1

1	UNITED STATES FEDERAL TRADE COMMISSION
2	and
3	UNITED STATES DEPARTMENT OF JUSTICE
4
5
6
7	SHERMAN ACT SECTION 2 JOINT HEARING
8	REFUSALS TO DEAL PANEL
9	TUESDAY, JULY 18, 2006
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14	HELD AT:
15	UNITED STATES FEDERAL TRADE COMMISSION
16	CONFERENCE CENTER CONFERENCE ROOM C
17	601 NEW JERSEY AVENUE, N.W.
18	WASHINGTON, D.C.
19	1:30 P.M. to 5:13 P.M.
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21
22
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24	Reported and transcribed by:
25	Sally Jo Bowling

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1	MODERATOR:
2	ALDEN F. ABBOTT
3	Federal Trade Commission
4	J. BRUCE McDONALD
5	Department of Justice
6
7	PANELISTS:
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9	William J. Kolasky
10	R. Hewitt Pate
11	Robert Pitofsky
12	Steven C. Salop
13	Thomas F. Walton
14	Mark Whitener
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25

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1	C O N T E N T S
2
3	Introduction
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5	Presentations:
6	William J. Kolasky
7	Robert Pitofsky
8	R. Hewitt Pate
9	Steven C. Salop
10	Thomas F. Walton
11	Mark Whitener
12
13	Moderated Discussion
14
15	Adjournment
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1	P R O C E E D I N G S
2	-  -  -  -  -
3	MR. ABBOTT: Good afternoon. I'm Alden Abbott,
4	Associate Director of the Bureau of Competition of the
5	Federal Trade Commission. I wish to join my
6	co-moderator, Deputy Assistant Attorney General for
7	Antitrust, Bruce McDonald, to welcome you to today's
8	session of the FTC/Justice Department hearings on the
9	antitrust implications of single firm conduct.
10	This is the fourth session in the ongoing
11	hearings. Prior sessions involved an introductory
12	overview of the topic, and sessions on predatory pricing
13	and buying.
14	Before we start, I need to cover a few
15	housekeeping matters. First, please turn off cell
16	phones, Blackberries and any other electronic devices.
17	Second, and most important, the restrooms are outside
18	the double doors and across the lobby. There are signs
19	to guide you. Third, in the unlikely event building
20	alarms go off, please proceed calmly and quickly as
21	instructed. If we must leave the building, go out the
22	New Jersey Avenue entrance by the guard's desk, follow
23	the crowd of FTC employees to a gathering point and
24	await further instruction. Finally, we request you not
25	make comments or ask questions during the session.

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1	Thank you.
2	Now, before turning the podium over to my
3	colleague, Bruce McDonald, I'll briefly mention, prior
4	to giving more fullsome introductions, we're honored to
5	have six of the most distinguished leading lights of
6	antitrust here today. Bill Kolasky, Wilmer Cutler &
7	Pickering, former deputy assistant Attorney General;
8	professor and former dean and FTC chairman Robert
9	Pitofsky of Georgetown University Law Center, and Arnold
10	& Porter; Hew Pate, former assistant Attorney General
11	and currently partner at Hunton & Williams; Professor
12	Steven Salop, Georgetown University Law Center,
13	Consultant CRA International, and also an FTC alumnus;
14	Thomas Walton, director economic policy analysis,
15	General Motors Corporation, and also an FTC alumnus; and
16	Mark Whitener, senior counsel, competition law and
17	policy, General Electric Company, and also an FTC
18	alumnus. So we see there's a certain FTC flavor to the
19	distinguished speakers here today, but I won't say
20	anything more about that.
21	Bruce?
22	MR. McDONALD: If counting, there is a distinct
23	DOJ flavor on the panel, too. Let me say my welcome to
24	the joint DOJ/FTC single firm conduct hearings. The
25	hearings opened on June 20 with an overview of the

