are in the middle of a mediation process and that is governed by the strictest of confidentiality rules,

and as an officer of the court, I would not comment on the prospects.

What I can say is two things. I believe the District Court’s findings in this case reveal what the Department had asserted, which

was that Microsoft had engaged in a serious pattern of anticompetitive practices, and I think that a remedy ought to be commensurate with those practices. It has always been my view and

the Department’s view that settlement is better than litigation, but

the settlement would have to be, of course, appropriate to deal with

the concerns that the court documented in its opinion.

Senator KOHL. I will ask, and I hope you can make a comment,

is there any possibility of a resolution short of a structural solution?

32

Mr. KLEIN. Again, I think with the matter pending at this point,

I think it would be better for me not to comment on it. I think

there are special sensitivities about a mediation process, and actually, this process, although there have been occasional breaches,

has been remarkably confidential. So I think it would be better at

this point for me to observe those rules, Senator.

Senator KOHL. All right. Mr. Klein and Chairman Pitofsky, I

would like to turn to another issue that has been the subject of

much public interest, namely the airline competition. In our subcommittee, we continue to be concerned about competition in the

industry. For example, start-up carriers face serious obstacles in

establishing competing service to the incumbent carriers. We plan

to hold a hearing shortly on how to improve competitive conditions

in this industry.

But, Mr. Klein, consumers in the upper Midwest have been suffering from limited choice for much of their air travel due to the

dominance of Northwest Airlines in this upper Midwest area. As I

understand it, you are still investigating Northwest’s conduct and

practices. If you conclude that Northwest has engaged in anticompetitive practices, will you bring an enforcement action to stop

this conduct?

Mr. KLEIN. Yes, we will, Senator. If we reach such a conclusion.

Indeed, the proof of that is that we investigated American Airlines’ conduct in the Dallas hub and did, indeed, bring a monopoly action

challenging American with respect to its practices and the way that

it essentially tackled these new low-cost carriers in Dallas. So we

are, as you say, continuing our investigation on Northwest and obviously that will be decided on the merits of the investigation. But

if we determine there is a violation, I assure you we will proceed.

Senator KOHL. It may be that the conduct engaged in by Northwest or other major airlines does not meet the legal definition of

illegal conduct under the antitrust laws or the technical requirements to make out a predatory pricing case, but as you know, the

Transportation Act also authorizes the Department of Transportation to prevent ‘‘unfair, deceptive, predatory, or anticompetitive

practices in air transportation.’’ So, do you not think that the

Transportation Department could, if it wishes, use its statutory authority to prevent anticompetitive practices to curb the unfair but

otherwise legal conduct that some airlines may perhaps be engaging in?

Mr. KLEIN. There is no question, Senator, that they do have the

statutory power, and I think they are continuing to look at an appropriate response. Let me just say, though, I think something significant has happened. I think the case against American Airlines,

which is scheduled to go to trial, I think is a watershed case because I think that this will be one that has a real opportunity to

set the rules nationally. I acknowledge what you said, so-called

predatory pricing or predatory capacity cases are tough cases in the

antitrust laws, but I think this is a strong and a meritorious case.

Of course, that will be ultimately for the court to decide.

But I think this case will have significance. This is the first case

since deregulation in which any Antitrust Division has challenged

these kinds of practices and they go to the heart of the concerns

that you are articulating, which is that, given the opportunity for

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these new low-cost carriers to grow and develop and create real

competition in the United States, we can see instead of a single

hub dominance structure, we could see multi-carriers providing

real choices throughout the United States.

I think that this American Airlines case could give us some real

guidance on that. That is not to say there is not an appropriate role

for DOT, but I think this is a major event, even though I understand right now we are focusing on one airline, but this will have

national repercussions, I have no doubt.

Senator KOHL. Talking about the telecommunications industry,

gentlemen, Chairman Pitofsky, you have been eloquent in the past

expressing your view, which I share, that when dealing with mergers in the media, unlike mergers in other industries, such as cereal

companies, banks, or oil companies, for example, we must give

them a different type of scrutiny because these media mergers affect competition in the marketplace of ideas so central to the First

Amendment.

Are you worried, Chairman Pitofsky, that the level of consolidation in the media is beginning to threaten these values by reducing

the number of major sources of information available to the American public?

Mr. PITOFSKY. I am concerned about concentration in the media.

We were concerned about it when we reviewed Time-Warner, Turner, TCI about 4 or 5 years ago, and we insisted upon an order in

that case designed to preserve access for smaller companies and

new entrants. Now, there are some major mergers going on in this

industry, but there is also innovation in the form of the Internet,

extension of cable resources to many homes.

