[Senate Hearing 106-994]
[From the U.S. Government Publishing Office]
S. Hrg. 106-994
ANTITRUST OVERSIGHT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
BUSINESS RIGHTS, AND COMPETITION
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MARCH 22, 2000
__________
Serial No. J-106-71
__________
Printed for the use of the Committee on the Judiciary
----------
U.S. GOVERNMENT PRINTING OFFICE
72-736 WASHINGTON : 2001
----------------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone (202) 512�091800 Fax: (202) 512�092250
Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce A. Cohen, Minority Chief Counsel
------
Subcommittee on Antitrust, Business Rights, and Competition
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania ROBERT G. TORRICELLI, New Jersey
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
Pete Levitas, Chief Counsel and Staff Director
Jon Leibowitz, Minority Chief Counsel and Staff Director
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa. 27
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 3
Leahy, Hon. Partick J., a U.S. Senator from the State of Vermont. 4
WITNESSES
Klein, Joel I., Assistant Attorney General, Antitrust Division,
U.S. Department of Justice, prepared statement................. 5
Pitofsky, Robert, Chairman, Federal Trade Commission, prepared
statement and attachments...................................... 12
ANTITRUST OVERSIGHT
----------
WEDNESDAY, MARCH 22, 2000
U.S. Senate,
Subcommittee on Antitrust, Business Rights,
and Competition,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:12 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine
(chairman of the subcommittee) presiding.
Also present: Senators Grassley, Kohl, and Leahy.
OPENING STATEMENT OF HON. MIKE DeWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Senator DeWine. Good afternoon. Welcome to the Antitrust,
Business Rights, and Competition Subcommittee hearing. This
hearing is the fourth in a series of antitrust oversight
hearings held by our subcommittee. We are happy to have back
here today Assistant Attorney General Joel Klein from the
Antitrust Division and Chairman Pitofsky from the Federal Trade
Commission. They will testify about antitrust enforcement
efforts being made by their respective agencies.
As they are both aware, the merger wave that has engulfed
our economy for the last several years shows certainly no signs
of abating. In fact, the mergers seem to be getting larger in
size and scope all the time. The most recent example is the
proposed merger between AOL and Time Warner for $185 billion.
Moreover, as the American economy becomes more and more
integrated with the economies of other nations, it is likely
that more companies will propose mergers as a means to
successfully compete in the global marketplace.
These trends indicate that the antitrust enforcement
agencies will continue to play an important role in maintaining
the competitive environment necessary for our economy to thrive
both at home and abroad. Indeed, as international trade and
business contacts escalate, it will be increasingly important
for the antitrust agencies to carefully police the actions of
foreign companies to assure that they are playing by the rules
of fair competition.
The Antitrust Division has been particularly successful in
its efforts to fight international price-fixing cartels. In
fiscal year 1999, the Antitrust Division collected over $1
billion in criminal fines, most of which were the result of
prosecution of foreign cartels. The price-fixing activity
targeted by the Antitrust Division, this particular activity
would distort markets, undermine competition, and unfairly
raise prices for consumers, and I commend their vigilance in
prosecuting these crimes.
Part of our effort to combat anti-competitive actions
abroad is the use of antitrust cooperation agreements with
foreign enforcement agencies. These agreements have been fairly
successful in some instances, but we have had some problems
with their implementation in other cases and we continue to
face significant challenges with regard to international
enforcement in general.
Mr. Klein recognized these difficulties, and 2 years ago,
the Justice Department appointed an advisory committee to
examine these issues and to offer recommendations. This group,
the International Competition Policy Advisory Committee, has
recently issued its report and we look forward to discussing
some of the recommendations in our hearing today.
Before I turn to Senator Kohl, I think it is important to
discuss one particular aspect of the merger wave, and that is
the increasing consolidation in the entertainment, news, and
media industries. I have repeatedly expressed my concern that
increased consolidation in these industries will decrease the
number of information and entertainment providers and may
eventually erode competition in the so-called marketplace of
ideas. I know that this type of discussion is not part of the
traditional antitrust analysis, but I believe that such mergers
do raise important public policy and competition issues and I
would like to discuss some of those issues today.
On a related point, some have argued that the mergers in
media industries and other important industries, such as
telecommunications, oil, railroads, and defense, have gotten to
the point where we need to rethink our general approach to
antitrust analysis. Some people have gone so far as to suggest
that in reviewing the so-called mega-mergers, antitrust
enforcement agencies should be examining the ripple effect of
the deal. In other words, even if a particular merger is not
anticompetitive, the agencies, it is argued, should consider
whether that particular merger will kick off a mini-wave of
industry mergers that will decrease competition and ultimately
harm consumers.
I discussed this notion several years ago with our
witnesses, the same witnesses we have today, in the context of
defense consolidation. Based on my experience as chairman of
the Antitrust Subcommittee, I believe it is somewhat risky to
attempt to predict the future based on just one merger, and I
think there is good reason to maintain the current standard of
reviewing mergers one deal at a time. Nonetheless, this issue
deserves some consideration, especially as we look towards a
world where key industries at the core of daily life are
controlled by a handful of very large companies.
This is an exciting and important time in the arena of
antitrust enforcement. As consolidation increases, it is
essential that the antitrust agencies be able to handle
theincreased merger workload while still maintaining their ability to
detect and prosecute illegal cartel behavior which harms American
consumers. This subcommittee will continue to work with our witnesses
to vigorously address these new challenges and ensure that the
marketplace remains competitive, both at home and throughout the world,
and I look forward to discussing with both of our witnesses today how
we can achieve these goals.
I turn to the ranking minority member of the committee,
Senator Kohl.
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
OF WISCONSIN
Senator Kohl. Thank you. Let me start by commending our
chairman, Mike DeWine, for ensuring the bipartisanship and
effectiveness that has characterized our subcommittee's work.
Today, we are privileged to hear from our two witnesses,
Joel Klein and Bob Pitofsky. We have been very impressed with
your leadership, gentlemen, and the talent and skills with
which you and your dedicated staffs, the unsung heroes of
antitrust, have enforced the antitrust laws and promoted
competition in our national economy.
The past several years have been critical times. We have
witnessed an incredible wave of mergers and acquisitions,
touching virtually every sector of our economy. In the space of
just 8 years, from 1991 to 1999, the value of mergers reviewed
by the antitrust agencies increased tenfold, from $169 billion
to over $1.8 trillion. Big is not necessarily bad, to be sure,
but we must always be careful to ensure that increasing levels
of concentration do not hurt the folks that we represent.
Application of antitrust laws is not limited to corporate
mergers, of course. In industries as varied as computers,
software, airlines, and food processing, your agencies have
moved swiftly and decisively to prevent anticompetitive conduct
by companies that harm consumers.
The resolution of these issues is ultimately for the
courts, but let me make plain that we are committed to ensuring
that you have sufficient resources to do your job, and we will
reject any effort to play politics with your budget in response
to your action on any specific case.
The great increase in merger activity has unquestionably
burdened your agencies with a very heavy workload and we,
therefore, support sufficient funding for your budgets. But the
thresholds under which companies enter into mergers and
acquisitions must report their transactions to the FTC and
Department of Justice have not been adjusted even for inflation
since the passage of Hart-Scott-Rodino in 1976. This has led
the agencies to review far more transactions, many irrelevant,
at least from an antitrust perspective, than Congress intended.
So we have authored, with Senators Hatch and DeWine,
legislation to raise the pre-merger notification thresholds in
most cases from $15 million to $35 million. This overdue reform
will enable you to focus your efforts on the deals which are
most likely to raise competitive concerns. We intend to work
closely with you to ensure that nothing in the bill weakens
your ability, Mr. Klein and Mr. Pitofsky, to carry out your
responsibilities.
Unfortunately, Senator DeWine and I do not have as much
confidence in the FCC's ability to get the job done, so we
intend to move quickly our legislation to put strict time
limits on the FCC's merger review process.
In addition, we also have concerns about the increasing
level of concentration in agriculture, so we intend to focus on
this issue because we are very concerned that farmers are
getting the short end of the stick. Senators Daschle, Leahy,
and I will soon be introducing a bill on this subject and we
would like for you to work with us on it.