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1	issues presented by single firm conduct and the
2	enforcement of Sherman Act Section 2. At the opening
3	hearings, both FTC Chairman Debbie Majoras and antitrust
4	AAG Tom Barnett emphasized the challenges in identifying
5	what conduct threatens long-term harm to competition and
6	the importance of developing clear rules to guide
7	business and that both underdeterrence and
8	overenforcement need to be considered.
9	Today is our fourth session, and our third day
10	of hearings. Our topic today is refusals to deal, which
11	is hard fought ground in the single firm conduct debate.
12	Our distinguished panel will focus on the circumstances
13	in which a firm's unilateral refusal to deal with a
14	competitor violates or should or should not violate
15	Section 2, addressing issues raised by Colgate, Otter
16	Tail, Kodak, Aspen, Microsoft and Trinko. The views of
17	our panelists have been influential in this debate, and
18	we appreciate the time that they have devoted to these
19	hearings.
20	Let me outline the agenda for you this
21	afternoon. Each of the panelists will take about 15
22	minutes to outline the issues and things critical, then
23	we'll take a 15-minute break, and then we'll dig deeper
24	into a discussion, giving the panelists an opportunity
25	to respond to each other's presentations and to consider

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1	several propositions and hypotheticals that we hope will
2	initiate further discussion. The hearing will end at
3	about 5:00.
4	Let me turn the podium back to Alden Abbott to
5	introduce the presenters. Thank you.
6	MR. ABBOTT: Thank you, Bruce. Our first
7	speaker, Bill Kolasky, is cochair of Wilmer Hale Cutler
8	& Pickering, actually Wilmer Cutler Pickering Hale &
9	Dorr, it's a problem with all of these law firm mergers.
10	He co-chairs the firm's antitrust and competition
11	practice group. He's also had a distinguished record of
12	public service. From September 2001 through December
13	2002, he served as Deputy Assistant Attorney General for
14	International Antitrust at the Justice Department, at
15	which time he spoke out vociferously on the benefits of
16	an economic approach to antitrust in the international
17	forum and was very active in helping launch the
18	International Competition Network. His private practice
19	covers a full range of antitrust matters and Bill has
20	also taught antitrust law at American University, and he
21	speaks regularly on antitrust topics.
22	Bill?
23	MR. KOLASKY: Thank you very much, Alden, and
24	thank you, Bruce, as well, for inviting me to
25	participate in this. I have to say that it's somewhat

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1	intimidating to be the first speaker in this afternoon's
2	session, especially given that I think all of the other
3	members of the panel, and probably most of you in the
4	audience, have thought longer and harder about these
5	issues than I have.
6	The other disadvantage of speaking first, of
7	course, is that everyone gets the chance to shoot at
8	what I'm about to say. I do think that I have, perhaps,
9	one comparative advantage, and only one, I'm going to
10	try to take full advantage of that, and that is my age,
11	and therefore, in fact, I've been doing this a lot
12	longer than most of the people in the room.
13	I've titled my talk refusals to deal with
14	rivals, because I want to distinguish very clearly
15	between refusals to deal with competitors as opposed to
16	refusals to deal with customers.
17	Refusals to deal with customers, I think involve
18	very different competitive concerns. The exclusionary
19	effects are more likely to be direct and immediate, and
20	there's a long line of cases running from Lorain Journal
21	to Dentsply that deal with refusals to deal with
22	customers. As I understand it, we're not here to
23	discuss those, we're here today to discuss refusals to
24	deal with rivals.
25	In structuring my remarks, I felt that I made

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1	one of the classic rookie mistakes, I have far too many
2	slides and so I'm going to have to skip around somewhat,
3	but I wanted to touch on five basic topics. The first
4	is the pre-Trinko refusal to deal cases. Next I want to
5	talk briefly about Trinko. Then I want to talk about
6	the current dialogue that is going on, among others,
7	between Steve Salop and my partner, Doug Melamed over
8	the various standards for applying Section 2 generally.
9	I then want to stake out my own position as to what
10	analytical framework I think should be applied to
11	Section 2, and it's basically a step-wise rule reason
12	approach, applying the California Dental sliding scale.
13	And then I propose to talk about how they apply to
14	refusals to deal with rivals.
15	Focusing first on the pre-Trinko refusal to deal
16	law, there are basically, I think, four distinct lines
17	of cases. The first line of cases, and the oldest, are
18	the vertical integration cases from the 1970s and early
19	80s. The second line of cases are the essential
20	facilities cases, largely from the 1980s and early
21	1990s. The third line of cases are the intellectual
22	property cases, most recently the Federal Circuit's
23	decision in CSU. And then finally there is Aspen, which
24	because it's a Supreme Court case, I think deserves
25	particular mention and focus.