So whether there is more concentration right now or less concentration, I am not exactly sure. I do look at each of these mergers, and especially the mega-mergers, with heightened concern.

There is no question in my mind that we should give these transactions the most careful review.

Senator KOHL. Mr. Klein, with all the consolidation we have

seen, are you concerned that we are in danger of a very few companies controlling the broad band delivery of the Internet?

Mr. KLEIN. Well, we have got some investigations ongoing into

those issues right now. What I think is the following on this, Senator Kohl, that it is very early in the process of broad band rollout

and there are going to be some very interesting and tricky developments with respect to both the cable modem, the DSL on the telephone lines, satellite, and other forms of delivery.

What I think is encouraging for the first time is because of digitalization, we now have the possibility that instead of having a single cable pipe—that always worried me much more, a single telephone line, because if you control the means of distribution, whether you force access or not, the consumer still only has one means

of distribution.

And my own view, the model that I have really cared for and we

made a big dent in it, not a complete solution, in the Primestar

case is let us get lots of means of access to the home so that then,

through digitalization, you can bring voice, you can bring data. The

cable modem, for example, can now, instead of just bringing you

cable TV, can bring you voice, can bring you Internet access, can

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bring you data, and then you want to see that happen on the other

means of access to the home or to the business.

Once that happens, if there are three or four pipes and digital

transmission and broad band, we will see competition that we have

not seen in any of these media. If anything, I am going forward

more encouraged because my hope is that through the multiplicity

of pipes, we are going to see something that we have not seen,

which was one copper wire or one cable into the home.

I agree with the chairman, of course, that I think these megamergers in the media deserve very, very careful and thorough scrutiny and both agencies, and we consult a lot about this because we

are both involved in it, but both agencies, I believe they are getting

that thorough scrutiny.

Senator KOHL. Chairman Pitofsky, we have heard complaints

from small medical device manufacturers about the conduct of

large buying organizations that buy medical supplies for hospitals,

the group purchasing organizations. The small medical device manufacturers claim that hospitals will not buy their products because

these products are not on the approved lists of devices kept by the

GPO’s. They claim that hospitals will not buy products which are

not on the GPO list because hospitals would lose the significant

discounts they get for buying products which are on the approved

list.

We understand that buying medical devices through GPO’s lowers hospital costs generally, but could there be a problem here,

namely that the smaller medical device manufacturers are insulated from competition, and just as important, will you commit to

looking at this, and if necessary, revisiting your health care guidelines which permit GPO’s?

Mr. PITOFSKY. Yes, I certainly would commit to do that, and I

think you framed the question exactly right. On the one hand, you

want these joint buying organizations to have the advantage of introducing efficiencies, especially, or primarily, when they are

passed on to consumers in one way or the other.

On the other hand, these joint organizations do raise the question of whether or not they can be a device to exclude smaller competitors or new entrants, and you are trading that sort of thing off

constantly. We have some matters in this area. The health care

guidelines address it. Our new draft joint venture guidelines address some of these issues, and we certainly will keep a very careful eye on the issue that you raise.

Senator KOHL. Do you have a view on that, Mr. Klein?

Mr. KLEIN. I agree with Chairman Pitofsky.

Senator KOHL. Thank you, Senator DeWine.

Senator DEWINE. Senator Kohl, thank you very much.

Senator Hatch is in a meeting at the present time with Attorney

General Reno, and he has asked me to express his regrets to both

of our witnesses for not being able to be here today. But he has

requested that on his behalf I pose to you the following two questions. So assuming that I can read the honorable Senator’s writing,

I will read the questions to you. These are Senator Hatch’s questions.

Mr. Klein, as you well know, our antitrust laws allow for

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cent years, you have used this extraterritorial jurisdiction to prosecute anticompetitive behavior, such as those in the Bilkington

Glass matter, and you have done this to the benefit of U.S. consumers and I want to commend you for that.

Now, we are all aware of the recent increases in gasoline prices

at the pumps. Much of this is attributable to the anticompetitive

restrictions on oil production by OPEC and by the OPEC countries.

My question is this. I would like to know if you have examined the

possibility of applying our antitrust laws to examine any anticompetitive behavior on the part of foreign oil producers, that is,

whether these producers are private actors or government bodies

acting in a commercial capacity, which, as I understand, will not

afford them protection under our foreign sovereign immunity laws.

Do you believe this might be an avenue the administration,

through trade negotiations, might address?

