Yesterday I saw The Simpsons Movie. I have a long review and post about the film at the Mises Economics Blog. I ended that post by expressing admiration for the film’s animation staff:

[R]egardless of one’s take on the storyline or humor, every libertarian should stand and applaud the epic accomplishment of the people who put together the film and the series. Movie director David Silverman—who also helmed the series’ first episode in 1989—led a team of hundreds of animators in the U.S. and South Korea (take that, Lou Dobbs!) Even with today’s computer aides, the Simpsons still rely on hand drawings to produce 24 frames of animation per second. Freed of television’s size and time constraints, Silverman and his colleagues produced a gorgeous work of art that’s a worthy testament to social cooperation. Government planning or “social democracy” does not produce feature animation of this quality.

The point about social cooperation merits repetition. Among regulators and litigators, the common view holds that social conflict—regulation and litigation—advance society. FTC and DOJ officials often cite antitrust as the basis of America’s economic success, not private property rights or entrepreneurs. The message is that without all this conflict, society is doomed to collapse. Without valiant lawyers and regulators, after all, who will protect consumers, fight for social justice, et cetera. A constant barrage of fear convinces most folks that there must be some immense value in enduring all this conflict.

And yet, if you sit and watch The Simpsons Movie as I did yesterday, you remember that social cooperation will always triumph over conflict. A film that took four years and the efforts of hundreds to produce is a simple and profound testament to how society and markets actually work. It shatters the fear-induced illusions of the regulators and litigators. Those people are unproductive leeches upon society. The animators are among the productive champions of social cooperation.

In my own experience as a freelance paralegal, I’m often assigned projects of little value to clients. It’s not because the lawyers that hired me are swindling the clients—I don’t work in litigation, mostly trusts and estates—but because external regulators impose duties that require compliance. I spend a lot of time filling out forms to prevent other forms from being filled out later. There’s no productive value in this, but it does perpetuate the regulators’ false sense of social importance. (And incidentally, I’m looking for additional work right now, in case anyone in the Washington, DC-area is hiring!)

Still, I remain a positive guy despite all the social conflict that surrounds us. Yesterday’s movie reminded me that man’s (and woman’s—don’t sue me, Mr. Banzhaf) combined productive capacity far outweighs the destructive, antisocial acts of all the regulators and litigators in America. And more recently, I’ve learned that it’s futile to try and convince the opposition that they’re wrong. It’s more effective, and peaceable, to lead by example and education. Frankly, I can wait for the destructive folks to get it out of their system. I’m not going anywhere.

And with that, good night and good luck.

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Put another way, try to fashion a consumer protection or antitrust law in a purely barter economy. If A trades two pounds of flour to B in exchange for a bushel of apples, which party is the “consumer” entitled to government protection? It’s easy to apply common law principles regarding fraud to such a transaction, but virtually impossible to employ contemporary consumer protection standards, which require a presumption that one trader is good and the other is bad.

Antitrust regulators obsess over short-term prices. They deem a price “anticompetitive” when they think it should have been lower. The seller is liable for trading a good at anticompetitive prices. But why isn’t the buyer equally liable? If the government sets the competitive price of a good at x and a seller trades that good at x+1, both the buyer and seller undermine the competitive price level.

The rejoinder to this is that the buyer is “forced” to pay the anticompetitive price because the seller controls the supply of an item desired by the buyer. But the reverse is also true. The buyer controls a supply of an item desired by the seller—cash. The seller lacks the ability to obtain cash from anyone except those cash-holders willing to trade for the seller’s item.

Then there’s the impact on third parties. A potential buyer who is only willing to pay the government-determined competitive price—loses out when another buyer chooses to pay the anticompetitive price. Why, then, doesn’t antitrust law permit suits against those buyers who perpetuate anticompetitive price levels?