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1	In the debate over refusals to deal, I've been
2	surprised in the recent publications how little
3	attention has been paid to the vertical integration
4	cases, which is really where a lot of the law in this
5	area was first developed. And when you go back and read
6	those cases, I believe, at least, that the analytical
7	framework that they used is a surprisingly sound one,
8	given that these cases were decided largely in the 1970s
9	and early 80s as we were just emerging from what Doug
10	Ginsburg refers to as the dark ages of antitrust.
11	Many of the cases, some of which my firm was
12	involved in, involved refusals to deal by monopoly
13	newspapers that were vertically integrating into
14	distribution. The obvious reason why these papers were
15	vertically integrating into distribution was to get
16	around the problem that was created by Albrecht, by the
17	rule that maximum resale price by principles is per se
18	unlawful. Since it was obviously efficient to have a
19	single delivery person covering each block, newspapers
20	found themselves basically with the situation where they
21	were dealing with independent dealers, giving those
22	dealers a monopoly, and they had no way to prevent those
23	dealers from charging monopoly prices higher than what
24	the newspaper itself would have charged.
25	It's not surprising, therefore, that the cases

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1	for the most part ended up with the courts ruling in
2	favor of the newspapers and upholding their refusal to
3	continue to deal with independent dealers and vertically
4	integrating into the distribution themselves.
5	When you go back and read the cases, and most
6	notable the Paschall versus Kansas City Star decision,
7	in 1984, which was an en banc decision of the Eighth
8	Circuit, what you find is that the courts applied
9	essentially a Section 1 rule of reason standard in
10	evaluating these unilateral refusals to deal. In that
11	sense, I would argue that they are in a way ahead of
12	their time, because it was really not until the
13	Microsoft decision in 2001 that a court of appeals here
14	in the D.C. Circuit affirmatively embraced the rule of
15	reason as the applicable standard for Section 2.
16	Applying that Section 1 rule of reason
17	framework, the Eighth Circuit found that the
18	anticompetitive effects from the alleged loss of
19	potential competition as claimed by the plaintiffs were
20	slight, and that the newspaper had offered several
21	legitimate business reasons for its decision to
22	vertically integrate into distribution.
23	One of the most interesting things about the
24	case is that the newspaper did not rely on the argument
25	that I relied on in my opening remarks about this case,

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1	namely the need to get around Albrecht. Instead, the
2	newspaper focused on the desire to be more responsive to
3	subscribers and have more uniform pricing in order to
4	facilitate advertising.
5	Quite frankly, those are relatively weak
6	justifications for what the newspaper was doing, and yet
7	nevertheless the court held without scrutinizing those
8	justifications very closely, that they outweighed the
9	rather minimal showing of anticompetitive injury that
10	the plaintiffs had made.
11	One of the key factors in causing the court to
12	reach that decision was its determination -- and this is
13	consistent with what I said earlier on Albrecht -- that
14	a vertically integrated newspaper was likely to charge
15	lower prices than if you had unintegrated monopolists at
16	both the publication level and the distribution level.
17	The essential facilities cases, I'm going to
18	skip over lightly, because others are going to be
19	speaking about those in more detail. There are two
20	things that I want to note about them. The mother of
21	essential facilities cases, at least with respect to
22	unilateral conduct, is of course the Supreme Court's
23	decision, Otter Tail. What people often don't comment
24	on is that that was a decision in the mid-1970s, again,
25	as we were just emerging from the dark ages, it was a