One more thing. For a long time, I have wondered how we
ever got to a system where we have two agencies administering
exactly the same program. In a perfect world governed by the
efficiencies that your agencies are asked to promote, I ask,
would it not be better for all concerned if there was a single
agency charged with guarding against anticompetitive conduct?
Mr. Chairman, in this era of ever-quicker technological
change and ever-increasing corporate consolidation, the need
for vigorous enforcement of our antitrust laws has never been
greater. Mr. Klein and Mr. Pitofsky, you both have been equal
to the challenge and we are very fortunate that you are both
occupying your offices at this critical time.
Thank you, Mr. Chairman.
Senator DeWine. Senator Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman. I would join in the
comments of the distinguished Senator from Wisconsin in
praising the way you have handled this, but I would include him
in the praise. He was too modest to include himself, but I
would. I think the both of you have set a fine standard. It has
been very helpful to all the other Senators who serve on
Judiciary on both sides of the aisle because of the leadership
the two of you have given.
Mr. Klein, I want to thank you for appointing a special
counsel on agricultural matters. As Senator Kohl mentioned
about the legislation that he and I and Senator Daschle and
others will introduce soon, it is intended to enhance
competition in rural America and protect farmers and ranchers
from sometimes deceptive and unfair business practices of
agribusiness.
One of the difficulties I have had is knowing who has
bought whom and when and why and how. A lot of companies are
buying othercompanies for free, in their thought, because they
have got highly-inflated stock, part of the exuberance, I suppose, that
Chairman Greenspan speaks of.
Unfortunately, we start at a point where you have one
merger, and this is somewhat related to what Senator DeWine
said, and then you have a string of defensive mergers. A
company will buy another company to buy another company to stop
a company from buying them, and all that fueled by high stock
prices. In the end, you end up with one huge conglomerate and
nobody can tell who is in charge.
I sent a letter recently to Mr. Klein about a company that
is in a buying frenzy, Suisse Foods of Texas. I know you filed
a complaint against them in Kentucky because you are concerned
about potential higher school milk prices. In the competitive
impact statement filed by the Department of Justice in that
case, you mentioned that Suisse acquired a company with a
history of school milk bid rigging, Flavoridge, and now you
suddenly have a new company, but they own the old company that
did the bid rigging.
I remember that case well because I had introduced a bill
to ensure that dairies which are convicted of school lunch bid
rigging would be debarred from continuing to participate in the
school lunch program. I did this from the Agriculture Committee
because we try to fund the school lunch program, but there is
only so much money and we need competition to make sure that we
get what we pay for. That bill became the law of the land with
very strong bipartisan support.
The dairy farmers in my part of the country are concerned
about the unyielding market power of Suisse Foods, but I think
the concern would be any part of the country, whether it is in
the Midwest, the West, anywhere else. You want to make sure
that there is still competition.
Senator John Sherman, who over a century ago did the
Sherman Antitrust Act, said that we will not endure a king over
the production, transportation, and sale of any of the
necessities of life, and I think we all still feel that way.
Chairman Pitofsky, I am glad you are here. As I mentioned
to you before we started, the FTC has been quite busy these
days. Of course, you have superb people over there, which helps
a lot, and especially with your very hands-on leadership. You
are going to have the fun of looking at the AOL-Time Warner
merger, something that we discussed in this committee. But the
issue at stake is not just what it does for a company's
shareholders but what kind of choice we as consumers have. Your
consumer privacy workshops have been very good, and I do want
to sit down and talk with you at some point about that.
Finally, I am also interested in the views of both of you on
the need for reform for the Hart-Scott Rodino Act.
I have concerns over the limitations in document production
under the reform bill introduced by Chairman Hatch and Chairman
DeWine and Senator Kohl, but I agree with them that we should
increase the size of the transaction thresholds and adjust the
fee structure, and that is something I want to work more on.
Thank you very much.
Senator DeWine. We will turn to our panel. Joel Klein is,
of course, the Assistant Attorney General for the Antitrust
Division at the Department of Justice, a post he has held since
July of 1997. He is certainly a very familiar face at this
committee's hearings and we welcome you back, Attorney General
Klein.
Robert Pitofsky was sworn in as Chairman of the Federal
Trade Commission in April 1995. He has also testified many
times before this committee and we welcome him back, as well.
Mr. Klein, we will start with you this afternoon, if you
could just make any opening statement that you wish. Your
written statement, of course, will be made a part of the
record.
STATEMENT OF JOEL I. KLEIN, ASSISTANT ATTORNEY GENERAL,
ANTITRUST DIVISION, U.S. DEPARTMENT OF JUSTICE
Mr. Klein. Thank you very much, Mr. Chairman, Senator Kohl,
Senator Leahy. I appreciate your kind remarks, and more
importantly, I want to note that I think the way this
subcommittee has operated is truly exemplary in terms of
legislative-executive relationships. Your oversight has been
tough, it has been constant, it has been vigilant, but it has
always been fair, and most importantly, I believe the
commitment of you and Senator Kohl to appropriate antitrust
enforcement to protect America's consumers, America's
businesses, and ultimately America's economy, because our
economy is the strongest in the world in large measure because
it is the most competitive in the world. And for that, while I
know on specific cases, like any other matter, we may have a
difference of views, I think the relationship has really been
extraordinary and I want to thank both you and the ranking
member for that, Mr. Chairman.
Let me just say very briefly, since I think a large part of
opening remarks actually you already read, so I can be
mercifully brief here. I do think a lot of great significance
is going on, both in the American economy--I think this really
is a watershed time in history. I think one could go back and
look at the industrial revolution and the agricultural
revolution and we are now at the third of those great historic
moments, the technology revolution, coupled with globalization,
that are related.
I think the significance of antitrust enforcement to those
changes is absolutely critical and I think it has now been well
demonstrated that the role of antitrust in the new economy is
going to be every bit as important as it was in the old
economy, and our 100-year history in this endeavor has
demonstrated to the rest of the world that they have to play
catch-up, a point that you have noted many times, Mr. Chairman.
Let me say, with respect to our enforcement efforts, I
think first and foremost, what has happened in international
cartel enforcement is truly extraordinary. You mentioned the $1
billion-plus dollars we brought in in fines last year. That is
on a criminal enforcement budget that is significantly less
than $50 million. So those who said we have questioned the
private market, I propose that we be allowed to take the
Antitrust Division private. I think those kind of margins would
do us well.
More important, we cracked open last year the single
largest cartel in history, the vitamins cartel, and this has
had enormous consequence for America's farmers, who have to buy
these vitamins. These are vitamins they feed to their wildlife.
What is significant about this is not just that it was such a
huge conspiracy, but that the hub of this conspiracy, the
dominant players were all major European companies and it took
an American enforcement effort to bring down Hoffman-LaRoche,
BASF, and ultimately Rhone Poulenc, who cooperated with us, and
I think that has affected a major shift in global attitude.
Second, last year, as part of our enforcement effort, we
prosecuted two very high-level executives at the Archer Daniels
Midland Company, successfully prosecuted, and they are now
serving time in prison in Illinois, significant prison terms,
and I think that America has been successful in cartel
enforcement because we have individual liability and prison
terms. We currently have two Europeans serving time in American
prisons in the vitamin cases and those are ongoing
investigations.
Second, our civil enforcement program has been, I think,
very, very robust and I think it raised several key cases with
respect to monopoly practices, the Microsoft case, the Visa-
MasterCard case, and the American Airlines case, each of which,
I think, raised important issues about antitrust in the new
economy. We are enormously gratified by the Federal District
Court's ruling on findings of fact in the Microsoft case. We
have a trial scheduled in a couple of months in the Visa-
MasterCard matter, and later toward the end of this year in
American Airlines.
I think these cases are going to raise some of the key
issues about market power in network economies. In each of the
three cases I have mentioned, what the real barriers to entry
are all about there are these network effects, these increasing
returns to scale, which is very different from the kind of
things we saw during the industrial revolution.
