Chapter 17

Antitrust laws: Keeping Competition Alive

Here is the dilemma. Copyright law grants to authors certain exclusive rights regarding their writings. Trademark law grants to owners the exclusive right to use a word or phrase in commerce. Both these bodies of law are premised on the notion that, by granting these exclusive rights—monopolies, if you will—individuals and businesses will be given the incentive to create and those creations will be good for the overall health and vitality of our economic system. But consumers can suffer when competition is restrained, when there is only one source for commodities. Hence, antitrust laws govern fair competition and are relevant to our understanding of content rights.

The antitrust laws are complex and worthy of a completely separate treatise. Yet, some familiarity with the principles designed to protect consumers by preserving competition is essential to appreciate the interplay of content rights in the digital world of the 21st century.

Key Concepts of Antitrust law

Antitrust has several key concepts, which are evaluated not only when a company's conduct is being assessed as a violation of antitrust laws, but also when a proposal to merge two companies or sell one part of a business to another is being reviewed:

• Monopoly, market power, and extension of power to new areas of commerce. A monopoly exists when a business can control prices to consumers or prevent entry by competitors. You can determine the existence of a monopoly by calculating what is known as market power, the degree to which one entity controls a line of commerce. The greater the percentage of the business in an industry that a company controls, the greater is its market power. Market power in an industry may be diluted if alternatives not controlled by the monopolist exist. For example, if the government were trying to decide if the two largest companies that deliver programming to homeowners via satellite should be allowed to merge, the analysis would be greatly affected by a decision to count dozens of large cable companies as part of the same industry. If you ignore the cable companies, the combined satellite company might look like a colossus controlling more than 90% of the business, whereas if the cable firms are added to the mix, the net share of the satellite companies might not even break 15% of the market. Thus, the definition of market is crucial to an understanding of a company's power and whether consumers are helped or harmed by the combination. Also, the matter of extending market reach is always important. If a company naturally grows from one product line to another, it may be perfectly good for competition and consumers. However, if a company that has a monopoly in one line of commerce tries aggressively to utilize that power to buy control over another area, then competition may be unfairly harmed and consumers may suffer. As we shall see, this issue dogged the world's largest software company for the better part of a decade.
• Combinations or conspiracies that unfairly restrain trade. An important antitrust principle is that what an individual company decides to do on its own may be just fine; however, if that decision is made, not independently, but as the product of two companies working together, then competition is harmed and consumers can suffer. The good act of one can be a bad act of two. If the action restrains trade in any fashion, it is called a combination or conspiracy in restraint of trade, and the antitrust laws prohibit it.
• Mergers and acquisitions that effectively destroy competition. When does a joining together of two competitors make for an unlawful combination? That is the issue often posed by the plans of big business to get even bigger. As noted regarding the satellite and cable industry, the analysis may hinge on the definition of market. A company's behavior or market conduct is also relevant. Most big business plans to combine or acquire companies are carefully reviewed by the federal and state agencies that regulate competition.

Federal Antitrust Laws

The antitrust laws of the United States have twin processes, criminal and civil actions. The criminal laws are administered primarily by the Department of Justice and the FTC. The civil laws are enforced by private companies harmed by the actions of their competitors. There are also antitrust laws at the state level. In the interconnected, ever-shrinking world we live in, the decisions of U.S. firms with multinational business may be reviewed by foreign officials and governments. Altogether, these laws are designed to guard against the abuses of economic power. In the federal system, the key legal provisions include

1. Section 1 of the Sherman Act prohibits contracts, combinations, or conspiracies that unreasonably restrain trade.
2. Section 2 of the Sherman Act makes it unlawful for a company to monopolize or attempt to monopolize trade or commerce through unreasonable methods.
3. The Federal Trade Commission Act bans unfair methods of competition.
4. The Clayton Act prohibits mergers or acquisitions where the effect may be to substantially lessen competition or tend to create monopoly.

States and foreign governments have laws that provide similar restraints. In rare cases, even though a merger of companies or an assessment of conduct may pass muster in the United States, it may fail under the tests applied by foreign countries. This was the fate of the proposed merger of General Electric and Honeywell in fall 2001. A planned joining of the companies, deemed to be the crown jewel in the illustrious career of GE Chairman Jack Welch, was torn apart, not by U.S. or state law enforcers, but by the antitrust sleuths of the European Union.

Antitrust laws credit the notion that the behavior of a monopolist, even one with market power, does not have to be anticompetitive or anticonsumer. What counts is the nature of the conduct, and conduct that harms consumers and competitors is illegal. As a result, antitrust laws often require balancing facts and claims and a careful assessment of the impact of the proposed behavior and goals, in effect a “rule of reason.” Justifications for actions are as important as the actions themselves.