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1	four to three opinion written by Justice Douglas, who
2	probably wrote more decisions that antitrust lawyers now
3	try to distance themselves from than almost any other
4	Justice.
5	The other thing that's important about the key
6	essential facilities cases such as Otter Tail and the
7	Seventh Circuit's decision in MCI v. AT&T is that these
8	cases do not involve just a simple refusal to deal by a
9	monopolist. Rather, they were cases in which the
10	monopolist had engaged in a whole pattern of conduct
11	that was designed to exclude rivals from these monopoly
12	markets.
13	The next line of cases, as I mentioned, are the
14	cases involving intellectual property rights, the First
15	Circuit's decision in Data General, the Ninth Circuit's
16	decision in Kodak and the Federal Circuit's decision in
17	CSU. There's been an enormous amount of ink spilled
18	about these decisions, including a very good article by
19	Hew Pate, and I'm sure Hew will have something to say
20	about this line of cases.
21	The important point, I think, that one draws
22	from these line of cases is the Second Circuit's
23	recognition, which was endorsed even by the Ninth
24	Circuit, that an author's or inventor's desire to
25	exclude others from the use of copyrighted or patented

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1	work is a presumptively valid business justification for
2	any immediate harm to consumers that might result from a
3	refusal to license.
4	The debate really, then, is between the Ninth
5	Circuit and the Federal Circuit under what's necessary
6	to rebut that presumption, with the Federal Circuit
7	taking probably the most restrictive view that the
8	presumption is virtually irrebuttable unless there is
9	additional conduct beyond just the simple refusal to
10	license, such as an illegal tie, fraud on the Patent &
11	Trademark Office, or sham litigation. And I think that
12	is consistent, in fact, with cases like MCI and Otter
13	Tail, if you go back and read those decisions.
14	That brings me to Aspen Ski, which was the first
15	serious effort, I would argue, by the Supreme Court to
16	deal with the question of what standards should apply to
17	refusals by monopolists to deal with its rivals, and the
18	key points here that I want to bring out are that the
19	Court focused not just on the impact on the rival, but
20	also on the impact of the refusal on consumers, and the
21	Court also made it clear that what it was looking at
22	under Section 2 was whether the defendant was seeking to
23	exclude rivals on some basis other than efficiency, that
24	is other than through competition on the merits. And I
25	think that's a very important strand that needs to be

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1	kept in mind as one thinks about these cases.
2	The other point that's important to make about
3	Aspen requires really looking at the facts of the case
4	and what the conduct was. Again, as in Otter Tail and
5	MCI, the conduct was not a simple refusal to deal.
6	There was a lot of other conduct going on there,
7	including to me most significantly the fact that Ski Co.
8	discontinued its own three-day, three mountain pass so
9	that the only way somebody could get a discount on a
10	multi-day, multi-mountain pass was to buy a six-day
11	pass, and that meant that if the vacationer wanted to
12	ski the Highlands, they almost certainly had to pay
13	twice, both for the day ticket to the Highlands and the
14	six-day pass to the Highlands. The other thing that's
15	important is that, while the court described Ski Co.'s
16	justification as pretextual, the court also gave fairly
17	close scrutiny to those justifications before reaching
18	that conclusion.
19	Trinko, I'm not going to spend very much time
20	on, because others are going to spend a lot of time on
21	it. The key message point, of course, is that the Court
22	appeared to adopt a very restrictive view as to when a
23	monopolist might have a refusal to deal and cooperate
24	with its rivals.
25	Because I'm running out of time, I'm going to

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1	jump ahead to the contending standards. As I say, there
2	are basically three sets of contending standards out
3	there now, in this area. One is what I would call the
4	Section 2 rule of reason approach, taken by the D.C.
5	Circuit in Microsoft and by the Eighth Circuit in
6	Paschall, the profit sacrifice or no economic sense test
7	that Greg Werden from the Justice Department and Doug
8	Melamed have been advocating and I think Hew from time
9	to time has advocated it as well, and then finally the
10	essential facilities doctrine.
11	Again, because we're running out of time, I'm
12	going to skip ahead to my proposed synthesis. I come
13	down, as I think about this, in favor of basically the
14	Microsoft step-wise rule of reason test for exclusionary
15	conduct. I think that test involves, as the court said,
16	basically four steps. First, an examination of whether
17	the monopolist's conduct, in this case its refusal to
18	deal, had the requisite anticompetitive effect.
19	Second, a requirement that the monopolist, if
20	the plaintiff establishes a prima facie case, proffer
21	some nonpretextual procompetitive justification for its
22	action, and if it does so, the burden then slides back
23	to the plaintiffs to rebut that justification. And it's
24	only if the plaintiff meets that burden that you move on
25	to the fourth and final stage, which is balancing.