Last term the Supreme Court decided a case that fits into this discussion. In Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., the Court faced an unusual challenge to “predatory bidding,” the parallel to predatory pricing. Ross-Simmons accused Weyerhaeuser of paying too much for raw materials, rendering the smaller Ross-Simmons unable to compete and stay in business. Ross-Simmons prevailed at a jury trial and on appeal to the Ninth Circuit, but a unanimous Supreme Court held that the lower courts failed to apply the same standard to predatory bidding as they did to predatory pricing. (The Ninth Circuit reasoned that predatory pricing can benefit consumers in the short term, while predatory bidding offered no similar benefit, thus it should be easier to challenge under the antitrust laws.)

Predatory bidding raises the same question addressed above. If there’s a case against a company for paying too much for raw materials, there should also be a claim against the firms that sold the raw materials, since they benefited from anticompetitive prices to the detriment of companies unable to pay the same price as the predatory bidder. Indeed, since the predatory bidder trades cash in exchange for the raw materials, an antitrust claim against the raw material producer should be even stronger.

Obviously, I’m not hoping for more antitrust litigation. It’s simply worth noting the logical incoherence of antitrust doctrine. It comes back to the question, why does trading cash afford one greater legal protection than trading a good or service? Or has modern ideas about “consumer protection” rendered equal justice a dead letter?

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While I’m very sorry that the two Phoenix TV copters collided and crashed, killing four, I am very much against TV stations (and cable “news” networks) televising live police chases. There isn’t much news value there and the the very presence of TV coverage of such events encourages people – particularly the drunk and drugged – to break the law and lead the police in high-speed chases thereby endangering countless thousands of responsible drivers, their passengers, and pedestrians. …

I’m reminded of a recent “Simpsons” episode where the Channel 6 news copter follows the Jailbird (aka Snake) on a police chase, which takes an unexpected turn when the fugitive leaves his car, steals a helicopter of his own, and pulls alongside the news copter, where he turns to the camera and offers a succinct traffic report before flying off.

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Despite the occasional high-profile merger challenge, like the FTC’s recent lawsuit to stop Whole Foods from acquiring Wild Oats, very few deals face antitrust roadblocks. In the fiscal year 2006, the FTC and DOJ issued second requests for information—the first step towards a formal challenge—in only 2.6% of reported mergers. This is slightly below the ten-year average of 3.01%.

That doesn’t mean there are no regulatory costs imposed upon the 97% or more of deals that don’t get to the second request stage. All parties subject to HSR requirements must pay a “filing fee” of up to $280,000. These fees directly pay for most of the FTC and Antitrust Division budgets. Even antitrust supporters have questioned this practice. The government’s own Antitrust Modernization Commission (AMC) said in its recent final report, “merging parties should not have to shoulder the burden of paying a large portion of the cost of antitrust enforcement generally. Indeed, the fees Congress has imposed effectively tax mergers, the vast majority of which are procompetitive or competitively neutral.”

As for the 3% of deals subject to a second request, the AMC found:

The burdens of second requests are high and increasing. The cost of responding to a typical second request includes outside counsel fees, payments for processing electronic documents and photocopying, and economists’ fees. Indirect costs, such as employee time and opportunity cost, are difficult to quantify but are nonetheless very significant. The ABA Antitrust Section cited reports that compliance with a second request typically takes six months and costs $5 million, while the reviews in more complex investigations can take eighteen months and cost the merging parties up to $20 million.

The primary reason second requests are so expensive is that there are no judicial or due process restraints on pre-merger investigations. Whole Foods CEO John Mackey, writing about the FTC’s lawsuit against his company, provided valuable insight into the second request process:

From the first day the FTC began their investigation they were very hostile and adversarial towards Whole Foods. Instead of conducting a dispassionate, impartial, and fair investigation into this merger the FTC consistently behaved in a biased, adversarial, and arrogant manner, while engaging in “bullying tactics” again and again and again. Whole Foods was always presumed to be “guilty” and had to try to prove our “innocence” to the satisfaction of the FTC. However, the FTC seemed to us to be completely uninterested in Whole Foods explanations for why we were doing the deal. From the very beginning the FTC staff began to build their case against the deal. It is Whole Foods’ opinion that the FTC had already decided to try to prevent this merger before they even began their investigation!

