Antitrust Brainstorming Board with Herbert Hovenkamp

Below, we have provided the full transcript of the interview with Prof. Herbert Hovenkamp, the James G. Dinan University Professor at the University of Pennsylvania Law School, recorded on September 8, 2021.

This interview was done as part of the Antitrust Brainstorming Board created by CPI with the support of the CCIA.

Thank you, Prof. Hovenkamp, for sharing your time for this interview with CPI.

A video of the complete interview is available HERE.

Do you think the current antitrust framework works for consumers?

Herbert HOVENKAMP:

I think a good deal of it works, but not everything. Consumers benefit from high output measured by both quantity and variety and innovation and low prices, and in some areas I think antitrust is quite effective at that, but not in others. I do believe that the rule of reason needs to be modified as it’s applied in the US. It’s been far too pro defendant. It was never intended to be that way. It was intended to permit a prima facie examination and then give the defendant once a prima facie case of competitive harm was met, the defendant should have an opportunity to defend and what the Supreme Court has done instead is loaded all the proof requirements into the initial part of the case. And as a result, the burden of proof never shifts to the defendant. That has made rule of reason cases very, very difficult to prove. Plaintiffs don’t win them very often.

And the result is that the rule of reason has become almost useless to the point that plaintiffs look very, very hard to find some way to bring a case under the per se rule, which I think is actually inferior if the rule of reason were working properly. I think merger law right now suffers from under-enforcement. I think we’ve articulated standards that are too generous to defendants. We give them the benefit of the doubt and things like defenses and innovation, even when those things are not proven. And that’s why I think we should ramp up merger enforcement and particularly we should address concerns where mergers are used as acts of monopolization or a coverage of conglomerate mergers, which we haven’t done in some time now. So overall, I would say kind of a B minus on the overall performance of the antitrust laws.

Do you believe the vertical merger guidelines need to be changed?

HOVENKAMP:

We don’t have any real cases yet under the vertical merger guidelines. They were written largely in response to the failure of the government’s challenge to the AT&T-Time Warner merger along with some observations by the court that it’s been more than 30 years at that point since any vertical merger guidelines were issued. They are narrow, I think somewhat overly focused on market definition issues. However, we really haven’t seen them in action yet and we don’t know how the courts are going to respond to them.

So from what I said, I think the best thing is to leave them alone for the time being.

Now I’ll add one qualifier to that, and that is that President Biden’s executive order on antitrust and innovation from about a month ago urges review of the merger guidelines. I assume he meant by that both the horizontal and the vertical merger guidelines. So consistent with that, I suspect the agencies are at least going to take a look.

Do you approve of the shift from competition towards regulation?

HOVENKAMP:

Generally, quite strongly negative. Public utility regulation has always forced regulated firms into too narrow a path and it’s always been fairly hostile towards innovation. The regulators don’t know how to deal with innovation very much because they’re typically overly concerned on price and output. So I think in general, certainly public utility style regulation for any of the major internet platforms is a bad idea. Now, there are certain parts of those markets and firms that I think could be subject to non-antitrust and somewhat more invasive regulation.

One is do we need to expand our notion of common carrier obligations under the Federal Communications Act and regulate the internet generally and perhaps the operational details of large firms under that? And the answer is perhaps, but I haven’t seen a study about that yet. The other one is whether we should use… How we should regulate the political process and speech as it applies to large internet companies. Here I think the answer is antitrust should to the extent possible stay out of regulation of the content of speech. A lot of the critiques of particularly Google are basically about its involvement or the way it treats various political participants. I think those are areas where antitrust could be set aside in favor of more explicitly political regulation. But subject with those qualifications, no. I think antitrust should be permitted to do the job it was designed to do.

What are your thoughts regarding start-up acquisitions?

HOVENKAMP:

Yeah, we have been in a period of under-enforcements. In part, a reaction to over-enforcement that occurred in the middle sort of second, third of the 20th century, and I think we could do a lot better there. The antitrust laws permit the courts to go much further than they are currently going, certainly with respect to things like the measurement of market power, exclusionary practices, how antitrust accommodates innovation, and particularly the patent system. Antitrust, the statutes themselves permit all of these modifications, but enforcement policy took a pretty sharp rightward turn in the last part of the 19th century and we haven’t quite escaped from that yet. I think there’s some signs that we are, but we need to get more aggressive about practices that harm innovation and mergers in particular.

I think we can do that within antitrust if the courts are willing to interpret the language of the antitrust laws more literally and for what they really say. We don’t need a lot of statutory modification. Now, if history shows us that interpretation under the current language isn’t working. So, for example, if the current government challenges to Facebook and Google fail, then maybe it’s going to be time to rethink some of this and develop some stronger statutes. But I’m not quite there yet.

Yes, we should be a little stricter about them than we are. One of the problems with startup acquisitions is that they fall under the radar screen with respect to the current merger guidelines. Their market shares are too small. In fact, frequently their market share is zero because they haven’t actually put a product on the market yet. And if that’s the case, then the merger laws, which are overly focused on market share levels of concentration and more particularly increases in concentration. Well, if a startup firm has a market share of zero or even if it’s very small market share, using those metrics, you’re not going to show an anti-competitive merger. We need to do a little bit of rethinking about how we deal with nascent firms that do have the power to become formidable competitors.

