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Office of Public Affairs | Deputy Assistant Attorney General Michael Kades of the Antitrust Division Delivers Remarks at the University of Virginia School of Law: Virginia Law and Business Review 2023 Symposium

OpinionOffice of Public Affairs | Deputy Assistant Attorney General Michael Kades of the Antitrust Division Delivers Remarks at the University of Virginia School of Law: Virginia Law and Business...

Remarks as Prepared for Delivery

I. Introduction

Thank you for that warm and welcoming introduction, George. I am truly delighted to be here today at the Virginia Law and Business Review Symposium. This is a fantastic symposium. It touches on critical issues in antitrust law today. I see a number of familiar faces. You have invited panelists with a range of different viewpoints. Just as competition in markets results in better outcomes for society, competition in the sphere of ideas leads us toward the right—or at least better-informed—answers.

For all the students in attendance today, I love your interest in antitrust. This is an exciting time in antitrust law, and it’s an exciting time at the Antitrust Division. I hope all of you will consider joining us in our fight as interns, volunteers, or attorneys. It is a bit of an understatement to say we are busy these days—including in the courts of the Commonwealth—and we can use all of your help.

Although the conference is on high tech and antitrust, I want to go back in time to 1939 – the year Metro Goldwyn Mayer released the Wizard of OZ. A tornado transports Dorothy and her dog Toto from dust bowl Kansas (the black-and-white part of the film) to the magical land of OZ (presented in color). Desperate to return home, Dorothy searches for the Wizard of Oz. He agrees to return her to Kansas if she and her companions dispose of the wicked witch of the West.

Dorothy, Toto, and her three companions complete the request and receive an audience with the Wizard. He appears as a large, green, and disembodied head, surrounded by flames. In a deep voice, he says, “I am Oz, the Great and Powerful.” He refuses to honor his promises.

Dorothy and her companions stand stunned, terrified, and powerless before the Great and Powerful Oz – but not Toto. Toto finds a curtain, pulls it aside, and reveals “a little old man, with a bald head and a wrinkled face.”[1] Surprised, Oz pulls the curtain shut and the deep foreboding voice intones “Pay no attention to that man behind the curtain.”

The gig is up. Dorothy confronts the man behind the curtain; he admits he is a humbug; and Dorothy must find her own way home.

Dorothy’s confrontation with the Wizard of Oz is a useful allegory for refusals to deal under the antitrust laws. In 2004, the Supreme Court issued its opinion in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP.[2] The case addressed whether the defendant, Verizon, had engaged in illegal monopolization by refusing to deal with a competitor.

Some in the bar and certain companies would have us believe Trinko is a great and powerful decision: great because, they would have us believe refusals to deal cover a broad range of conduct, and powerful because they would have us believe that Trinko virtually immunizes refusals to deal from antitrust liability. An example of this approach is the decision dismissing New York v. Facebook.[3]

Today, I hope to play the role of Toto, to pull back the curtain and to show you that neither Trinko nor refusal to deal law is great and powerful. Much like the Wizard of Oz, the real Trinko is far less than it appears. My remarks today draw in part on an amicus brief that the Department of Justice filed earlier this year that explained errors in the Facebook court’s decision.

This is not to say companies, even monopolists, have a generalized duty to help competitors. It does mean, however, that the general principles of Section 2 law still apply to refusals to deal. The refusals to deal of the kind at issue in Trinko are highly context-specific and driven by the unique facts and circumstances at issue in that case. The specific rules for refusals to deal do not apply to a range of conduct that arises in antitrust cases involving digital markets. Finally, a unilateral refusal to deal that has a purpose to create or maintain a monopoly may violate Section 2 of the law, and a variety of evidence can establish the violation.

II. The Great and Powerful Trinko

Although Toto pulled back the curtain in a matter of moments, it will take me a bit longer. Refusal to deal is a hot-button topic in antitrust and in digital markets in particular. Dealing with others is at the heart of what the platforms do. They are multi-layered, intertwined networks that connect a variety of stakeholders. And so, when we challenge anticompetitive conduct in these markets, counsel is quick to latch on to a refusal to deal framework.