To give one example of FTC bullying tactics, let’s look at how they behaved toward us in order to gain multiple time extensions beyond the original deadline. Whole Foods has spent thousands and thousands of hours trying to comply with the enormously burdensome requests that the FTC placed upon us and which have cost us millions of dollars in staff time, lawyers’ fees, consultants’ fees, supplies, and other expenses. We have produced over 20 million documents for them to “study” (which is of course impossible for them to effectively do since this amount of information is simply too large to be digested, no matter how many tax-payer funded lawyers are working on it), but the FTC could still always claim that we left something valuable out of the documentation and could then force us to start the entire process over again. On more than one occasion we came up against the time deadlines and the FTC “asked” for Whole Foods to agree to extensions. If we expressed any reluctance then the FTC brought up the threat of starting over. Needless to say, we didn’t want to start over again so we agreed to the extensions. The entire process was inherently coercive.

My second objection to this entire FTC process is that I personally consider the way the FTC gathered its information on the deal to be unethical (even if it is “legal”) and a complete invasion of privacy. The FTC has the legal power to look at absolutely anything about our company that they want to. They can look at all of our financial information, all of our strategic documents, all of our e-mails-absolutely anything and everything that they want to. Think about that for a moment and imagine how you would personally feel if every single e-mail you had ever written was to be read by governmental bureaucrats you didn’t know, and then could be selectively revealed publicly to the entire world if those governmental bureaucrats decide that it is “relevant to their legal argument”. Whole Foods is powerless to prove that a particular e-mail isn’t relevant or that it contains competitively sensitive information.

While the FTC can look at absolutely anything and everything it wants to about our company does Whole Foods have the same reciprocal rights with the FTC? Of course not! We can’t go look at all the FTC e-mails concerning Whole Foods and Wild Oats (which no doubt say some pretty interesting things about how the FTC really operates!). We can’t download all the various minutes of their meetings or get a look at the FTC “strategy” concerning Whole Foods. It is totally one-sided. It is unfair. It should not be legal for the FTC to do this in my opinion. There is obviously no evidence that Whole Foods or Wild Oats are “terrorists” or pose some kind of threat to national security. The FTC should not have the legal right to look at sensitive and private corporate documents simply because they want to.

Since Whole Foods now has a first hand understanding of how the FTC really operates in the United States today and the power that they legally wield, one of the consequences to our company going forward is that we are very unlikely to ever again attempt to buy a company that requires FTC approval. We don’t need permission from the FTC (yet) to open new stores. However, we do need their approval to buy stores from another company in many instances—consequently we’ll simply open stores in the future and not try to buy any that require FTC “permission”.

In addition, since the United States government has the right to look at all of our e-mails, all of our strategic documents, all of our company memorandums, and all of our financial information we will likely reduce the creation of these in the future. I would suggest that any company operating in the United States take to heart our experience and beware of its digital exposure. As far as we know the United States government is not yet recording all of our phone conversations and isn’t yet bugging our meeting rooms (we hope) so most of our most important discussion and decisions in the future won’t have a “digital trail” that can be involuntarily taken from us and then very selectively used against us to attempt to publicly embarrass us.

(As an aside, the recent Patriot Act reauthorization does allow the Antitrust Division to seek wiretaps in criminal antitrust investigations. While this doesn’t apply to merger review, it wouldn’t be difficult for a committed prosecutor to raise price-fixing allegations to get a judge to sign off on wiretaps.)

