Tuesday, May 19, 2009

Varney Discusses Antitrust Enforcement in Distressed Economy

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

Antitrust chief Christine A. Varney made headlines last week when she announced, in a May 11 speech, the withdrawal of the Antitrust Division’s controversial report on single firm conduct. (See Trade Regulation Talk, May 11, 2009).

However, Varney’s comments on other significant issues—from the role of antitrust enforcement in a distressed economy to the Antitrust Division’s enforcement agenda—were not widely reported.

In a speech to the Center for American Progress, the Assistant Attorney General suggested that “a combination of factors, including ineffective government regulation, ill-considered deregulatory measures, and inadequate antitrust oversight contributed to the current conditions.” In light of the state of the economy, antitrust enforcers can no longer “sit on the sidelines.”

Prior Economic Crises

Varney noted that the federal government’s response to the Great Depression was to pass legislation, such as the National Industrial Recovery Act, that effectively foreclosed competition by setting industry prices and wages, establishing production quotas, and imposing restrictions on entry.

“Competition was relegated to the sidelines, as the welfare of firms took priority over the welfare of consumers,” she said. “It is not surprising that the industrial codes resulted in restricted output, higher prices, and reduced consumer purchasing power.”

By 1937, the Roosevelt Administration got back in the game of antitrust enforcement on a nationwide scale. This newly vigorous enforcement became a cornerstone of the New Deal’s economic agenda.

Lessons Learned

“The lessons learned from this historical example are twofold,” she said. “First, there is no adequate substitute for a competitive market, particularly during times of economic distress. Second, vigorous antitrust enforcement must play a significant role in the Government’s response to economic crises to ensure that markets remain competitive.”

In recent years, firms have been given “room to run with the idea that markets self-police and that enforcement authorities should wait for the markets to self-correct.” However, it is clear that this self-correction has not occurred, the official said. Instead, markets are distorted, firms fail, and American consumers are failing with them.

“I believe that these extreme conditions require a recalibration of economic and legal analysis and theories, and a clearer plan for action,” Varney stated.

Section 2 Enforcement

Varney spoke of her intention to aggressively pursue enforcement of Section 2 of the Sherman Act and explained the reasons for withdrawing the 2008 report, entitled “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act.”

“In my view, the greatest weakness of the Section 2 Report is that it raises many hurdles to Government antitrust enforcement,” she said. It raises the concern that the enforcers and courts may fail to distinguish between anticompetitive acts and lawful conduct and their actions may lead to “overdeterrence” of potentially procompetitive conduct, she observed.

“I do not share these concerns. I strongly believe that antitrust enforcers are able to separate the wheat from the chaff in identifying exclusionary and predatory acts. As Judge Posner explained, ‘antitrust doctrine is supple enough to take in stride the competitive issues presented by the new economy.’”

She also noted that the report went too far in evaluating the importance of preserving possible efficiencies and underestimated the importance of redressing exclusionary and predatory acts that harm competition, distort markets, and increase barriers to entry.

Rather than any specific test to govern Section 2 analysis, Varney recommended that the Antitrust Division go “back to basics” in evaluating single-firm conduct within the fundamental principles of antitrust enforcement.

Section 1 Cases

Varney added that “continued criminal and civil enforcement under Section 1 of the Sherman Act will also be an important part of the Antitrust Division’s response to the distressed economy.”

“With the higher levels of concentration and economic instability, markets are increasingly vulnerable to collusion and other fraudulent activity,” the Assistant Attorney General said.

On the civil front, the new antitrust chief will emphasize both merger and non-merger investigations and explore vertical theories in other new areas, such as those arising in high-tech and Internet-based markets.

Besides enforcing antitrust laws, the Division will be asked to contribute expertise to the Obama Administration’s broad reforms over numerous industries. “Indeed part of our efforts will be to foster inter-agency discussions regarding competition-related issues posed by existing and proposed regulations and policies, and to play an active role in competition advocacy.”

Text of the speech (“Vigorous Antitrust Enforcement in This Challenging Era”) appears at CCH Trade Regulation Reporter ¶50,242 and here on the Department of Justice Antitrust Division website.

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