Now, this is a particular feature of digital technologies that output can grow very, very rapidly. It’s not like producing automobiles or steel or something where you have to build a plant and gear up for production. So we need to do a little bit of a rethink about that. I think that means a couple of things. Number one, we should rethink the use of Section 2 of the Sherman Act to go after mergers as monopolistic practices. I think we’re going to see a debate emerge about that, particularly with respect to the Facebook litigation that’s going on now because when very large platforms acquire tiny firms, we’re really not so concerned about collusion as we are about exclusion or the emergence of independent rivals. That is to say the danger of  the Facebook Instagram acquisition, for example, is not so much a collusion, it’s that it prevents the emergence of a new and powerful rival. And that’s really an exclusionary practice kind of analysis of Section 2 of the Sherman Act is pretty well-equipped to handle. We just don’t have guidelines currently that deal with merger enforcement under the Sherman Act.

Now the Federal Trade Commission’s complaints against Facebook, both the one that was dismissed and the revised one, they both are going after Facebook including the Instagram and WhatsApp acquisitions as exclusionary practices, not as concentration increasing mergers. So we may see some new law being developed in this area. I also think we need to get a little bit more aggressive about the use of intellectual property restraints and particularly… I’m searching for a word right now. And particularly the use of non-competition agreements or other kinds of restraints in those particular types of cases.

Is break-up the best solution for the digital economy and for consumers?

HOVENKAMP:

I think they would almost always be harmed with almost in the sense because I can’t say invariably, everyone will be harmed. One of the things that characterizes the large digital platforms, but particularly Facebook and Google is vast economies of scale and network effects that make them increasingly valuable as they get larger. The reason that Facebook is so valuable is because so many other people are on it, okay? So then you have to start thinking about exactly how would you break up Facebook if you were going to do some kind of structural remedy against it? Well, I think the plausible one is you go after recent acquisitions. So the acquisitions of WhatsApp and Instagram would be plausible choices.

Beyond that, what would you do? Would you take away Facebook’s power to post videos or still photographs? Would you put all the boys on one side and all the girls on the other side or would you break it up territorially? There’s no way you can break up Facebook that does not do a lot more harm than good. Now, what you can do—this is not a breakup remedy—what you can do is think about opening Facebook up to more competitors to get them to operate on a Facebook network rather than in competition with it. That’s what we basically did with the telephone system. We’d speak about the breakup. Well, the breakup was a breakup of AT&T. It was not a breakup of the phone system. The phone system remains integrated. It has many, many more participants than it did in the past. And I think that’s a much better framework for thinking about something with thinking about a solution to the Facebook problem or the Google problem.

How do you see the role of the FTC and the DOJ in ensuring competition works for consumers?

HOVENKAMP:

Their roles are similar but not identical. First of all, because the Federal Trade Commission enforces the Federal Trade Commission Act directly and the Clayton Act, but not the Sherman Act, it has the power to reach a few things that the Antitrust Division does not reach. That is to say the Supreme Court has been clear since the 1960s that the substantive coverage of the Federal Trade Commission Act is somewhat broader. The courts have been unduly restrictive about that. And I think that’s the place with Facebook where the FTC can reach a little more broadly, particularly with things like collusive practices and the absence of an agreement. The Sherman Act has an agreement requirement that’s always restricted coverage vis-a-vis certain types of collusive activity. The Section 5 of the Federal Trade Commission Act reaches unfair methods of competition, which is much more general.

I think there are areas where the Federal Trade Commission can reach further with the important proviso that when it’s acting as regulator of competition, those areas have to be consistent with competition policy. They shouldn’t be consumer protection by another name or regulation of telecommunications by another name. They need to be competition enhancing, but they can reach further than the technical language of the Sherman Act.

The Antitrust Division enforces the Sherman and Clayton Acts. And in general, I think has done a decent job. I think one very important misstep in the final year of the Trump administration was the issuance of the New Madison doctrine and a much more lenient policy with respect to highly digitized firms and licensing of patents. I think that was a misstep. I think it’s going to be reversed in this administration, but other than that, I think the Justice Department is right now at least on the right track.

How would you reconcile competition and competitiveness? Should antitrust reforms take into account the potential impact on proposed changes vis-à-vis China?

HOVENKAMP:

As a general matter, no. Now one of the duties of the antitrust enforcers actually applies to private enforcement as well is to pay some attention to the international legal regime. So that means that doctrines like foreign sovereign immunity, the act of state doctrine, foreign sovereign compulsion, and so are all relevant and they limit the extent to which we can get too wrapped up in making a competition policy that treads on Chinese prerogatives.

But other than that, I think our goal should be to try to police practices in a way that tends towards maximum output. We should not be discriminating against certain technologies simply because they are of Chinese origin or represented by Chinese companies as an opening matter. Antitrust policy treats all companies within its jurisdiction the same and looks for anti-competitive restraints, and then setting aside those things like the act of state doctrine, it deals with all companies more or less identically. So I don’t think there is a China problem as such with respect to antitrust law. Now, there might be China problems with respect to the dissemination of technology, but they usually don’t fall within the realm of antitrust.