The AMC report echoes some of Mackey’s objections to the second request process:

Unfortunately, agencies may face internal pressures that discourage staff from limiting the scope of second requests and may restrict the systematic reforms they adopt. The agencies are generally reluctant to forgo the possibility of obtaining relevant information, even where it may not improve their ability to assess the competitive impact of the merger. As one witness observed, from the agency staff perspective, “[i]t is easy to take the view that more is better when it comes to obtaining information,” since limitations “pose risks . . . without, from the government’s perspective, much apparent downside.” For example, a large percentage of email that is responsive to a second request typically comes from lower-level employees, and arguably is not likely to produce insights regarding competitive effects beyond information also stored centrally or available in management files. Moreover, such evidence may provide relatively little useful information on the market and economic characteristics most relevant to merger assessment.

Again, it’s notable that few mergers ever reach this point. In FY 2006, the FTC and DOJ only brought formal action against 32 mergers. Only nine of those 32 deals were killed outright because the parties abandoned their plans. The rest were “restructured,” in the agencies’ words, to address regulatory objections. (Some deals were abandoned after the government imposed conditions.) Still, the DOJ and FTC spend more than $350 million annually which, added to the hundreds of millions spent to comply with the HSR Act, seem like an awful waste of capital to stop less than a dozen mergers based on pure speculation that consumers will be “injured”—i.e., face short-term price increases—by certain deals.

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The Antitrust Division’s success in convicting price fixing defendants can be attributed to the Corporate Leniency Policy, an invention of Division lawyers that allows one company in a purported “cartel” to escape all criminal prosecution in exchange for providing evidence against other firms. It’s a terrific bargain. A company can inflict maximum damage on its competitors—who face large criminal fines and treble damages in subsequent civil lawsuits—while prosecutors are generally ensured of quick plea bargains from their remaining targets.

In Stora Enso’s case, competitor UPM-Kymenne took the government’s “amnesty” and said it conspired with Stora Enso to raise prices. Stora Enso said that while executives of the two companies “exchanged information about their respective companies’ decisions to follow a competitor’s price increase,” there was no “agreement or commitment to one another to confirm their pricing conduct.” Stora Enso argued the government’s case “is based on the flawed theory that comprehension as to how a competitor will act is equivalent to an agreement with that competitor to so act.”

The jury agreed. It probably helped that the trial judge instructed the jury that UPM’s amnesty agreement did not constitute evidence that any price-fixing took place. In the light of open court, it’s reasonable for the jury to infer that UPM’s cooperation with prosecutors did not make the company’s executives—who are also spared individual prosecution by the amnesty deal—did not make the firm the most reliable witness against its largest competitor.

But the problem in other criminal antitrust prosecutions is that there is never a light of day. The Corporate Leniency Policy serves one overriding purpose: To keep Antitrust Division investigations secret and avoid any meaningful judicial or public scrutiny. Amnesty agreements are state secrets. The DOJ won’t officially identify any firm that receives amnesty, even in cases dating back more than 15 years. Since the DOJ classifies amnesties as exercises of “prosecutorial discretion,” they are not submitted to any court or disclosed to the public. The courts accept this lack of transparency. Just this past March, a district judge in Washington upheld the DOJ’s refusal to disclose its amnesty agreements under the Freedom of Information Act.

The DOJ’s position is that any transparency would destroy the effectiveness of the Corporate Leniency Policy, which in the words of the Antitrust Division’s top criminal enforcer is designed to create a “race to the prosecutor”. But it’s doubtful companies would stop seeking amnesty if the details were made public. Indeed, most companies voluntarily announce their participation in the amnesty program. The secrecy only benefits prosecutors, who in an ideal world never present evidence to a court or defend their decisions to the public.