Finally, you and Senator Kohl have both gone on at some
length about the merger wave we are experiencing. I do think no
matter how enormous the numbers are, we cannot fully appreciate
the real sea change in our economy to see what is going on. We
have had a strong merger enforcement program. We blocked, as
you know, Senator DeWine, the Lockheed Martin-Northrup Grumman
shortly after those hearings we had on defense consolidation,
and I think that sent an important signal in the defense
industry.
You talk about media consolidation. We blocked the
Primestar acquisition of the Rupert Murdoch assets with respect
to satellite transmission and we facilitated a close to $2
billion divestiture of the Internet backbone assets in the
Worldcom-MCI merger.
In the farming area, we have had several key cases, one of
which I would simply mention, the Cargill-Continental case, not
just because of the significance on farm producers in the
United States, but also because that is one of two cases we
brought in the past several months where, for thefirst time in
a long time, we asserted a buyer power, not a seller power, but a buyer
power theory. That is, the producers who have to sell to these large
conglomerates could have been hurt in an anticompetitive fashion, and I
think that marks a step that reflects our vigilance and concern in this
area. In addition, we took an action with respect to a tractor merger,
and finally with respect to two big agribusiness biotechnology issues
involving the Monsanto Company.
Lastly, Mr. Chairman, let me just note that your concerns
about international enforcement and our relationship with our
trading partners throughout the world continues to be a great
concern to us. We are analyzing the ICPAC, the Competition
Policy Advisory Committee's report, and I will say here now we
have had some success with respect to the Saber matter on a
positive comity referral and this committee has been tough with
us on positive comity, but I think your suggestions and your
recommendations have helped strengthen the process and I want
to thank you for that, as well.
Senator DeWine. Mr. Klein, thank you very much.
[The prepared statement of Mr. Klein follows:]
Prepared Statement of Joel I. Klein
Good afternoon, Mr. Chairman and members of the Subcommittee. It is
a pleasure for me to appear again before you today on behalf of the
Antitrust Division of the Department of Justice. I would like to say a
few words about the current environment in which we enforce the
antitrust laws, and then highlight some of our recent enforcement
initiatives.
As members of this Subcommittee appreciate, sound antitrust
enforcement is vital to America's economic health. Competition is the
cornerstone of this country's economic foundation. American consumers
and businesses all benefit from the kind of robust free-market economy
that antitrust enforcement promotes and protects. Effective antitrust
enforcement helps consumers obtain more innovative, high-quality goods
and services at lower prices, and enhances the competitiveness of
American businesses in the global marketplace by promoting healthy
rivalry, encouraging efficiency, and ensuring a full measure of
opportunity for all competitors.
Antitrust enforcement has rightly enjoyed substantial bipartisan
support through the years, and we appreciate the active interest and
strong support this Subcommittee has shown toward our law enforcement
mission.
Our economy is in the midst of dramatic changes, with increased
globalization and rapid technological innovation, and deregulation
creating an environment in which many firms are choosing to merge or
undertake other types of strategic business alliances. While most of
these arrangements foster efficiency to the benefit of consumers and
businesses alike, some can result in market power that decreases
competition. That is why we must look at these arrangements carefully,
so that we can take appropriate steps to protect American consumers and
businesses from those that threaten competition.
RESPONDING TO CURRENT CHALLENGES
Before I turn to some of our recent enforcement actions, let me
talk for a minute about what the changes in the marketplace mean for
antitrust enforcement, and how we are responding.
Globalization of markets
We are responding to the fact that we live in a global marketplace.
Our legal authority under the antitrust laws reaches anticompetitive
conduct that take place off U.S. soil if it has significant effects
here, as reaffirmed most recently in the Nippon Paper Industries Co.
case. But to make effective use of that authority, we often need help
from foreign competition authorities to obtain crucial evidence. We
have negotiated numerous mutual assistance agreements with our foreign
counterparts to facilitate this kind of cooperation, including one
agreement thus far, with Australia, under the International Antitrust
Enforcement Assistance Act of 1994, which allows us to share certain
confidential information under appropriate protections.
There are an increasing number of mergers that cross international
boundaries and are subject to review by more than one country's
antitrust authority. To minimize the burden of multi-jurisdictional
review on merging parties, and the conflicts that can result from
differing conclusions regarding a merger, we have worked hard to
cultivate good relations with foreign enforcers so that we understand
each other's merger enforcement policies and practices, and to
coordinate where it makes sense, bearing in mind each country's
understandable interest in conducting its own review of mergers that
impact its markets. We learned some valuable lessons from the Boeing/
McDonnell-Douglas merger, where the FTC and the EC reached differing
conclusions. I believe the more recent MCI/WorldCom and Dresser/
Halliburton mergers are a good model for how close consultation in
international merger enforcement can and should work. The parties
agreed to waive confidentiality, enabling us and the EC to share our
independent analyses as they evolved, and we ultimately reached
essentially the same conclusions. We've formed a U.S.-EU merger working
group, along with theFTC, to build on our experiences in these cases.
At times, due to jurisdictional and practical limitations, it may
make more sense, if a foreign country's markets are most directly
affected, for the antitrust authority in that country to investigate a
matter in the first instance. To that end, we have included so-called
``positive comity'' provisions in bilateral cooperation agreements with
several of our major trading partners, including the European Union,
Canada, Japan, Israel, and Brazil--as well as a special enhanced
positive comity agreement with the EU. Our one formal positive comity
experience to date--the referral to the European Commission of possible
anticompetitive conduct by several European airlines with respect to
computer reservation systems--has thus far been successful. The
Subcommittee has played an important constructive role in our thinking
about how to make positive comity an effective tool in international
antitrust enforcement.
Rapid technological change
We have also responded to the challenges posed by the rapid
technological advances evidenced in many industries. We spend
significant time and energy developing the expertise needed to
understand the competitive impact of the new technology. We are mindful
that technological change can bring industries previously considered
separate and distinct into the same competitive marketplace. And we
critically evaluate the increasingly frequent claim by the parties we
are investigating, that technology is changing their industry so
rapidly that we should not be concerned. We know, however, that in some
cases rapid technological change can actually increase barriers to
entry through network externalities and first mover advantages that may
cause the market to tip quickly toward a dominant supplier and thereby
make new entry extremely difficult.
The more important that innovation becomes to society, the more
important it is to preserve economic incentives to innovate. Timely and
effective antitrust enforcement may be essential to preserving the kind
of environment in which companies new and old, large and small, can be
confident that there will be no anticompetitive barriers to bringing
their new products and services to market.
Deregulation and the introduction of competition
In recent decades, legislative and regulatory changes in the United
States have reversed a generation of pervasive government regulation
and deregulated such basic industries as telecommunications, energy,
financial services, and transportation. As competition displaces
regulation as the industry norm, antitrust enforcement becomes
important to ensuring that the procompetitive goals of deregulation can
be achieved. In telecommunications, we are seeing the effects of the
1996 Act unfold. When successfully implemented, that Act will
significantly restructure the industry and bring enormous competitive
benefits to consumers and the economy; but bringing competition to
segments of an industry in which regulated monopolies have long held
sway will not be fully accomplished overnight. In addition the role we
play in advising the Federal Communications Commission on section 271
long-distance entry applications, helping to ensure that the local
market is open to competition before long distance entry is granted, we
are also paying close attention to mergers and alliances being
undertaken in response to deregulation, to ensure that competition is
able to spread and flourish.
For example, we challenged the proposed acquisition by Primestar, a
joint venture controlled by five of the largest cable companies in the
U.S., of the direct broadcast satellite assets of News Corp. and MCI,
because we were concerned that it would allow those cable companies to
prolong their monopoly in multi-channel video programming distribution.
The assets in question included a satellite at the last orbital slot
available to independent DBS firms for reaching the entire continental
U.S., and allowing it to be transferred to the dominant cable companies
would have eliminated one of the most important avenues of new
competition to cable. In the face of our challenge, Primestar abandoned
the acquisition.
The electric power industry is beginning to follow a similar path
from regulation to competition, and we and others in the Administration
look forward to working with Congress to ensure that regulatory
restructuring at the federal level is consistent with fundamental
competitive principles, and that competition is protected and nurtured
as restructuring in the industry proceeds.