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1	That's the reason why I don't particularly like to have
2	this test described as the balancing test, because in
3	fact, you rarely reach the fourth balancing step in the
4	test.
5	In applying the step-wise rule of reason under
6	Section 2, I would argue that the courts should do just
7	as they do in Section 1, and as I believe they do in
8	practice under Section 2, and that is apply a sliding
9	scale. That is to say, as Justice Souter wrote in
10	California Dental, what is required is an enquiry need
11	for the case. In other words, the stronger the evidence
12	of anticompetitive harm, the closer the scrutiny of
13	proper justifications.
14	Going back to, I'm not sure how to go to a
15	previous slide, I want to go back to Microsoft for a
16	second, because -- I'm sorry about this. I hope I get a
17	minute for my technological ineptitude. Here we go.
18	In Microsoft, if you read the decision closely,
19	you will see that the court, in fact, applied exactly
20	this kind of a sliding scale. When it came to the
21	license restrictions that Microsoft imposed on OEMs, the
22	court subjected Microsoft's proposed justifications to
23	very close scrutiny. When it came, however, to the
24	integration of Internet Explorer and Windows, the court
25	expressed at the very outset of that section of its

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1	opinion a general deference to the dominant firm's
2	product design decisions, and the only reason it found
3	Microsoft's conduct unlawful, to the extent it did, is
4	that Microsoft proffered no justification whatever for
5	its decisions.
6	What I found interesting, and I credit this to
7	one of our summer associates, Tian Mayimin, who is in
8	the audience today, is how similar the California Dental
9	sliding scale approach to the rule of reason is to what
10	the courts do in the constitutional area, both under the
11	First Amendment, and under equal protection, where over
12	the years, what began back in the 1960s as a balancing
13	test, has evolved instead to three different levels of
14	review, strict scrutiny, intermediate scrutiny, and weak
15	scrutiny, in which the degree to which the court
16	subjects the proffered justifications for the
17	government's action depends on how objectionable the
18	conduct is in terms of First Amendment principles and/or
19	equal protection.
20	And I would suggest that the analogy in the
21	antitrust area is to the test we use for determining
22	whether or not the proper justifications justify the
23	conduct at issue. We often talk about needing to find
24	that the conduct is reasonably necessary, that's a
25	relatively tough standard.

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1	A more relaxed standard would be to find that
2	it's reasonably related, and an even more relaxed
3	standard would be that it's plausibly related, which is
4	the standard the Supreme Court adopted in Broadcast
5	Music in determining whether or not the per se rule
6	should be applied. I would argue that you could use
7	that same sliding scale under Section 2, where the
8	degree of scrutiny depends on the nature of the conduct
9	in question.
10	Why do I prefer the rule of reason approach to
11	the profit sacrifice test? I think basically four
12	simple reasons. One is that it focuses directly on
13	competitive effects, whereas the profit sacrifice test
14	focuses more on the effect on the monopolist, rather
15	than the effect on consumers. Second, because, as Steve
16	Salop has pointed out quite persuasively, exclusionary
17	conduct can be profitable, even in the short-term, and
18	in fact, if you read the facts of Aspen Ski, I suspect
19	that even there, Aspen's conduct was profitable in the
20	short-term, even though it degraded the attractiveness
21	of its product to the skiers, and that's because it
22	would have shifted skiers from Highlands to the Aspen
23	mountains, thereby increasing its revenues, i.e., even
24	if the total number of skiers coming to the Aspen area
25	generally declined.