When you combine such an expansive view of prosecutorial discretion with the inherent vagueness of antitrust, there’s a real danger that mid-level DOJ bureaucrats will collude with politically-savvy companies to manipulate market outcomes. Imagine a scenario where the Antitrust Division awards amnesty to a U.S.-based company in exchange for implicating its non-U.S. competitors in a price-fixing scheme. This actually happened in the random access memory market, where the lone U.S.-based firm, Micron Technology, signed a non-public amnesty agreement that led to criminal pleas from the other non-U.S. memory manufacturers. The DOJ collected over $700 million in fines, effectively a tariff that benefited Micron. (And at the same time Micron was conspiring to fix prices too high, according to the DOJ, Micron pursued a “dumping” case with the Commerce Department charging a Korean manufacturer with charging too little for its memory. Talk about playing both sides of the fence.)

But let’s imagine another scenario. Suppose a company with political ties to the White House uses its influence to receive amnesty in exchange for implicating a competitor with ties to the opposition party. No, I don’t think this has happened. But if it did, the true nature of the conspiracy would be difficult to discover since all amnesty-related documents are deemed secret, even from the courts. While the DOJ likes to portray corporations as bastions of shadowy, anti-consumer conspiracy, in truth it’s the prosecutors who routinely engage in such collusion.

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In the last Supreme Court term, a 5-4 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. was hailed and condemned (depending on who you ask) as a pro-business decision. The conservative majority, led by Justice Kennedy, overruled a 1911 precedent that condemned “resale price maintenance” (RPM)—contracts where a manufacturer conditions sales to distributors on setting a specific retail price—as an automatic violation of the Sherman Act. Most antitrust challenges are subject to the rule of reason, and after years of complaints from mainstream economists, the Leegin majority acquiesced in ending RPM’s special status under the “per se” rule.

From the right, Leegin is pro-business because it subjects RPM challenges to economic analysis, which has demonstrated that the practice is often good for competition. From the left, the decision is pro-business because it deprives consumers of their “day in court” if and when RPM raises retail prices.

The characterization of Leegin as pro-business is odd, however, because both parties to the case were in fact businesses. As I noted below, most antitrust cases are disputes among businesses, usually over competing business models. It’s not unusual in an antitrust complaint for the injured “consumers” to be multi-billion dollar public companies. Even when individual consumers are the nominal plaintiffs, the real beneficiaries of the case are plaintiff’s attorneys, which themselves are businesses.

If anything, Leegin is a pro-manufacturer decision, because those are the firms that stand to benefit from reduced legal restrictions on RPM. But calling a decision “pro-manufacturer” makes poor fundraising copy, especially when you’re an interest group emphasizing the partisan makeup of the current Supreme Court.

But even as a pro-manufacturer decision, Leegin is nothing to cheer. Liberals fear that RPM-based price increases will run amok free of the per se constraint. Yet the rule of reason, while officially more tolerant of business conduct, creates more uncertainty for manufacturers. A per se rule tells you what is forbidden. The rule of reason simply invites judges to solicit the views of paid economic “experts” and cherry-pick what business practices to allow or condemn. Even if there’s less RPM litigation post-Leegin, manufacturers will need to retain even more lawyers and antitrust experts to guess how the lower courts might view particular RPM schemes.

For more on Leegin, see my post at the Mises Economics Blog (”A Victory for Executive Power,” July 4) and the excellent analysis by Josh Wright (June 30) and Thom Lambert (June 29) at Truth on the Market.

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At first glance, you’d assume that such an “expert” would help steer his clients to a favorable outcome in their tussle with the regulators. That assumption would be correct, if by “favorable outcome,” you mean that the defendants agreed to all of the government’s demands and waived their right to trial or even proof that their actions injured consumers. As is the case with over 90% of federal antitrust prosecutions, the three groups of defendants signed “consent orders” awarding the government total victory by default.

Imagine a criminal defense lawyer who “successfully” led all of his clients charged with capital murder to quick guilty pleas and immediate execution. Few accused murderers would retain such an attorney, expertise notwithstanding. But it’s common for companies to retain ex-prosecutors-turned-experts to defend them against antitrust and other regulatory charges. Consider this article published yesterday by CNET’s Declan McCullough on Google. The internet giant is fast becoming the “next Microsoft” in terms of attracting antitrust scrutiny. In response, McCullough notes, Google retained a slew of Washington lobbyists, including ex-DOJ antitrust official Makan Delrahim.