RECENT ENFORCEMENT INITIATIVES
I would not like to highlight a few of our important enforcement
initiatives over the past year or so, first in criminal enforcement,
then in merger enforcement, and finally in civil non-merger
enforcement.
Criminal enforcement
In the area of criminal enforcement, we are continuing to more
forcefully against hard-core antitrust violations such as price-fixing
and market allocation. In the past few years, a significant number of
our prosecutions have been against international price-fixing cartels
that have directly impacted substantial volumes of U.S. commerce. We
have found that many of these international price-fixing cartels were
highly sophisticated, involved leading firms in the industry, and
affected a wide variety of goods sold to business and individual
consumers. Theyare also often particularly brazen.
The past fiscal year set yet another new record in terms of
criminal antitrust fines secured, on top of several previous record-
breaking years--a total of $1.1 billion. One single fine, the $500
million fine against Swiss pharmaceutical giant F. Hoffman La Roche in
relation to the international vitamin cartel, was the largest criminal
fine in the entire history of the Department of Justice, antitrust or
otherwise.
You should not presume that we will continue breaking records every
year. The order of magnitude of criminal antitrust fines since fiscal
year 1997 is unprecedented--in the previous decade, they averaged $29
million annually, and that average was itself higher than previous
periods. In fact, the amount of fines obtained since fiscal year 1997
is many multiples higher than the sum total of all criminal fines
imposed previously for violations of the Sherman Act, dating all the
way back to the Act's inception in 1890. The fiscal year 1999 record
was itself an almost four-fold leap over the record set the previous
year. But the recent fine levels are a direct result of our sustained
effort to crack not just domestic price-fixing schemes, but also to
focus our resources on the biggest international cartels that victimize
American consumers and businesses, to bring the violators to justice,
and to send a strong deterrent message throughout the world--and effort
that we will continue.
International cartels typically pose an even greater threat to
American businesses and consumers than domestic conspiracies, because
they tend to be extremely broad in geographic scope and amount of
commerce affected, as well as highly sophisticated, characterized by
precise and elaborate agreements among the conspirators to carve up the
world market by allocating sales volumes among themselves and agreeing
on what prices would be charged to customers around the world,
including in the United States.
International cartels victimize a broad spectrum of U.S. commerce,
costing American businesses and consumers hundreds of millions of
dollars a year.
The record-setting fine I mentioned a minute ago resulted from a
major investigation into an international cartel organized to fix
prices and allocate market shares for vitamins. The conspiracy affected
$5 billion in U.S. commerce, involving vitamins used not only as
nutritional supplements and food additives, but also as important
additives in animal feed; it may well be the most harmful conspiracy we
have ever uncovered. The victims who purchased directly from the cartel
members included companies with household names such as General Mills,
Kellogg, Coca-Cola, Tyson Foods, and Proctor and Gamble. As a result,
for nearly a decade, every American consumer--anyone who took a
vitamin, drank a glass of milk, had a bowl of cereal, or ate a steak--
ended up paying more so that conspirators could reap hundreds of
millions of dollars in additional, ill-gotten revenues.
Last May, two firms, F. Hoffman-La Roche and a German firm, BASF
Aktiengesellschaft, agreed to plead guilty, with Hoffman-La Roche to
pay a fine of $500 million and BASF to pay a fine of $225 million.
These prosecutions are part of an ongoing investigation of the
worldwide vitamin industry in which there have been 14 prosecutions to
date. It has resulted thus far in convictions against Swiss, German,
Canadian, and Japanese firms, with over $875 million in criminal fines
against the corporate defendants, and in convictions against seven
American and foreign executives who are now serving time in federal
prison or awaiting potential jail sentences along with heavy fines.
Other industries where we have brought major criminal prosecutions
recently, in addition to vitamins, include: graphic electrodes used in
electric arc furnaces in steel mills to melt scrap steel; sorbates used
as chemical preservatives to prevent mold in cheese, baked goods, and
other food products; marine construction and transportation services;
point-of purchase display materials such as plastic and neon signs; the
livestock feed additive lysine; citric acid; the industrial cleaner
sodium gluconate; commercial explosives; real estate foreclosure
auctions; and metal buildings insulation.
International enforcement of our criminal antitrust laws is a top
priority of the Antitrust Division. At present, more than 35 sitting
U.S. antitrust grand juries are looking into suspected international
cartel activity. We are determined that international cartels not be
permitted to prey on American businesses and consumers with impunity.
An equally important goal is to ensure that every business person
around the world who contemplates price-fixing behavior that could
adversely impact American businesses and consumers will choose to forgo
such illegal activity because of concern that we will find out about it
and prosecute to the full extent of the law. Our efforts to achieve
that goal will continue unabated this year and for years to come.
Merger enforcement
We are in the midst of a continuing merger wave throughout our
economy. A record $1.4 trillion in U.S. merger transactions took place
in 1999. In each of the last two fiscal years, more than 4600
transactions were reported to us under the Hart-Scott-Rodino Act, the
most in our history, and more than double the number being filed per
year just a few years ago. And in the first five months of fiscal year
2000 there have been more than 2000 reported transactions, an
approximately 18-percent jump over the same period in the previous
fiscal year.
We have devoted tremendous energy to staying on top of this merger
wave, so that we can challenge the mergers that would harm competition
while minimizing any delays and disruptions in competitively beneficial
or benign business combinations, which constitute the overwhelmingly
majority.
In the last fiscal year, we brought 47 merger challenges, the
highest level of merger enforcement in our history. So far this fiscal
year, we have brought 12 more. While most of our merger challenges have
been resolved by consent decrees, we have not hesitated to seek to
block transactions in their entirety when necessary to preserve
competition. Both the Lockheed Martin/Northrop Grumman and the
Primestar transactions were abandoned after we filed complaints and
were well into discovery, and parties have abandoned other
transactions, such as Monsanto/Delta & Pine Land, after learning of our
intention to sue. Since July 1, 1997, we have gone to court nine times
to full-stop block merger transactions; and on seven other occasions we
have been prepared to go to court to full-stop block a merger, but the
parties abandoned the transaction prior to our filing a lawsuit.
Our important merger enforcement actions of the past year include
the Cargill/Continental Grain merger, where we insisted on divestitures
in a number of grain storage facilities throughout the Midwest and in
the West, as well as in the Texas Gulf, to protect competitive options
for grain and soybean producers and to protect competition in the
delivery points for the corn and soybean futures markets. This was a
particularly important case in that it demonstrates that antitrust
enforcement is concerned not only with market power in the possession
of sellers, but so-called ``monopsony'' power in the possession of
buyers. In this case, the concerns that led to our challenge had to do
entirely with the creation of monopsony power in the mergers firm as
buyers of grain and soybeans.
In addition to Cargill/Continental and Primestar, other recent
merger challenges include:
Lockheed/Northrup Grumman, where the merger would have
resulted in unprecedented vertical and horizontal concentration in the
defense industry, substantially lessening and in some cases outright
eliminating competition in major product markets critical to our
national defense. In the face of our challenge, the parties abandoned
the merger.
Northwest/Continental, where the proposed transaction
would allow Northwest to acquire voting control over Continental,
substantially diminishing the incentives for the two airlines--the
nation's fourth and fifth largest--to compete against each other. This
case is pending and is currently scheduled for trial in October.
Monsanto/Dekalb Genetics, where the merger as proposed
would have substantially lessened competition in biotechnological
innovation in corn. Monsanto agreed to spin off claims to an important
cutting-edge technology used to introduce new genetic traits into corn
seed, and to license its proprietary Holden's corn germplasm, to
numerous seed companies so they could develop their own special
hybrids.
Civil non-merger enforcement
Civil non-merger enforcement has become especially important in
this era of rapid technological change and the growth of network
industries, and we have also been very active in this area to ensure
that antitrust enforcement keeps up with these changes to protect
competition in a variety of industries important to our economy.
Perhaps our best-known recent civil non-merger case is our pending
case against Microsoft under sections 1 and 2 of the Sherman Act for
its efforts to use exclusionary practices to protect its monopoly in
personal computer operating systems and to extend its monopoly power
into the Internet browser market. As you know, Judge Jackson issued
findings of fact in November, the parties have filed briefs as to
proposed conclusions of law and concluded oral arguments, and we are
now awaiting the court's conclusions of law.