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1	Third, at least as I have read the articles, the
2	profit sacrifice test, as it has been articulated,
3	doesn't acknowledge the need to calibrate the degree of
4	scrutiny of the business justifications based on the
5	strength of the evidence of competitive injury. Doug
6	Melamed, for example, has argued that one can look at a
7	refusal to deal as basically a make-or-buy decision, and
8	that it should be unlawful if it would be more
9	profitable for the monopolist to buy the downstream
10	services than to vertically integrate them. I would
11	argue that that is too high a degree of scrutiny for the
12	courts to impose on those kinds of decisions.
13	And then finally, there is no obvious reason why
14	courts should be any less able to evaluate competitive
15	injury and business justifications in a Section 2 versus
16	a Section 1 setting. What should differ is how strictly
17	they scrutinize the justifications, not the test that
18	they apply.
19	Thank you.
20	(Applause.)
21	MR. ABBOTT: Thank you, Bill. Now I have the
22	honor of introducing Robert Pitofsky, a name known
23	certainly to all of you and throughout the antitrust
24	world, former FTC Chairman, Commissioner and Bureau of
25	Consumer Protection Director, distinguished background

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1	in private practice, currently of counsel at Arnold &
2	Porter, and of course very distinguished academic,
3	former NYU law professor, then dean of Georgetown Law
4	School, currently Sheehy Professor in Antitrust and
5	Trade Regulation Law at Georgetown University Law
6	Center. His writings are many. He has co-authored,
7	Cases and Materials on Trade Regulations, which is in
8	its fifth edition, one of the most widely used antitrust
9	and trade regulation case books.
10	Bob Pitofsky.
11	(Applause.)
12	MR. PITOFSKY: Thank you all and good afternoon.
13	It's great to be back at the FTC, and to see that the
14	DOJ and the FTC are continuing the tradition of taking
15	on the toughest issues and addressing them not
16	necessarily by litigation, but by hearings like this.
17	And I do regard the definition of exclusion under
18	Section 2, and refusals to deal in particular, as about
19	the toughest issues that an antitrust lawyer is required
20	to face today.
21	I'm going to do three things here. One, I want
22	to put refusals to deal in a broader context, and I
23	believe that's what Trinko's majority opinion was
24	designed to do. Secondly, I want to say a little bit
25	about the general universal test that Bill talked about

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1	in such an interesting way. I just have one question,
2	because I agree with virtually all that he had to say.
3	And then I'm going to discuss, the antitrust concept of
4	essential facilities and whether essential facilities is
5	such an unwise doctrine that it ought to be abolished.
6	Let's start with Trinko, because I don't think
7	Trinko is just about the facts of that particular case.
8	It was a unanimous opinion. I would have voted to
9	reverse the Second Circuit, too. I had no problem with
10	the holding. It's the dicta in Trinko that went on and
11	on and on, and I'm disappointed that other judges on the
12	court didn't concur separately, and write that they were
13	not ready to go along with all this additional talk.
14	More broadly, I think Justice Scalia was saying, very
15	directly, that he's uncomfortable, he's skeptical about
16	enforcement of Section 2, and thinks that Section 2,
17	certainly compared to Section 1 of the Sherman Act,
18	causes more harm than good. His reasons were that there
19	are too many false positives, as he put it, in Section
20	2, that Section 2 enforcement tends to chill the
21	incentives of aggressive and innovative companies, that
22	he's uncomfortable with a generalist antitrust court
23	taking on issues like those raised by Section 2
24	enforcement, and the remedy, especially with refusal to
25	deal, is at least difficult and may be impossible.