Behavior Targeted by Antitrust Laws

In principle, therefore, antitrust laws and the exclusive grants of rights to copyright and trademark owners are compatible. However, certain behavior raises red flags, signs that careful review of the actions of entities must be considered. These activities, which traditionally have been deemed the seeds of abusive business practices, include

• Agreements among competitors about price. The essence of a market economy is the ability of competitors to price goods and services to maximize public appeal. When competition works effectively, prices can be affected by factors such as supply and demand, costs of production, promotion, quality, and service. However, if competitors reach side agreements on how to price their products or services, the law is violated. Price similarity is not the same as price fixing; an agreement to set a price by competitors is the difference.
• Agreements among competitors to limit product. Anytime two or more companies reach an understanding on how to control output, the antitrust laws are violated.
• Boycotts. A joint decision not to deal with another person or business is unfair if the intent is to force others to pay higher prices. The telltale sign of such an agreement is a plan to use their joint involvement as a way to limit a mutual competitor and thereby exact a higher price from a consumer. • Dividing markets. An agreement among competitors to subdivide territories or allocate customers is an agreement not to compete. While it may have a rational basis, such as the desire not to overspend when getting into a new business or moving to a new location, if it is made by two or more competitors jointly deciding how to behave, that is not okay.
• Tie-ins. Linking the sale of one product with another is not per se a problem; however, if the effect harms competition, then the practice may be illegal. The annals of copyright include many stories in which authors tried to tie acquisition of one product to another. In essence, this is what Microsoft was charged with doing in making Internet Explorer inseparable from Windows 98. Decades earlier, major movie studios were charged with illegally bundling the licensing of certain films, one to another, without adequate opportunity for the customers to reject undesired titles. When the effect is detrimental to competition, the federal government will step in and rely on the antitrust laws to prevent the practice.
• Mergers and acquisitions play a special role. When a company seeks to add a new division or extend its control of a line of commerce by merging with or acquiring a competitor, both the Department of Justice and the ETC take a very close look at the impact of the action on the marketplace. Too much concentration of power or consolidation in the hands of fewer players can wreck a vibrant industry. The cable and telephone industries in recent years, like the newspaper and broadcast industries before them, have seen mergers or acquisitions reduce the number of major players from many to a few. The impact of these business developments on competition, price of services and goods, and standards for new entrants into the business, all must be considered by the government before such deals can close.

Microsoft's Antitrust Dilemma: A Case Study in Copyright Rights and Wrongs

At the height of its power and influence, at a time when the net wealth of its principal shareholder, Bill Gates, soared to $85 billion, the Justice Department launched a lawsuit to break up Microsoft, the most successful software company in history. The claim was that Microsoft had improperly used its copyright monopoly in Windows desktop computer software to attempt to control the market for Internet browser software. By embedding Microsoft's Internet Explorer as an essential and inseparable operating part of Windows 98, by issuing copyright licenses controlling how desktop icons are to appear, the original equipment manufacturers were materially constrained in utilizing an Internet browser other than Internet Explorer. In short, the charge was that Microsoft was utilizing its Windows copyright monopoly to make users adopt another Microsoft product by default, to the detriment of competitors (Netscape in particular and other Internet browsers in general) and the consuming public.

The case, which was initiated in the 1990s and decided in 2001, involved the Department of Justice, attorneys general from dozens of individual states, and an army of witnesses from many affected Internet companies. In one of the most dramatic legal decisions of American jurisprudence, a federal judge ordered a breakup of the world's richest company. The decision to split Microsoft into two independent companies was partially reversed on appeal.

The Appeals Court ruling kept in place many key elements of the District Court's antitrust decision. Nevertheless, the appellate decision required a reconsideration of the remedy imposed by the district court. In an extraordinary personalization of the proceeding, Microsoft charged, and the US. Circuit Court of Appeals agreed, that the district judge showed bias, stepping outside his role as dispassionate jurist by granting interviews with the press while the case was going on. That behavior forced the court to appoint a new judge to hear the case after it was sent back to the lower court.

When the matter was returned to the district court, in the aftermath of the September 11 World Trade Center attack and at the urging of the new judge assigned to handle the case, the Justice Department and Microsoft reached a compromise that promised to keep the company intact. That compromise was challenged by state attorneys general, who were parties to the complaint, and the case remained alive.

Then, in January 2002, AOL Time Warner filed a private antitrust lawsuit against Microsoft. Before the AOL-Time Warner merger, AOL had acquired Netscape and made it the service provider's preferred Internet browser. The AOLTW antitrust complaint relied on the findings in the Department of Justice case and raised the specter of Microsoft owing billions of dollars in damages for anticompetitive behavior. The antitrust laws allow the court in a civil case to exact punishment against a losing defendant by trebling the money award.

Whatever the final outcome of these cases, they underscore the importance and relevance of the antitrust laws, not only for the world's largest company, but for all owners of copyrighted works and trademarks. As the Circuit Court, citing another appeals court ruling, pithily explained, “Intellectual property rights do not confer a privilege to violate the antitrust laws.”