The mantra we hear time and time again stems from a selective, partial quotation of the opinion in Trinko: “the Sherman Act ‘does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.’”[4] Whether intentionally or by accident, they frequently omit the beginning of that quote “Thus, as a general matter.” Instead, they interpret Trinko to forbid a refusal to deal only if the monopolist had a voluntary prior course of dealing with the rival before refusing to deal. Others go further and add ever-growing requirements to challenge a refusal to deal.

Take the U.S. District Court for the District of Columbia’s decision to dismiss New York v. Facebook.[5] Among other things, the state attorneys general allege Facebook forbid competing social platforms from connecting to Facebook, and it forbid apps that are connected to Facebook from linking to or integrating with competing social platforms.[6] Eventually, according to the complaint, an application that was connected to Facebook could not replicate Facebook’s core functionality.[7] According to the complaint, these policies allowed Facebook to neutralize competitive threats. Because complaints are written to be read not listened to, I have simplified the language. But, the written version of the speech quotes the specific allegations.

In dismissing these allegations, the District Court analyzed the conduct as refusals to deal. In the court’s view, conditioning access to the platform on a company’s agreement not to deal with the platform’s competitor is the same as refusing to deal with a competitor. In its view, any unconditional refusal to deal can always be reframed as a conditional one.[8]

That semantic framing overlooks a critical distinction. In an unconditional refusal to deal, the company is withholding an asset from another party. In contrast, Facebook made its platform available to app developers but allegedly imposed conditions that interfered with, deterred, and prevented market transactions between the app developers and Facebook’s competitors. This is not to say such conditions are illegal; rather, they are not refusals-to-deal.

The term conditional refusal to deal is inartful. Conditional sounds less restrictive than unconditional, but that is not so. A conditional refusal to deal imposes an additional condition on dealing. The company must meet the usual terms and conditions to access the platform and agree to additional restrictions. Restrictive refusals to deal might be a better term.

Having defined refusal to deal broadly, the Facebook court applied a three-pronged test to determine their legality: the monopolist must have refused to deal (i) with a rival with which the monopolist had a previous course of dealing; (ii) while the monopolist kept dealing with others in the market; (iii) at a short-term profit loss, with no conceivable rationale other than driving a competitor out of business in the long run.[9]

III. The real Trinko behind the curtain

If Trinko stood for the propositions the District Court asserted, it would indeed be a great and powerful case. The real Trinko, however, is far more modest.

Let’s start with Trinko itself. Historically, local telephone companies enjoyed a monopoly within their service areas. In order to facilitate entry by competitors, the Telecommunications Act of 1996 required incumbent local telephone companies to share their networks with competitors, including by providing them access to individual parts of the network on an “unbundled” basis.[10] The regulatory requirement was intended to increase competition. The 1996 Act established “a complex regime for monitoring and enforcement” that afforded the Federal Communications Commission an active role in policing the terms of sharing.[11]

A law office brought suit alleging that Verizon—the incumbent monopolist for local telephone services in New York state—refused to share its network services with a rival (ironically AT&T) as required by the Telecommunications Act.[12] Further, according to the plaintiff, that refusal allowed Verizon to maintain its monopoly in violation of Section 2 of the Sherman Act. The FCC earlier had found Verizon’s conduct violated the Telecommunications Act and ordered Verizon to share its network.

The Supreme Court observed in Trinko that antitrust analysis “must always be attuned to the particular structure and circumstances of the industry at issue” affording a “careful account . . . of the pervasive federal and state regulation characteristic of the industry.”[13] The court decided three issues relevant to our discussion.