The Microsoft case is obviously one of our top priorities, and we
consider it to be very important for our economy. But let me turn
briefly to a few of our other important civil non-merger cases.
First let me say a few words about our pending case against
American Airlines under section 2 of the Sherman Act for monopolizing
airline passenger service on routes emanating from its hub at Dallas/
Ft. Worth International Airport. As the complaint we filed sets forth
in detail, American repeatedly sought to drive small, start-up airlines
out of DFW by saturating their routes with additional flights and cut-
rate fares. After it succeeded in driving out the new entrant, American
would re-establish high fares and reduce service. Passenger traffic
surged when the low-cost airline began operations and more people could
afford to fly, and then fell back dramatically after American had
driven out the upstart and resumed monopoly pricing. American knew this
strategy was a money-loser in the short term, but expected to make that
up by preserving its ability to set fares at monopoly levels.
American, like anyone else in our capitalist economy, is free to
compete, and compete aggressively. But is crossed a fundamental line
into predation. This is the first predation case brought against an
airline by the Antitrust Division sincethe industry was deregulated in
1979. I think it will be tremendously important for our traveling
public throughout the country, who deserve the lower fares and expanded
choices available in a competitive airline marketplace.
Out case against VISA/MasterCard is also an important civil non-
merger enforcement action. We are charging VISA and MasterCard, the two
dominant general purpose credit card networks, with restraining
competition among themselves through overlapping governance
arrangements among the large banks that own and control them, as well
as adopting rules to prevent their member banks from dealing with other
credit card networks. The result is that competition and innovation are
severely impaired. This case is also pending, and trial is expected
this summer.
A third civil non-merger case I'll mention is our case against
Dentsply International for unlawfully maintaining a monopoly in the
market for artificial teeth in the U.S. Dentsply entered into
restrictive dealing arrangements with more than 80 percent of the
nation's tooth distributors, preventing them from selling products made
by its competitors. Dentsply's efforts to deprive its rivals of an
effective distribution network have resulted in increased prices for
artificial teeth; they have reduced innovation; they have prevented
other firms from competing effectively; and they have deterred new
entry into the market. Trial in this case is expected sometime this
year.
ANTITRUST DIVISION BUDGET AND STAFFING
As you can see, our workload is expanding, its complexity is
increasing, and its importance to American businesses and consumers has
never been greater. To continue to effectively carry out our mission,
we need increased resources.
For the current fiscal year, the Antitrust Division's budget is
$110 million, providing for an appropriated staffing level of
approximately 360 attorneys. In light of our tremendous ongoing
workload and its projected expansion, the President's fiscal year 2001
budget request for the Antitrust Division is $134 million, which
includes increases to handle cost-of-living expenses as well as to hire
additional attorneys, economists, paralegals, economic research
assistants, and other critical support. This increase is needed in
light of our increasing workload and the clear importance of
competition to the nation's economic health and prosperity. It will for
the first time in 20 years enable us to bring our staffing level back
to where it was in 1980, a time when the economy was significantly
smaller, less complex, and less globalized. I can assure you that we
will put the additional resources to productive and cost-effective use.
CONCLUSION
The Supreme Court has described the Sherman Act as the ``Magna
Carta'' of the free enterprise system. The responsibility we are given
to enforce it is one we take very seriously. We are working hard to
carry out our enforcement mission to protect competition in the
marketplace against private efforts to thwart it. We are not in the
business of picking winners and losers. In a free market economy, that
responsibility falls to consumers, who make that determination through
their purchasing decisions. The job of the antitrust enforcement is to
ensure that the benefits of the competitive process are not blocked by
private anticompetitive conduct. We look forward to meeting the ongoing
challenge to ensure that businesses can compete on a level playing
field and that consumers and businesses are benefited by competition
that produces low prices, high quality, and innovative goods and
services.
Senator DeWine. Chairman Pitofsky, thank you very much for
joining us.
STATEMENT OF ROBERT PITOFSKY, CHAIRMAN, FEDERAL TRADE
COMMISSION
Mr. Pitofsky. Thank you, Mr. Chairman.
Senator DeWine. We are glad to have you back.
Mr. Pitofsky. Thank you very much. Senator Kohl, Senator
Grassley, as always, I am very pleased to appear before this
committee to discuss the FTC's activities in antitrust
enforcement.
In my years at the agency, we have worked in an
exceptionally constructive way with members of this committee
and I want to echo what my friend Joel Klein just said, that we
appreciate the support and the guidance that we have received
in the oversight process. In my experience, I have not seen as
fine a relationship between an oversight committee and a
regulatory agency than we have seen with this group.
This is an unusually interesting time to be engaged in
antitrust enforcement. There have been several mentions already
of the merger wave, and I am sure we will come back to that;
rapid globalization of trade, which changes the nature of
measurement of market power; rapid expansion of the high-tech
sector of the economy, which means you have to be careful in
applying old precedent to very new structures; deregulation of
vast sectors of the economy, including telecommunications and
electricity; and finally from our point of view, because we are
so committed to enforcement in this area, a distribution
revolution which has opened up markets to access and consumers
to greater opportunities for choice. I have in mind principally
the online commerce sector, which was $15 billion this year and
is predicted to be $78 billion by 2003.
The challenge is to take this 19th century discipline which
has served this country so well and apply it to 21st century
problems. I know that we have to adjust in applying precedent
in this area and I hope we are in the process of doing so.
I would like to single out just three areas of the many
that we are involved in for a statement. First, the merger
wave, 3 times as many filings in 1999 as 1991, and now we find
this year filings are up another 18 percent. One cannot help
asking where this will all end, 10 or 11 times as many assets
scooped up in mergers as 10 years ago.
My own view is that the merger wave is not the problem. It
is primarily a consequence, an inevitable consequence, of the
most dynamic economy this country has seen in a generation. The
problem is, the mega-mergers that we see now, some of which are
exceeding $100 billion in value, among firms that already have
great market power and sometimes between firms that are direct
competitors with each other.
Nevertheless, the fact is that we thoroughly investigate
only 3 percent of the mergers that are filed. We challenge a
little over 1 percent. Ninety-eight or 99 percent of these
mergers go through, but the ones that do not, I think deserve
very aggressive review.
On distribution, my own view is that the United States has
the most open wholesaling and retail sector of its economy of
any country in the world. I think it has served the country
well and I believe that one of the success stories of antitrust
is the way it has kept distribution open.
But now we find new challenges. For example, I mentioned
online distribution. One of the more interesting cases in the
last year involved a pattern of behavior in which 25
conventional Chrysler dealers went to the Chrysler Company and
said, there is somebody selling cars on the Internet at a very
low price. Do something about that company. Cut them back. Cut
them down. Chrysler referred their complaint to us and we
entered into a consent order preventing that kind of behavior.
It was a fairly conventional boycott. I hope that our action in
that area will convince other brick-and-mortar distributors
that that is not an appropriate way to deal with the new
competition offered on the Internet.
We challenged a proposed vertical merger between Barnesand
Noble, the number one book-selling chain in the United States, and
Ingram, the number one retailer, because we were concerned that small
booksellers and new entrants in the Internet sector of book selling
would not have a secure wholesale source of supply. That deal was
abandoned before we got to court, but it seems to me, again, it was an
effort to keep markets open.
Finally, just a few weeks ago, we settled a case with
McCormick spice company. Our complaint alleged that they were
providing discriminatory discounts in the nature of slotting
allowances, shelf space allowances, conditioned on the chain
giving McCormick spice 70 or 80 percent of the shelf space in
the store, injuring smaller competitors in the spice market,
disadvantaging smaller chains and independents who did not
receive the discount.
I believe the case was important. I am even more
enthusiastic about the fact that we will hold a workshop at the
FTC in a month or two in which we will invite private sector
people, consumer people, academics, to discuss the role of
slotting allowances in the modern economy. I think that is in
the tradition of my agency, which is not supposed to be just a
law enforcement agency but is supposed to anticipate commercial
problems and report findings to Congress.