Mr. KLEIN. Senator, you can tell my friend, Senator Hatch, that

this is actually an area in which the Federal Trade Commission

has taken the lead, so—— Senator DEWINE. Would you like to defer the question?

Mr. KLEIN. I would like to have Chairman Pitofsky respond.

Senator DEWINE. All right.

Mr. PITOFSKY. What an unusual honor. Let me say that I want

to answer the question, because I notice I was quoted in the paper

this morning as saying that we have opened an investigation of the

antitrust aspects of the OPEC cartel. Not quite true. Not quite

true.

We have been asked to testify, and our bureau director will testify next week before a House committee, and we have been asked

to address the question of whether or not the antitrust laws could

apply to OPEC. I am aware that there are some old cases, one in

the Ninth Circuit about 15 years ago that said OPEC was protected

by the state action doctrine.

So we are looking at this question and we are reviewing the old

cases. We want to see how they would apply to the modern situation with respect to the international oil industry, and Rich Parker,

our bureau director, will testify next week. But we have not opened

a formal investigation, but we will look at these questions.

Senator DEWINE. And you have not opened a formal investigation, why? Why have you not done that?

Mr. PITOFSKY. I think, given the history of antitrust enforcement

in this area, we really have to take the measure of these older

cases, the state action doctrine. I know the state action doctrine

has been interpreted by the Supreme Court in recent years in the

non-oil context, so before we fire off with anything approaching an

investigation, we want to do our research and answer the questions

that are put to us by the Congress.

Senator DEWINE. Mr. Chairman, let me ask you the second question. Now, this one is directed at you, but if you want to send this

over to Mr. Klein, I am sure that would be more than fair. This

is Senator Hatch’s second question.

The administration has asked for substantial increases for the

budget of both the Antitrust Division as well as the FTC. The administration proposed to pay the requested increases with significant increases in HSR antitrust filing fees. The justification for the

36

increases are yet to be provided, and both this committee and the

appropriators will determine the appropriate funding level in due

course.

What I want to address, Senator Hatch continues, is the FTC’s

funding in general, and specifically the funding of the FTC’s worthy but non-antitrust activities with antitrust fees imposed on

those in the business community. Do you believe it is justified to

fund the FTC’s expanding non-antitrust functions with increased

fees imposed on merger parties as the President proposes, or

should we begin to consider other appropriate avenues for funding

the Commission?

Mr. PITOFSKY. A very interesting question because, until recently, merger fees covered our antitrust mission, but the Treasury

covered our non-antitrust mission. It is only in the last few years

that our entire budget has been covered by merger fees. It is a call

that is made by Congress and our appropriators rather than appropriate for me. There is enough money right now in merger fees to

cover our entire budget, and if we amend the merger filing fee approach, which I know Senator Hatch has proposed and each of you

has supported, then there would be enough money to cover even an

expanded operation at the FTC.

I support a sliding scale and raising the threshold amount. I can

only say that whether it should cover only our antitrust function

or all of our functions is a question that I am going to leave to Congress to decide.

Senator DEWINE. This is my question. Mr. Chairman, let me ask

you one additional question. As you know, this subcommittee held

a hearing in 1998 concerning the BP-Amoco merger and what its

impact would be within the petroleum industry. At that time, we

anticipated the BP-Amoco merger was the beginning of a wave of

consolidation, and in fact, we have seen a good deal of consolidation

since then.

At that time, however, some representatives in the industry asserted that larger oil companies would be in a much better position

to compete in the global market for oil production, and/or oil exploration. Is there any evidence thus far that this has been the case,

and have you seen any other benefits to consumers as a result of

mergers in the oil industry, or is it too early to tell?

Mr. PITOFSKY. We have struggled with the question of whether

or not oil companies in this country and around the world are not

large enough to achieve all the efficiencies that they possibly could.

I have always been very skeptical about the argument that you

need to be larger and larger and larger to be better. I have heard

the quote from Steve Case, actually, of AOL, that larger is not better, better is better, and I think that is exactly right.

As to these particular mergers, and BP-Amoco is the second in

the string, then Exxon-Mobil and then BP-ARCO, we have been

presented with contentions, claims that these mergers will reduce

costs. We never were required to address that issue in Exxon-Mobil

because the company agreed in a clean sweep to divest great

amounts of assets that overlapped. So having eliminated what we

felt was the competitive problem, we did not have to get to the efficiency issue.

37

I think it is quite possible in an international, in a global oil

market, that some of these mergers would lead to significant efficiencies. We have just never gotten to the point in any of our enforcement efforts where we had to argue pro and con on that issue.