First, the Supreme Court made the unremarkable finding that violating the Telecommunications Act did not establish an antitrust violation: “But just as the 1996 Act preserves claims that satisfy existing antitrust standards, it does not create new claims that go beyond existing antitrust standards.”[14]

Second, it determined that Verizon’s refusal did not violate existing antitrust standards.[15]

Finally, the Court considered whether it should expand antitrust liability to include the activity alleged in Trinko. The Court rejected this approach.[16] The FCC had, and had used its, broad authority to protect competition. Recognizing a new antitrust cause of action would achieve little. “Where such a [regulatory] structure exists, the additional benefit to competition provided by antitrust enforcement will tend to be small, and it will be less plausible that the antitrust laws contemplate such additional scrutiny.”[17] At the same time, the Court worried a new cause of action would impose costs: “Judicial oversight under the Sherman Act would seem destined to distort investment and lead to a new layer of interminable litigation, atop the variety of litigation routes already available to and actively pursued by competitive LECs.”[18] All that policy discussion related to expanding existing antitrust law, not limiting it.

IV. Trinko did not upend other areas of Section 2 caselaw

Neither the first nor the third issue say much about refusal to deal law generally because both depend on the regulatory structure Verizon operated in. Such a structure does not exist for digital markets and does not justify the approach taken by the Facebook court.

The Court did find that the allegations in Trinko failed to state a claim upon which relief could be granted. Nothing in the Supreme Court’s opinion in Trinko, however, suggests an intent to completely upend Section 2 of the Sherman Act or refusal to deal law specifically. The Court did not overrule any existing precedent. Instead, it recognized the continued validity of key cases involving refusals to deal and took care to distinguish Trinko based on its unique facts and regulatory context.

The Trinko court did not expand the definition of a refusal to deal. It did not address all cases in which a dominant firm imposed anticompetitive conditions when dealing with other companies, such as Lorain Journal v. United States.[19] There, the monopolist newspaper violated Section 2 of the Sherman Act because it sold advertising only if customers did not place ads with rival radio stations.

The takeaway is that the legal test for refusals-to-deal applies in two narrow, related situations: (i) where the defendant outright refused to provide a rival a requested product or service and (ii) where a rival challenged an ongoing deal with commercially disadvantageous terms.[20] Conduct falling outside those two categories are judged by different legal standards.

In analyzing the legality of the refusal to deal at issue, the Court relied on existing precedent. Since the early 20th century, in United States v. Colgate & Co. the Supreme Court has recognized the right of a “trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.” But, the right exists only “[i]n the absence of any purpose to create or maintain a monopoly.”[21] Trinko “simplified” this language when discussing Colgate, describing the right only as a “general matter.”[22] It did not overturn Colgate’s analytical framework focused on purpose. To the contrary, the Trinko Court states that “[t]he high value that we have placed on the right to refuse to deal with other firms does not mean that the right is unqualified,” and “[u]nder certain circumstances, a refusal to cooperate with rivals can constitute anticompetitive conduct and violate § 2.”[23]

Further, it reaffirmed Aspen Skiing and Otter Tail, existing Supreme Court cases finding antitrust violations involving refusals to deal. To understand what a purpose to obtain or retain a monopoly is, we need to examine these cases.

In Aspen Skiing, a dominant ski resort, Ski Co., had offered a joint ski pass with a smaller neighboring rival, Highlands. Eventually, Ski Co. terminated the relationship. It also refused to sell lift tickets to its rival at either the tour discount or full retail price.[24] Highlands sued alleging the refusal to participate in the joint ticket was exclusionary. Based on all the evidence, the Supreme Court upheld the jury’s finding of liability. The Trinko Court described Aspen Skiing as “at or near the outer boundary of § 2 liability”—not outside it.[25] And being on the boundary of liability does not means Aspen Skiing is the only way a refusal to deal violates the antitrust laws.