Finally, very briefly, we spend a lot of our resources on
the health care market because inflation in that area seems to
be quite pronounced, the usual merger concerns among
pharmaceutical firms. We have a case in court now in which the
allegation is that Mylan, a genetic pharmaceutical firm,
cornered the market, allegedly, on a key ingredient for their
product, and having cornered the market, raised the price in
January 1998, from $11.36 for 500 capsules to $377, and this
was a product needed by many people who are on rather fixed
incomes. An unusual aspect of the case is that we are seeking
not just the conduct remedy, but disgorgement of allegedly ill-
gotten profits.
Finally, we brought a case just--well, two cases came up
just 2 weeks ago, one we settled and one we are going to be in
court on, involving rather similar conduct, and that is a
situation in which a branded pharmaceutical, as it sees its
patent winding down and is threatened by a challenge by a
generic, enters into an agreement with the generic firm, paying
millions of dollars per month for the generic firm to stay out
of the market or to delay its entry into the market. We settled
one case and we will litigate the other. The question of
competition between branded pharmaceuticals and generics is one
that we are paying a lot of attention to at the present time.
Let me simply conclude where you started, Mr. Chairman. We
are extremely busy. I think we can handle the merger wave by
reassigning people from one part of our agency to the other. I
do worry that there are conduct cases that are not being
handled as aggressively and as promptly as they should be
because our resources have been moved so much in the direction
of merger review.
Thank you very much, and I look forward to answering your
questions.
Senator DeWine. Mr. Chairman, thank you very much.
[The prepared statement of Mr. Pitofsky follows:]
Prepared Statement of Robert Pitofsky
Mr. Chairman and Members of the Subcommittee, I am pleased to
appear before you to present testimony of the Federal Trade Commission
that will provide an overview of our antitrust enforcement activities.
Today I will review the Commission's activities since I last testified
for general antitrust oversight purposes. The Commission is charged
with the enormous responsibility of ensuring that consumers receive the
benefits of a competitive marketplace, a mission that we share with the
U.S. Department of Justice. We welcome that responsibility and believe
that we are fulfilling our obligation.
The Commission strongly believes in the bedrock principle that
protecting competition by preventing improper creation, acquisition, or
exercise of market power enhances the welfare of consumers. Congress
decided long ago that a competitive economy is vastly preferable to an
economy reliant on government regulation of the conduct of firms with
market power. Competition is the best way to ensure that consumers
receive the benefits of lower prices, higher quality and quantity of
goods and services, and greater innovation. That approach has been
validated throughout the past hundred and ten years of antitrust
enforcement.
These are dynamic times for the economy, and with these changes
come many challenges for the antitrust agencies. The economy is rapidly
being reshaped, and markets are being created or redefined, by numerous
forces operating at the same time, including: the explosion of
electronic commerce; deregulation of critical industries such as
telecommunications, financial services and electricity; convergence of
technologies and, indeed, of markets; and globalization. These forces
result in a fast-changing, more complex economy, even with respect to
basic sectors of the economy such as electricity. While these changes
carry the promise of tremendous benefits for consumers, some may also
create incentives and opportunities for anticompetitivebehavior. The
challenge for us, apart from the sheer magnitude of the amount of
activity, is to understand these changes and to know when antitrust
intervention is appropriate.
The Commission's approach to antitrust enforcement is guided by two
important principles. First, we seek to enforce the antitrust laws with
vigor, and protect consumers from abuses of market power in whatever
form. It is the Commission's responsibility to protect consumers from
anticompetitive consequences of private agreements, the abuse of
monopoly power, or illegal mergers. The Commission also recognizes,
however, the costs that government intervention can place on private
parties. For this reason, our second guiding principle is to avoid
unnecessary intrusions and to minimize, to the extent possible, the
burdens placed on businesses by our efforts to protect consumers. We
have an important responsibility to ensure that antitrust policy makes
sense and is sensibly and effectively applied.
I will begin this overview with a topic that is not new news, but
is still big news--the astounding level of merger activity. We are
busier than ever on that front. I will review some recent merger
enforcement actions that have had particularly immediate significance
for consumers. I will then cover several other areas that receive our
close attention: competitor collaborations, retailing, and health care
markets.
LEVEL OF MERGER ACTIVITY
The number of mergers reported to the FTC and the Justice
Department pursuant to the Hart-Scott-Rodino Act has more than tripled
over the past decade, from 1,529 transactions in fiscal year 1991 to
4,642 transactions in fiscal 1999. Thus far in fiscal year 2000,
filings are at a record pace; if this continues, filings for the year
will be approximately 18% above the record set in fiscal 1998.
Currently, more than two-thirds of our competition resources are
dedicated to merger enforcement, compared to an historical average of
closer to 50 percent. The merger wave strains the FTC resources to the
breaking point. The Washington Post recently characterized the merger
wave as a ``frenzy of merger madness, capping a dramatic wave of
corporate consolidation that has been gaining momentum through much of
the decade.'' \1\ The article quotes merger experts who note that a key
force driving merger activity is the new world of electronic commerce.
---------------------------------------------------------------------------
\1\ Sandra Sugawara, Merger Wave Accelerated '98: Economy, Internet
Driving Acquisition, Wash. Post, Dec. 31, 1999 at El.
---------------------------------------------------------------------------
While the number of merger filings has more than tripled in the
past decade, the dollar value of commerce affected by these mergers
rises on an even steeper trajectory, increasing an astounding eleven-
fold during the past decade.\2\ But mere numbers do not fully capture
the complexity and the challenge of the current merger wave. Today's
merger transactions not only are larger, but often raise novel or
complex competitive issues requiring more detailed analysis. In the
past year alone, companies filed notifications for 273 mergers with a
transaction size of one billion dollars or more, and many of these
mergers involved overlaps in several products or services.
---------------------------------------------------------------------------
\2\ See Attachment 1.
---------------------------------------------------------------------------
There are many reasons for the current merger wave. A large
percentage of these transactions appear to be a strategic response to
an increasingly global economy. Many are in response to new economic
conditions produced by deregulation (e.g. telecommunications, financial
services, and electric utilities). Still others result from the desire
to reduce overcapacity in more mature industries. The rapidly evolving
world of electronic commerce has a substantial impact on the merger
wave, because consolidations often quickly follow the emergence of a
new marketplace. These factors indicate that the merger wave reflects a
dynamic economy, which on the whole is a positive phenomenon. But some
mergers, as well as some other forms of potentially anticompetitive
conduct, may be designed to stifle competition in important sectors of
this dynamic economy.
Out of necessity, our scarce resources are directed at preserving
competition in the most important areas of the economy. The Commission
dedicates the bulk of its antitrust enforcement to sectors that are
critical to our everyday lives, such as health care, pharmaceuticals,
retailing, information and technology, energy, and other consumer and
intermediate goods. Rather than recite a litany of cases, I will focus
on some cases that underscore the importance of the Commission's
antitrust enforcement as we move forward in this new century.
MERGER ENFORCEMENT
In the last two fiscal years and fiscal 2000 to date, the
Commission has brought over 60 enforcement actions in industries
ranging from food retailing to basic industrial products.\3\ Retailing,
energy, and pharmaceuticals commanded the most enforcement
resources.\4\
---------------------------------------------------------------------------
\3\ In addition, 19 merger filings were withdrawn before the
Commission's investigation was completed.
\4\ Telecommunications, especially in the areas of cable and video
programming, also has been, and continues to be, an area of substantial
activity. See Prepared Statement of the Federal Trade Commission,
Presented by Robert Pitofsky, Chairman, Before The Committee on
Commerce, Science, and Transportation, United States Senate, November
8, 1999.