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1	Let me just go through these. First of all,
2	what is this false positives thing? I didn't agree with
3	the Second Circuit either, but I didn't conclude that
4	Section 2 raised many false positives as a result of
5	that wrong decision. Is the meaning that lots of
6	Section 2 cases have been brought by the government and
7	private parties and have been thrown out on motions to
8	dismiss, not stating a legitimate case? Well, let's go
9	back and review the record: Lorain Journal, Walker
10	Process, Otter Tail, Kodak, Xerox, Aspen, and Intel.
11	The plaintiff won every one of those Section 2 cases.
12	Now you might say yes, but they were false positives,
13	Otter Tail should have been decided the other way. But
14	the Supreme Court decided Otter Tail in favor of the
15	plaintiff, and the Court has not subsequently overruled
16	the decision.
17	Now there have been mistakes that have been
18	made, but the idea that there's just constant false
19	positives in Section 2 enforcement, I don't know where
20	that's coming from.
21	Second, Section 2 enforcement chills incentives
22	for innovative companies. I'm agnostic on that. Maybe
23	that's true. Just show me the data. Show me anyone who
24	has done a study which demonstrates that once a company
25	is aware that it may have to engage in mandatory

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1	licensing, at a reasonable royalty, they cut back on
2	their investment in innovation. I haven't seen it. But
3	I'm uncomfortable with all these ex cathedra statements
4	that that would occur.
5	Third, uncomfortable because generalist
6	antitrust judges are deciding these cases? Well, who
7	are the judges deciding joint venture cases? Merger
8	cases? Rule of reason cases? They all involve
9	trade-offs, just like Section 2; they all involve
10	generalist judges. Up until now, I thought U.S.
11	antitrust was doing a pretty good job, and I'm not
12	troubled that district judges are making a botch out of
13	these trials.
14	On refusal to deal, if you mandate disclosure,
15	you have not just the decision about mandating, you have
16	a decision about at what royalty, what terms, what
17	timing, and so forth. And there's no question, that
18	complicates this issue immensely. It was worked out in
19	Aspen Ski, it was worked out in Otter Tail, although
20	there was a Federal Power Commission at the time Otter
21	Tail was decided to help to work out the remedy. The
22	question for me is, given the fact that the remedies in
23	these cases are difficult, do you throw up your hands
24	and say, impossible, therefore the monopolist can do
25	anything it wants, or do you try to work out the best

25

1	remedy you can? Sometimes the remedy is easy. Perhaps
2	the monopolist has already been licensing other people,
3	but refuses to license potential competitors. It's not
4	common, but it happens.
5	Sometimes the monopolist has been selling in
6	other markets at a price it was comfortable with.
7	That's the beginning of negotiation for this remedy. I
8	grant immediately, it's difficult, the question is, does
9	that mean free reign for the monopolist?
10	Second, on proposals for a general rule, first
11	of all, I want to compliment Hew Pate, now Bill Kolasky,
12	Steve Salop, Doug Melamed, Greg Werden, all of whom are
13	trying to come up with a rule that lends certainty and
14	predictability to Section 2 generally and refusals to
15	deal specifically. But in the end, I think the
16	balancing test as advocated in Aspen and Microsoft is
17	where you have to end up. I'm uncomfortable with the
18	universal rule that focuses on the welfare of the
19	monopolist. That's the profit sacrifice test. I'm more
20	concerned about the consumer, not whether the monopolist
21	sacrificed profits.
22	On the approach that asks if there was any
23	plausible economic reason for doing something, you know,
24	I think lawyers can always come up with a plausible
25	economic reason. That's not the issue. The issue is

26

1	whether that reason is good enough to outweigh the
2	anticompetitive effects. And that, it seems to me, is
3	what you have to do.
4	I would welcome a clearer rule, but in the end,
5	you have to take into account the redeeming virtues, the
6	business reasons, the justification, but if the
7	anticompetitive effects are large and the efficiencies
8	small, you can't stop with step one, you have to get to
9	as many steps as you can, and that's the question that I
10	would like to address to Bill. His third step is: what
11	was your justification? Suppose the defendant states
12	it, and then the other side comes in and let's say fails
13	to show that your justification was not plausible,
14	substantial, significant -- that is, there was some
15	justification. Do we stop there? Or do we go on to the
16	question of maybe you had a good justification, but it
17	didn't outweigh the anticompetitive effects?
18	Let me return finally return to the issues
19	relating to essential facilities. Let me start with the
20	proposition that the general rule is and must be no
21	general duty to deal. You don't have to disclose these
22	kinds of information except under a very rare exception,
23	and the exception is where a monopolist has a bottleneck
24	monopoly. The scholars are suppose to all say let's get
25	rid of the doctrine. That's really not what they say.