I think it is possible, but I would not take it sort of as given that

you have to be larger in order to be more efficient. By and large,

my experience is that is not the case.

Senator DEWINE. I appreciate your answer. At the hearing that

we held, the proponents of the mergers were adamant about this

particular point, that they had to be this big in order to be able

to sustain the production and the exploration. I had some questions

about it at the time, and I guess time will tell and maybe give us

a better idea whether they are correct in that area or not.

Let me address this question to both of you, or either one of you.

The increasing importance of the world market means that companies need the capacity and ability to compete globally. An effective

international enforcement of the antitrust laws is essential to enable U.S. businesses to compete fairly.

In this setting, the agreements and cooperation we have with foreign governments are certainly a critical aspect of maintaining

competition in the global marketplace. We have seen advances during the past several years, especially with regard to our work with

the Canadian and the European enforcement agencies, but we

seem to be having less success, certainly a lot less success in other

markets, such as the Japanese flat glass market. What are your

thoughts on the overall progress of international enforcement and

what steps are you taking to improve that enforcement?

And second, a related question, we have signed a positive comity

agreement with the Japanese government. Article 8 of the agreement provides a mechanism under which you are able to consult

with the Japanese enforcement agencies on a yearly basis on a variety of antitrust and competition issues. Are you willing to use

that provision to continue discussion with the Japanese government on the flat glass issue? Mr. Klein.

Mr. KLEIN. Sure. I think it is a very important question, and I

think, as you know, really prompted by comments that you and

other members of the subcommittee have made, the Attorney General, on my recommendation, appointed the International Advisory

Committee and they issued its report and addressed some of the

front-end issues you asked about, Mr. Chairman.

But my general sense is that you are right, that this progress in

terms of international cooperation is really at its height with respect to our work with Europe and Canada and is really at very

beginning stages in many ways with respect to the Pacific Rim,

Japan, Korea.

I thought we took a major step last year in signing this cooperation agreement. It took many, many years. But there is a very

long-term view in Japan about antitrust enforcement. Until quite

recently, they did not even review global mergers outside their borders. They have really not been, I think, a major player in the

same way that the Europeans and Canadians have.

Having said that, I think this new cooperation agreement is a

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ing flat glass. We made inquiries not only during consultation time,

but separate inquiries, and we have met numerous times and will

continue to meet, I personally, my principal deputy who I charged

with making sure that we took extra efforts in this area, to work

with the parties to see what actions are appropriate, and I will certainly in our next bilateral consultation raise our concerns with respect to this matter again, Mr. Chairman.

Senator DEWINE. Mr. Klein, last month, Senator Kohl and I announced the results of a General Accounting Office, GAO, study

that we sponsored, and this had to do with the development of competition in local telephone markets. The report concluded that local

telephone markets are becoming increasingly competitive, but that

incumbent local telephone providers still have 97 percent market

share in the local markets.

When we announced the study results, we knew the continuing

importance of competitor access to the local network. This issue

was raised yet again in a recent dispute between Bell Atlantic and

local competitors in New York. Specifically, Bell Atlantic had some

problems handling orders submitted by competing local phone companies and had to pay $13 million in fines. As you know, Bell Atlantic was the first company to fulfill the requirements of Section

271 of the Telecommunications Act of 1996, and we hope to see others do so in the near future.

Specifically, Mr. Attorney General, what steps can be taken to

ensure that we do not have similar problems in other local markets, and more generally, what is your assessment of the progress

in competition among local telephone service providers under the

Telecommunications Act? Why have we not seen more applications

under section 271?

Mr. KLEIN. Again, it is a series of very important questions. Let

me just say, I think the principal problem we had with 271 and

why it took a while before we saw our first successful application

in Bell Atlantic was arguments over the price of access. When you

have one company competing with another over the same copper

wire, then the charge that the one company makes to the other can

be very critical, and there was a lot of litigation that the local incumbents brought to challenge the pricing and, indeed, ultimately

the constitutionality of the Act. We won all those cases, in essence

and substantially, and I think we are now back on track.

As a result, we saw the Bell Atlantic application. We have an advisory role in that process and we were concerned about Bell Atlantic. We thought they were very close to the finish line, but were

not over the finish line, and we communicated that view in the 271

process.

The Commission did grant their application and it was a tough

call. It was one where I thought reasonable people could disagree

on. But I think it is very important, Mr. Chairman, to make sure

that all the ‘‘i’’s are dotted and ‘‘t’’s are crossed so that we do not

have the kind of post-entry problems we had in Bell Atlantic.