---------------------------------------------------------------------------
The Commission has committed considerable resources to addressing
the wave of consolidation in the petroleum and gasoline industry. In
fiscal years 1999 and 2000 to date, the FTC's Bureau of Competition
used a staggering one-third of its enforcement budget to address issues
in energy industries. In February of this year, we filed an action in
federal district court in San Francisco seeking a preliminary
injunction against the proposed merger of BP Amoco p.l.c. and Atlantic
Richfield Company (``ARCO'').\5\ The complaint alleges that the merger
would combine the two largest firms exploring for and producing crude
oil on the North Slope in Alaska; that BP already exercises market
power in the sale of crude oil on the West Coast; and that by acquiring
ARCO, BP would eliminate as an independent competitor the firm most
likely to threaten BP's market power. ARCO, the pioneer on the North
Slope, has been the most aggressive explorer for oil in Alaska's
history.\6\ The Commission's suit has been joined by suits filed by the
States of California, Oregon, and Washington. This is the latest of a
number of enforcement actions in which the Commission worked with
various states in pursuit of our common interest in protecting American
consumers. Last week, the Commission, the states and the parties
obtained an order from the Court adjourning the preliminary injunction
hearing while the Commission evaluates the parties' proposal to sell
all of ARCO's Alaska operations to Phillips Petroleum Co.
---------------------------------------------------------------------------
\5\ Federal Trade Commission v. BP Amoco, p.l.c., Civ. No C 000416
(SI) (N.D. Cal. Feb. 4, 2000) (complaint).
\6\ The complaint also alleges that the combination of BP's and
ARCO's pipeline and oil storage facilities in and around Cushing,
Oklahoma, a major crude oil trading center, would enable the combined
firm to manipulate the market for crude oil futures contracts traded on
the New York Mercantile Exchange. Those contracts involve crude oil
designated for delivery in Cushing. The complaint alleges that the
combination of BP's futures trading business and existing pipeline and
terminal facilities with ARCO's pipelines, oil storage infrastructure,
and inline transfer business would increase BP's ability to manipulate
crude oil futures trading by giving it access to information and
control over pipelines and other essential facilities.
---------------------------------------------------------------------------
The BP/ARCO case comes on the heels of the Commission's
investigation of the merger between Exxon and Mobil. After an extensive
review, from oil fields to the gas pump, theCommission required the
largest retail divestiture in FTC history--the sale or assignment of
2,431 Exxon and Mobil gas stations in the Northeast and Mid-Atlantic,
and California, Texas and Guam.\7\ The Commission also ordered the
divestiture of Exxon's Benicia refinery in California; light petroleum
terminals in Boston, Massachusetts, Manassas, Virginia, and Guam; a
pipeline interest in the Southeast; Mobil's interest in the Trans-
Alaska Pipeline; Exxon's jet turbine oil business; and a volume of
paraffinic lubricant base oil equivalent to Mobil's production. The
Commission coordinated its investigation with the Attorneys General of
several states and with the European Commission (about 60 percent of
the merged firm's assets are located outside the United States).
---------------------------------------------------------------------------
\7\ Exxon Corp., FTC File No. 991 0077 (Nov. 30, 1999) (proposed
consent order).
---------------------------------------------------------------------------
There are several particularly noteworthy aspects of the Exxon/
Mobil settlement. First, the divestiture requirements eliminated all of
the overlaps in areas in which the Commission had evidence of
competitive concerns. Second, while several different purchasers may
end up buying divested assets, each will purchase a major group of
assets constituting a business unit. This is likely to replicate, as
nearly as possible, the scale of operations and competitive incentives
that were present for each of these asset groups prior to the merger.
Third, these divestitures, while extensive, represent a small part of
the overall transaction. The majority of the transaction did not
involve significant competitive overlaps. In sum, we were able to
resolve the competitive concerns presented by this massive merger
without litigation.
The Commission also required divestitures in the merger between BP
and Amoco,\8\ and in a joint venture combining the refining and
marketing businesses of Shell, Texaco and Star Enterprises to create at
the time the largest refining and marketing company in the United
States.\9\
---------------------------------------------------------------------------
\8\ British Petroleum Company p.l.c., C-3868 (April 19, 1999)
(consent order). BP/Amoco involved very large companies but relatively
few significant competitive overlaps. The Commission ordered
divestitures and other relief to preserve competition in the
wholesaling of gasoline in 30 cities or metropolitan areas in the
eastern and southeastern United States, and in the terminaling of
gasoline and other light petroleum products in nine geographic markets.
\9\ Shell Oil Co., C-3803 (April 21, 1998) (consent order). The
Shell/Texaco transaction raised competitive concerns in markets for
gasoline and other refined petroleum products in the Pacific Northwest
(Oregon and Washington), California, and Hawaii, for crude oil in
California, and in the transportation of refined light petroleum
products to several southeastern states. The Commission required the
divestiture of a refinery in Washington, a terminal on the island of
Oahu, Hawaii, retail gasoline stations in Hawaii and California, and a
pipeline interest in the Southeast.
---------------------------------------------------------------------------
The Commission challenged potentially anticompetitive mergers in
other energy industries as well. Three recent matters served to protect
emerging competition in electric power generation. Two of these cases
were so-called ``convergence mergers,'' where an electric power company
proposed to acquire a key supplier of fuel used to generate
electricity. One involved PacifiCorp's proposed acquisition of The
Energy Group PLC and its subsidiary, Peabody Coal. PacifiCorp's control
of certain Peabody coal mines allegedly would have enabled it to raise
the fuel costs of its rival generating companies and raise the
wholesale price of electricity during certain peak demand periods. The
Commission secured a consent agreement to divest the coal mines, but
the transaction was later abandoned by the parties.\10\ In another
case, Dominion Resources, an electric utility that accounted for more
than 70 percent of the electric power generation capacity in the
Commonwealth of Virginia, proposed to acquire Consolidated Natural Gas
(``CNG''), the primary distributor of natural gas in southeastern
Virginia and the only likely supplier to any new gas-fueled electricity
generating plants in that region. Dominion allegedly could have raised
the cost of entry and power generation for new electricity competitors.
Working closely with Commonwealth officials, the Commission required
the divestiture of Virginia Natural Gas, a subsidiary of CNG.\11\ In a
third matter, the Commission challenged CMS Energy Corporation's
proposed acquisition of two natural gas pipelines.\12\ CMS itself was a
transporter of natural gas, whose customers could purchase the gas from
other suppliers, either for their own use or to generate electricity.
The Commission alleged that the acquisition would have enabled CMS to
raise the cost of transportation for its gas and electric generation
customers. This case did not require divestitures, but the Commission's
consent order assures that CMS cannot restrict access to its pipeline
network, thus allowing new entry that should maintain a competitive
market.
---------------------------------------------------------------------------
\10\ PacifiCorp, FTC File No. 971 0091 (consent order accepted for
public comment, Feb. 17, 1998). This order was withdrawn when the
parties abandoned the transaction.
\11\ Dominion Resources, Inc., C-3901 (Dec. 9, 1999) (consent
order).
\12\ CMS Energy Corp., C-3877 (June 2, 1999 (consent order).
---------------------------------------------------------------------------
Another highlight from the past two years is the Commission's
successful challenge to the proposed mergers of the nation's four
largest drug wholesalers into two firms. McKesson Corp. proposed to
acquire AmeriSource Health Corp., and Cardinal Health, Inc. proposed to
acquire Bergen Brunswig Corp. The two surviving firms would have
controlled over 80% of the prescription drugs sold through wholesalers.
These mergers allegedly would have increased costs to these
wholesalers' customers--thousands of pharmacies and hospitals. These
two cases were among the few that have led to litigation in recent
years (although many more had to be prepared for trial). The district
court granted a preliminary injunction against both mergers, and the
transactions were later abandoned.\13\ Another significant aspect of
these two cases is that the district court's thoughtful and well-
articulated opinion helped to update merger case law in several
respects, including market definition and analysis of entry conditions,
competitive effects, and efficiencies. This helps make antitrust law
more transparent, and provides more guidance to the business community.
The court's analysis is consistent with the Commission's analytical
approach under the 1992 Horizontal Merger Guidelines, issued jointly by
the Commission and the U.S. Department of Justice.\14\
---------------------------------------------------------------------------
\13\ FTC v. Cardinal Health, Inc., 12 F. Supp.2d 34 (D.D.C. 1998).
\14\ 1992 U.S. Dep't of Justice and Federal Trade Commission
Horizontal Merger Guidelines, reprinted in 4 Trade Reg. Rep. (CCH)
para.13,104 (April 2, 1992; as amended, April 8, 1997).