Otter Tail Power Co. v. United States,[26] which the Trinko also reaffirmed, condemned a refusal to deal on different facts than Aspen Skiing. Otter Tail had a monopoly on the transmission of electricity at a wholesale level and also provided electricity at retail. Certain municipalities wanted to enter the retail market. Otter Tail refused to sell electricity at wholesale to the municipalities. The utility also refused to transmit electricity that those cities purchased from another generator. Otter Tail did provide both services to other customers. The court concluded that Otter Tail’s refusals were designed “to prevent municipal power systems from eroding its monopolistic position.”[27] Whether there was prior dealing was not a factor in the Court’s analysis.[28] There was also evidence of Otter Tail’s subjective intent, and Otter Tail failed to offer a legitimate justification. The critical issue for the Court, however, was that the utility provided the same services to other customers. As the Trinko Court explained, a refusal to deal could violate Section 2 of the Sherman Act where a “defendant was already in the business of providing a service to certain customers . . . and refused to provide the same service to certain other customers.”[29]

Why is the Trinko result different? the Trinko Court effectively held that no jury could have concluded that Verizon’s refusal to deal had the purpose of maintaining its monopoly. According to the Court, “Verizon’s reluctance to interconnect at the cost-based rate of compensation available under [the Telecommunications Act] tells us nothing about dreams of monopoly.”[30] There was no prior course of dealing that would suggest the relationship was profitable as in Aspen Skiing, nor was Verizon conditioning its dealing in a way that would thwart competition as in Lorain Journal. Verizon had not refused to provide the service on terms it offered other customers as in Otter Tail. Indeed, Verizon had not offered the service to anyone.

V. The Real Implication of Trinko

The decision in Trinko is far more modest than the version the Facebook Court applied. Aspen Skiing did not define mandatory elements; it engaged in the very typical appellate review of assessing the evidence presented. Further, Otter Tail itself would not survive the Facebook Court’s test. Indeed, the Facebook Court’s decision would put into question whether the government had a viable theory to challenge AT&T’s phone monopoly. The break-up of AT&T, which separated its long-distance telephone business from its local services was one of the most significant monopolization cases in U.S. history. The core of the government’s case was that AT&T refused to connect a competitor’s long-distance network with AT&T’s local phone networks, and that refusal protected AT&T’s existing monopoly on long-distance calling. The government’s case did not rely on a pre-existing relationship between AT&T and its potential competitors.

The real Trinko, the one behind the curtain, created no rigid test for analyzing refusals to deal. Refusals to deal cannot be reduced to a checklist that applies in every case. Rather, the analysis is fact-intensive. The overarching analysis is whether the monopolist had a purpose to acquire or maintain a monopoly. And a variety of evidence bears on that question. Objective evidence such as that relied on in Aspen Skiing and Otter Tail can establish the necessary purpose. Subjective evidence is also relevant.[31] Other courts have looked at whether the refusal is “irrational but for its anticompetitive effect.”[32] Others have considered whether the monopolist has a legitimate procompetitive reason for its decision.[33]

VI. Trinko, Refusals to Deal, and Digital Markets

As you listen to the panels today and refusal to deal comes up, make sure it is not the big, ugly, disembodied green head surrounded by flames, intoning absolutes in a deep foreboding voice version of Trinko, but the real version, the one that is hidden behind the curtain.

Specifically, refusal to deal applies to a limited and discrete category of conduct: a company’s decision to not deal with its competitors. So, if the challenged action involves a refusal to deal with a customer, Trinko and its progeny are irrelevant. If the monopolist will deal with a company only if the company must refrain or limit its dealing with others, it is not a refusal to deal. If a digital platform has invited and encouraged connection to the platform to increase the value of the platform, we are no longer in the world of an unconditional refusal deal. Neither the law nor the policy concerns about requiring companies to deal with their competitors apply in these situations.

Even where a digital platform has simply refused to deal with a competitor, the question before, in, and after Trinko is whether the digital platform has a purpose to create or maintain its monopoly.

That question, like many in the law, is qualitative. Did the Platform previously deal with the company? Does the Platform deal with others on terms it won’t offer the company? Would the collaboration benefit consumers? Does the refusal limit existing or future competition? Is the refusal profitable only because it limits competition? Is the Platform not dealing with a company because it would be expensive or for other reasons unrelated to limiting competition? That list is not exhaustive.