Hiring ex-regulators is justified as a cost of doing business. But it’s bad business. An ex-regulator may recite your public relations copy for money—witness ex-AG John Ashcroft’s selling himself to the highest bidder in the XM-Sirius merger fight—but a hired hack won’t criticize an underlying regulatory policy or framework, just the application to your immediate cause. At best, it’s damage control; at worst, companies strengthen the most destructive forms of regulation by giving current regulators every incentive to pursue new and broader “interpretations” of existing statutes.

In this sense, regulatory and litigation reform must be considered part and parcel of corporate governance. Firms need to take greater responsibility for their own interests by shunning ex-regulators and cultivating relationships with attorneys and lobbyists who reject the basic premises of destructive regulation. Free-market think tanks and tort reform groups provide great infrastructure, but until company executives resist the siren song of ex-regulators, the status quo will persist indefinitely.

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Since antitrust is my bread and butter, I’ll spend some time this week examining the impact of the four antitrust cases decided in the last Supreme Court term. I’ll also discuss some lesser-known antitrust cases that I’ve been following (and in some cases, directly participating in); and maybe I’ll even address some purely non-antitrust legal topics as well.

But let’s start with—you guessed it—an antitrust case. Last week the U.S. Third Circuit Court of Appeals decided Cosmetic Gallery, Inc. v. Schoeheman Corporation (download PDF), one of the first appellate decisions that relies on the Supreme Court’s May decision in Bell Atlantic v. Twombly. In Twombly, a 7-2 court held that a complaint alleging a conspiracy to restrain trade under Section 1 of the Sherman Act required more than “an allegation of parallel conduct and a bare assertion of conspiracy”; there must be “enough factual matter (taken as true) to suggest that an agreement was made.”

In the Third Circuit case, a New Jersey company that operates hair salons and retails related hair care products (Cosmetic Gallery) sued a Pennsylvania distributor of said products (Schoeneman). Specifically, the issue is “salon-only” products that are normally sold, as the name suggests, only through salons. Distributors like Schoeneman agree to manufacturers’ restrictions on the sale of these products to, according to the Third Circuit, “increase the cachet and prestige” of the products.

Schoeneman wouldn’t sell salon-only products to Cosmetic Gallery, because the retailer and its principal owner had a history of selling “diverted” salon-only products outside of salons, and Cosmetic Gallery’s actual salon sales did not meet the manufacturer’s requirements for salon-only distribution.

Cosmetic Gallery claimed Schoeneman led an illegal “group boycott” to prevent Cosmetic Gallery from entering into deals with any salon-only products distributor. Of course, Cosmetic Gallery offered no direct and little circumstantial evidence to support its claim: The “smoking gun” was a hearsay account of a conversation that Cosmetic Gallery’s owner claimed took place between a Schoeneman executive and another distributor, who contradicted the plaintiff’s account in a deposition.

Following Twombly, the Third Circuit affirmed the district court’s grant of summary judgment to Schoeneman. At best, the court held, Cosmetic Gallery’s allegations proved nothing more than “conscious parallelism”—a fancy antitrust way of saying that Schoeneman and other salon-only distributors decided independently not to deal with Cosmetic Gallery. A conspiracy, it turns out, requires some evidence of, well, conspiracy. The Third Circuit cited this passage from Twombly in a footnote:

A statement of parallel conduct, even conduct consciously undertaken, needs some setting suggesting the agreement necessary to make out a §1 claim; without that further circumstance pointing toward a meeting of the minds, an account of a defendant’s commercial efforts stays in neutral territory. An allegation of parallel conduct is thus much like a naked assertion of conspiracy in a § 1 complaint: it gets the complaint close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of entitlement to relief.