27

1	They say it should be rare and extremely narrow, that's
2	Areeda, that's Hovenkamp. I say the same thing. It
3	should be very rare, and very narrow.
4	But I think it should be an exception to the
5	general rule. I think the best summary of the
6	limitations on essential facility claims is in the MCI
7	case, which I notice virtually every lower court that
8	either sustains or overrules the essential facilities
9	claim, they all use the MCI test. The test is as
10	follows: one, it only applies to a monopolist; two,
11	other potential rivals cannot duplicate the facility or
12	the service. It's not just that it would be hard to
13	duplicate it, it's they can't do it at all. Three, the
14	monopolist denies access to the service or the facility;
15	and four, that it's feasible to make use of the facility
16	available.
17	I remember there was a throw-away line in Otter
18	Tail, and that's not my favorite case in this area, but
19	there's a throw-away line saying, you know, if you had
20	said that there's an engineering reason why you couldn't
21	wheel power to those municipalities, this would be a
22	different case. The problem with Otter Tail is there
23	was no plausible explanation except anticompetitive
24	purpose for refusing to wheel the power.
25	The EU has added a few additional

28

1	qualifications: The refusal to deal must eliminate all
2	competition, and that the product that the person
3	seeking access would make is not just a clone of the
4	first product, I don't think you need those two
5	additional restrictions, although they do narrow the
6	doctrine.
7	I think with the general qualifications stated
8	in MCI, we're in good shape. And I do want to emphasize
9	here -- the idea is not that the monopolist is giving
10	anything away, it's receiving reasonable royalties that
11	a court or an expert witness figured out was acceptable.
12	Finally, it has been said that there's Terminal
13	Railways, there's Otter Tail, there's Associated Press,
14	and there aren't many cases that address the essential
15	facility issue. That's just not true. There are scores
16	of lower court cases, including lower court cases since
17	Trinko kicked a lot of mud on the essential facilities
18	doctrine, which have addressed the claim of essential
19	facilities.
20	Let me conclude by saying that while Section 2
21	enforcement is an area that deserves to be addressed, at
22	least for the time being, I think Aspen Ski is the best
23	approach to it. It applies a rule of reason, and the
24	Court looked at and rejected any plausible business
25	justification. It seems to me a monopolist ought to

29

1	have some reason for refusing to do business with a
2	potential rival. I just don't think of antitrust as
3	being so narrowly confined when it comes to the market
4	power of a monopolist. I look forward to the
5	discussion. Thank you.
6	(Applause. )
7	MR. ABBOTT: Well, so far we've heard one
8	endorsement of the Cal Dental sliding scale approach and
9	an endorsement of an approach based on Aspen Ski,
10	variations on balancing approaches, and it will be
11	interesting to see what our next speaker has to say
12	about such approaches.
13	Hew Pate, partner and head of Hunton & Williams'
14	Global Competition Practice Group, is a former Assistant
15	Attorney General for antitrust, until relatively
16	recently. Hew's practice involves all aspects of
17	competition law, counseling and litigation. Hew has
18	served as Ewald Distinguished Visiting Professor of Law
19	at Virginia, from which he graduated first in his class.
20	Hew clerked for two Supreme Court Justices, Justice
21	Powell and Justice Kennedy.
22	Hew?
23	(Applause.)
24	MR. PATE: Thank you very much, Alden. It is
25	great to be here at the Commission's conference facility

30

1	for these hearings. I appreciate the opportunity to
2	take a part in them. I have submitted some written
3	testimony, which I have prepared on behalf of the United
4	States Telecom Association. That, as I understand it,
5	will be available on the website for these hearings. As
6	to my elaborations on that and what I say in the
7	exchange, you've just got me, and all the views I
8	express, both in the written testimony and here, are my
9	own.
10	The general point of the testimony I'm going to
11	give is that independent competition among competitors
12	who are not relying upon one another for assistance or
13	even for pulled punches in the competitive process is
14	what best produces innovative products at low prices.