The concerns justifying specific rules for refusals to deal are weaker in the context of digital platforms than the networks of the 20th century (rail and phones). The old-style phone system required substantial physical investment in wires and laying cable. In addition, interconnection or sharing could also be expensive, an expense that fell on the network.

Digital platforms are different. They have massive economies of scale, and interconnection is critical to success. The physical infrastructure is less costly than the traditional phone network, and often the cost of interconnection is low and falls on the party seeking it. Those differences should affect how courts analyze refusals to deal.

VII. Conclusion

As we leave the land of Oz, I want to leave you with two thoughts. Defining refusals to deal too broadly would create a loophole allowing anticompetitive conduct that will increase prices and reduce innovation. Second, although refusals to deal with competitors may not often violate antitrust laws, when they do, the impact can be devasting.

Thank you for the privilege of speaking to you, and I am happy to answer some questions.

[3] New York v. Facebook, Inc., 549 F. Supp. 3d 6 (D.D.C. 2021).

[4] Trinko, 540 U.S. at 408 (alteration in original).

[5] 549 F. Supp. 3d at 6.

[6] Complaint ¶ 199, ECF No. 4, New York v. Facebook, Dkt. No. 1:20-cv-03589 (D.D.C) (alleging “Facebook adopted a policy aimed at forbidding ‘competing social platforms,’ and any apps that linked or integrated with competing social platforms, from accessing its APIs.”).

[7] Id. ¶ 201 (alleging that in “2013, Facebook amended its Platform policy . . . to forbid applications that ‘replicat[e] [Facebook’s] core functionality’” (alterations in original)).

[8] Facebook, 549 F. Supp. 3d at 31.

[10] Trinko, 540 U.S. at 402.

[19] 342 U.S. 143 (1951). The Facebook court distinguished the allegations in that case from Lorain Journal on the ground that the challenged conditions did not prevent app developers from dealing with rivals outside of Facebook’s platform; rather, they simply regulated the “acceptable features” of apps used on Facebook itself. Facebook, 549 F. Supp. 3d at 33. As the Department explained it in amicus brief, “That limitation, however, is nowhere to be found in Lorain Journal. Moreover, it is inconsistent with how this Court treated analogous conditions in Microsoft. There, certain restrictions on app developers applied only to applications running on Windows.” Brief of the United States as Amicus Curiae Supporting Plaintiffs-Appellants at 16, New York v. Facebook, Inc., Dkt. No. 21-7078 (D.C. Cir. Jan. 28, 2022). Further, that court’s point sounds more like a justification for the conditions than a reason to treat the conditions in the Facebook case differently than those in Lorain Journal.

[20] See Pac. Bell Tel. Co. v. linkLine Commc’ns, 555 U.S. 438, 442, 451 (2009) (firm complained that high wholesale prices created insufficient profit margins).

[21] 250 U. S. at 307 (emphasis added).

[22] Trinko, 540 U.S. at 408.

[23] Id. (quoting Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 601 (1985)).

[24] Aspen Skiing, 472 U.S. at 593.

[25] Trinko, 540 U.S. at 409.

[29] Trinko, 540 U.S. at 410.

[30] Id. at 409 (emphasis added).

[31] Aspen Skiing, 472 U.S. at 608 n.39 (quoting R. Bork, The Antitrust Paradox 157 (1978)) (“specific intent to engage in predation may be in the form of statements made by the officers or agents of the company”).

[32] See, e.g., Viamedia, Inc. v. Comcast Corp., 951 F.3d 429, 487 (7th Cir. 2020) (collecting cases); Novell, Inc. v. Microsoft Corp., 731 F.3d 1064, 1075 (10th Cir. 2013).

[33] See, e.g., United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (en banc).

Story from www.justice.gov

Disclaimer: The views expressed in this article are independent views solely of the author(s) expressed in their private capacity.

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