As a result, we had another application quite recently by SBC

out of Texas, and again, this application is a serious application in

that it reflects real progress and the beginnings of some real competition in Texas. But we still thought, while SBC had gone a long

way, it had not gone over the finish line and we came in with a

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clear recommendation against the FCC approving that, because I

do think, again, in order for this to stick—it is easy to get the application in, but in order to make competition stick, we need to do

it.

I am optimistic about this for two reasons, Mr. Chairman. I think

what I said to Senator Kohl before, because of what we are seeing

with respect to digitalization, there may be alternative pipes that

can conduct telephony. AT&T is now in the process of rolling out

and developing a roll-out plan for telephone over cable, and there

is going to be obviously Internet telephony that is going to be expanded.

I think the solution will become that much better when we have

multiple means of access so that consumers can choose different

pipes. Until then, we will continue to work with the FCC to ensure

tough measures so that when people get in there, we will see greater competition.

I want to say, we have seen tremendous success on the business

side. It has been a true success story in terms of local competition.

In large measure, that has been because the businesses are typically in concentrated areas. You can lay your own fiber. The competitive people can. But we are beginning to see, and it is small but

it is significant, we are beginning to see 5, 6, some States 7, 8, 9

percent competition in local markets.

Three years ago in this Congress, or 31⁄2 years ago when the Congress passed the Act, or 4 years ago, there was zero. So we are

moving in the right direction and it is going to move more rapidly

in the years to come. I have always said that this is going to take

some patience, but we are on the right track, and I think that is

being borne out.

Senator DEWINE. Mr. Klein, I understand that you are currently

reviewing the application of American Airlines to join in an alliance

with Swiss Air and Sabina as a replacement for Delta Airlines. My

understanding is that the immunity for alliances between KLM,

Northwest, and United-Lufthansa are both past the 5-year expiration and, therefore, eligible for review, as well.

Now, without taking a position on the competitive merits of any

of these alliances, does it make sense to review one in a vacuum

without examining the entire array of alliances currently in existence?

Mr. KLEIN. I think this is an issue we have been doing some

thinking about at the Antitrust Division in the following sense, Mr.

Chairman. These antitrust immunity agreements—we do not favor

antitrust immunity as a rule. We are in the enforcement business,

not the immunity business. These immunity agreements come out

of the fact that these deals are negotiated on a bilateral basis with

our trading partners throughout the world in terms of issues of

market access and the like. And so often, in order to get open skies

agreements, which still increase competition, the Department of

Transportation confers antitrust immunity.

We are now moving into a new area. There are some important

policy considerations as we, shall we say, enter this next phase,

and I think we will certainly be taking a hard look and meeting

with our colleagues at the Department of Transportation to talk

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about how to think about the second phase and what changes

might or might not be appropriate.

Senator DEWINE. I want to thank our panel. Again, as always,

you both have been very eloquent and very helpful to this committee and I think to the American people. I think that today’s

hearing has made it clear that antitrust enforcement is very important in today’s economy, especially given the increasingly global

economy and the continuing impact of mergers here at home.

Both our witnesses have been doing an excellent job to help promote antitrust enforcement. Their testimony here today has been

very useful to this committee as we continue to work to improve

the competitive environment for businesses and consumers in this

country.

Let me conclude, though, by making two specific points regarding

issues that were raised during today’s hearing. First, with regard

to the Hart-Scott-Rodino pre-merger notification law, I think it is

important that we continue our efforts to reform it. The law has

not been substantially modified since it was enacted in 1976 and

it is clear from our discussions with the business community and

members of the antitrust bar that reform is long overdue. I look

forward to working with our witnesses, along with Senator Hatch

and Senator Kohl, to address this very important issue.

Second, I am also very concerned about the state of competition

in the Japanese flat glass market. I appreciate the efforts of Mr.

Klein and others at the Antitrust Division to engage their counterparts in the Japanese enforcement agencies on this issue, and I am

hopeful that those efforts will succeed in opening the market in

Japan.

But I must say that my patience is wearing thin. American businesses have been unfairly excluded from the Japanese flat glass

market for years and I am beginning to wonder if our enforcement

agencies have enough tools currently at their disposal. If we do not

see progress in the near future, I will consider legislation to remedy this problem. For global trade and commerce to flourish, we

must have fair access to markets all over the world, and the flat

glass market in Japan is most certainly not open to fair competition today. I will be watching carefully to see if this changes.

Again, let me thank both of our witnesses for joining us here

today in what I think has been a very productive hearing. The subcommittee is adjourned.

[Whereupon, at 3:31 p.m., the subcommittee was adjourned.]

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