The argument against this rule maintains that since a presumably secret conspiracy gave rise to the antitrust injury, it’s often impossible for well-meaning plaintiffs to provide many specifics at the pleading stage. Discovery is necessary to fill in the blanks. In Twombly, Justices Stevens and Ginsburg dissented, holding that such specifics should not be required to survive a motion to dismiss. In Cosmetic Gallery’s case, though, the district court granted summary judgment after determining that no set of facts could allow a finding of something other than unilateral conduct by Schoeneman, which does not violate Section 1 of the Sherman Act.

(As an aside, the jurisdictional elements of the Cosmetic Gallery case are noteworthy. Cosmetic Gallery sued Schoeneman under New Jersey’s antitrust statute; Schoeneman removed the case to federal court on diversity grounds, but the courts interpret New Jersey antitrust law under the same principles as the federal Sherman Act. Which begs the question of why have state antitrust laws in the first place.)

At its core, Cosmetic Gallery’s lawsuit was never about a group boycott or some conspiracy to restrain trade. Cosmetic Gallery simply wanted to enter the market with a different business model and compel existing firms to adopt that model, by force of law if necessary. Many if not most antitrust disputes share this premise. Although antitrust is couched in “consumer protection” terms, cases like Cosmetic Gallery’s are fights among businesses. Rather than compete openly, firms often believe it’s more expedient to hire lawyers and bring an antitrust complaint.

Twombly and Cosmetic Gallery may reassure some tort reformers by purporting to tighten pleading standards, but it’s unlikely that these cases will seriously dampen the enthusiasm (or revenues) of skilled antitrust practitioners. For one thing, the conspiracy rule only applies in Section 1 cases; unilateral conduct can still be litigated under Section 2 of the Sherman Act, which infamously bans “attempted monopolization” of a market. Indeed, the Third Circuit has been permissive in interpreting Section 2 claims, evidenced by LePage’s v. 3M, where the appeals court allowed a $68 million judgment to stand based on the then-novel premise that pricing above cost could be condemned as “predatory” when a competitor couldn’t match a discount on bundled products.

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• South Carolina State Board of Dentistry v. FTC. This Friday, the Supreme Court will consider a certiorari petition from the South Carolina Board to review a Fourth Circuit decision that rejected an appeal from a motion to dismiss an administrative complaint before the FTC. The FTC’s complaint seeks to prevent the Board from adopting rules in the future that restrict the ability of dental hygienists to perform certain dental procedures. The Board moved to dismiss the complaint citing state action immunity from the antitrust laws. The FTC rejected the motion, and the court of appeals declined to review the matter until the Commission conducted a hearing on the merits.
• Chicago Bridge & Iron Company v. FTC. The Fifth Circuit will hear oral arguments this year on a petition to review an FTC order (issued two years ago) to undo a merger consummated nearly six years ago. This case will test the limits of “post-merger” reviews by the federal government, a small but growing area of antitrust enforcement.

• In June, the Antitrust Modernization Commission, a panel of antitrust lawyers appointed by the White House and Congress, will issue its final report on revising the antitrust laws.
• Also in June, an FTC administrative law judge is expected to conduct a hearing on the Commission’s complaint against a Michigan Realtor group. The FTC has charged several Realtor groups nationally with illegally restricting access to Internet-based Multiple Listing Services. The Michigan group, RealComp II, is the only defendant to contest the FTC’s charges to date. Separately, a DOJ lawsuit against the National Association of Realtors regarding its MLS policies will move closer to trial.
• A district judge in Washington will rule sometime this year on a Freedom of Information Act complaint filed by Stolt-Nielsen Transportation Group against the Department of Justice. As I discussed previously, Stolt-Nielsen is the defendant in a criminal antitrust case in Philadelphia; the company has filed multiple FOIA requests seeking information on the Antitrust Division’s operations, specifically the Corporate Leniency Policy. The DOJ has historically kept the public in the dark about specific “leniency” agreements, to the point of never disclosing the identity of amnesty recipients. Stolt-Nielsen’s FOIA litigation could change these policies.

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The Rambus case started as a patent infringement dispute between the company and several memory manufacturers. Rambus doesn’t produce any memory itself; it develops and patents technologies and licenses them to manufacturers. During the mid-1990s, Rambus participated in a memory standard-setting group, JEDEC, and this is where the trouble began. The manufacturers claim Rambus misled JEDEC into incorporating Rambus patents into certain memory standards. Rambus said it was denied permission to present its technologies for standardization and that JEDEC members simply infringed Rambus’s patents.

In May 2001, a federal jury in Virginia ruled against Rambus in a counterclaim to a patent infringement lawsuit filed against Infineon Technologies AG. Infineon said Rambus violated JEDEC’s written rules regarding patent disclosure. Based on this finding, the FTC filed its own antitrust complaint in 2002, charging Rambus with “unfair” methods of competition in an attempt to monopolize several components of the computer memory market.

The Federal Circuit Court of Appeals overturned the Infineon verdict in 2003, stating that under the common law of fraud in Virginia, Rambus did not violate JEDEC rules. The FTC continued its case, however, maintaining that the antitrust laws imposed a higher disclosure duty than JEDEC’s written rules or the common law.

In February 2004, the FTC’s chief administrative law judge issued an initial decision dismissing the Commission’s complaint. It was only the second time in ten years that an ALJ dismissed a Commission complaint on the merits. Rambus’s victory was short-lived, however, as the full Commission reversed the initial decision on appeal and held Rambus liable for antitrust violations. A separate round of briefing and oral arguments to determine remedies concluded last month.

On top of all this, the memory manufacturers have dealt with their own antitrust troubles. The DOJ’s Antitrust Division eventually charged every major manufacturer except one—coincidentally, the only U.S.-based firm, Micron Technology—with participating in a price-fixing conspiracy that was designed, in part, to discourage the sale of memory products that incorporated Rambus patents. This has created the unusual scenario of the FTC prosecuting a case where its alleged victims and chief witnesses are themselves admitted antitrust violators.

Meanwhile, Rambus and the manufacturers have continued to duke it out in numerous patent infringement and civil antitrust cases throughout the country. The FTC’s proceedings have forced a delay in at least one case in San Jose, and the prospect of a Rambus appeal of the FTC’s final order means it could take another five years to sort out the underlying patent issues.

Regardless of one’s position in this fight—and there are strong advocates for both Rambus and the manufacturers—it’s become clear that the FTC’s intervention has only made the situation worse. Patent litigation is costly and complicated enough without having to run everything through an additional layer of antitrust litigation. But the bigger problem is that we have two judicial systems—the Article III courts and the FTC’s administrative process—working at loggerheads to resolve the same dispute.

The Federal Circuit rejected the fraud case because JEDEC’s rules were not drafted clearly on the critical issue of patent disclosures. (Actually, it was a dispute over whether Rambus had to disclose certain patent applications, not actual patents.) The FTC, conversely, said that the written rules were irrelevant, and that the Commission’s own subjective review of Rambus’s behavior was sufficient to determine legal liability.

The FTC’s decision to replace common law fraud with its own peculiar brand of antitrust liability is particularly harmful to the rule of law. Rather than deal with the rights and duties of the parties, the FTC wants to construct a parallel universe where economic outcomes conform to the Commission’s predetermined expectations. During the FTC’s hearing on remedies, which I attended, there were numerous references to the “but-for” universe—a fictional construct where the Commission imagines what life would have been like “but for” Rambus’s conduct within JEDEC. The regulators seek to “restore” market conditions that never existed in the real world. That’s not law enforcement; that’s central planning.

Additional links
FTC-Rambus.info
Rambus.org
FTC’s case information page

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