---------------------------------------------------------------------------
Food retailing is another sector that is experiencing a period of
consolidation. The number of supermarket mergers has increased
dramatically just in the last three years. While the Commission has not
challenged geographic expansion mergers, many mergers among direct
local competitors have raised competitive concerns. The Commission has
taken enforcement action where appropriate. Last June, for example, the
Commission took steps to prevent undue market concentration resulting
from Albertson's acquisition of American Stores--combining the second
and fourth largest supermarket chains in the United States.\15\ In
Albertson's the Commission required the divestiture of over 140 stores
in California, Nevada and Arizona--at the time, the largest retail
divestiture in Commission history (but now surpassed by the Exxon/Mobil
divestiture). In the last four years alone the Commission has brought
more than 10 enforcement actions involving supermarket mergers,
requiring divestiture of nearly 300 stores in order to maintain
competition in local markets across the United States.
---------------------------------------------------------------------------
\15\ Albertson's, Inc., FTC File No. 981 0339 (consent agreement
accepted for public comment, June 21, 1999). The Commission has also
challenged a number of other supermarket mergers. E.g., Albertson's,
Inc., C-3838 (Dec. 8, 1998) (consent order) (acquisition of Buttrey
Food and Drug Store Co.); Koninklijke Ahold N.V., C-3861 (April 14,
1999) (consent order) (acquisition of Giant Food, Inc.).
---------------------------------------------------------------------------
Another major transaction the agency reviewed last year was Barnes
& Noble's attempted acquisition of Ingram Book Group. Barnes & Noble
was the largest book retailing chain in the United States, and Ingram
was by far the largest wholesaler of books in the United States. Thus,
it was largely a vertical transaction. While many vertical transactions
are likely to be efficiency-enhancing, and therefore few are
challenged, the Commission staff saw the Barnes & Noble/Ingram
transaction as a serious competitive threat to thousands of independent
book retailers. The acquisition of an important upstream supplier such
as Ingram might have enabled Barnes & Noble to raise the costs of its
bookselling rivals by foreclosing access to Ingram's services, or
denying access on competitive terms.\16\ If rivals become less able to
compete, Barnes & Noble could have increased its profits at the retail
level or prevented its profits from being eroded by competition from
new business forms such as Internet retailing. The Commission did not
take formal action on this merger, because the parties abandoned the
transaction before the staff made a final recommendation.
---------------------------------------------------------------------------
\16\ The merged firm might have been able to do so in a number of
ways, including strategies short of an outright refusal to sell to the
non-Barnes & Noble bookstores. For example, Barnes & Noble/Ingram could
have chosen to (1) sell to non-Barnes & Noble bookstores at higher
prices; (2) slow down book shipments to rivals; (3) restrict access to
hot titles; (4) restrict access to Ingram's extended inventory of older
titles; or (5) price services higher or discontinue or reduce services.
---------------------------------------------------------------------------
We have also challenged a number of other large mergers involving
products and services that are highly important to consumers, including
pharmaceutical products,\17\ medical devices,\18\ household
products,\19\ and insurance services.\20\ In each of these cases, our
goal has been to protect consumers from the potential exercise of
market power by the merged firm, either unilaterally or in combination
with others. Under the methodology we use to determine consumer savings
pursuant to the Government Performance and Results Act, we estimate
that the Commission's merger enforcement actions in fiscal year 1999
saved consumers from paying $1.2 billion in higher prices.\21\ In
contrast, the Commission's budget for the competition mission in fiscal
1999 was only $55.7 million.
---------------------------------------------------------------------------
\17\ E.g., Hoechst AG, FTC File 991 0071 (consent agreement
accepted for public comment, Dec. 2, 1999) (acquisition of Rhone-
Poulenc S.A.; direct thrombin inhibitor drug); Zeneca Group PLC, C-3880
(June 7, 1999) (consent order) (acquisition of Astra AB; long-lasting
local anesthetic); Roche Holdings Ltd., C-3809 (May 22, 1998) (consent
order) (acquisition of Corange Ltd.; cardiac thrombolytic agents and
chemical used to detect the presence of illegal substances). The
Commission also took action to prevent competitive harm from a
pharmaceutical manufacturer's acquisition of a company providing
services as a pharmacy benefits manager. Merck & Co., Inc., C-3853
(Feb. 18, 1999) (consent order) (acquisition of Merck-Medco Managed
Care, LLC).
\18\ SNIA S.p.A., C-3889 (July 28, 1999) (consent order) (heart and
lung machines); Medtronic, Inc., C-3880 (June 3, 1999) (consent order)
(non-occlusive arterial pumps); Medtronic, Inc., C-3842 (Dec. 21, 1998)
(consent order) (automated external defibrillator).
\19\ Reckitt & Colman plc, C-3918 (Jan. 18, 2000) (consent order)
(household cleaning products); Nortek, Inc., C-3831 (Oct. 8, 1998)
(consent order) (residential intercoms); S.C. Johnson & Son, Inc. C-
3802 (May 20, 1998) (consent order) (soil and stain removers); CUC
Int'l. C-3805 (May 4, 1998) (consent order) (timeshare exchange
services).
\20\ Fidelity National Financial, Inc., C-3929 (Feb. 25, 2000)
(consent order) (title information services); Unum Corp., C-3894 (Sept.
29, 1999) (consent order) (data for disability insurance); Commonwealth
Land Title Insurance Co., C-3834 (Nov. 10, 1998) (consent order) (title
insurance); Landamerica Financial Group, Inc. C-3808 (May 20, 1998)
(consent order) (title operations).
\21\ The figure includes transactions that were withdrawn before
the Commission's investigation was completed. Under the GPRA
methodology, consumer savings estimates are based on the volume of
commerce in the markets adversely affected by a merger, the percentage
increase in price that likely would have resulted from the merger, and
the likely duration of the anticompetitive price increase. In the
absence of case-specific evidence that indicates higher or lower
figures, conservative default parameters are applied to the volume of
commerce: a one percent price increase for two years.
---------------------------------------------------------------------------
We have taken steps to ensure that these consumer savings are in
fact realized, by implementing changes that result in better remedies.
Last year, the staff completed a major study of merger remedies based
on the Commission's merger cases in the early 1990s.\22\ The study
found that while most of the cases settled through divestitures
resulted in the establishment of a new competitor to replace the one
lost through the merger, there were some ways in which merger remedies
could be improved to avoid potential problems. One of the steps we have
taken is to require, in a greater number of cases, that the merging
parties bring us qualified purchasers for the divestiture assets before
the transaction may be consummated. This procedure, referred to as the
``up-front buyer'' requirement, requires the merging parties to find a
suitable purchaser before the Commission accepts a settlement
agreement. This procedure has several benefits for consumers: we know
before accepting a divestiture settlement that a suitable buyer exists
and that the divestiture package is an appropriate one, and we can
restore the lost competition more quickly and with greater confidence
that the divestiture will succeed. It also reduces the burden of
uncertainty on the merging parties, because they know up front that
they have an acceptable candidate, and they can then devote their full
attention to their newly merged business.
---------------------------------------------------------------------------
\22\ Staff of the FTC Bureau of Competition, A study of the
Commission's Divestiture Process (1999).
---------------------------------------------------------------------------
While we are on the subject of mergers, we would like to offer a
few observations about Senate bill S. 1854, which seeks to amend
various provisions concerning the Hart-Scott-Rodino (HSR) process.
First, the Commission supports efforts to raise the size-of-transaction
threshold for HSR reporting from $15 million to $35 million. Although
the threshold would be higher, however, the fee structure proposed in
the bill is unlikely to meet the funding needs of the Commission in
future years, and therefore it would need adjustment to account for
future funding needs. Second, while the Commission agrees with the
burden-reduction goals of S. 1854, we have serious concerns about the
procedures contemplated by the bill. We believe they are impractical,
would themselves cause substantial delay in the process, and would
seriously hinder our efforts to protect consumers from anticompetitive
mergers.
The extent of burdens on the parties needs to be put into an
appropriate perspective. The vast majority of merger filings are
cleared within 20 days. Fewer than 3 percent of reported transactions
receive a request for additional information (the so-called ``second
request''). The issuance of a second request is not undertaken lightly,
and the care we take in choosing when to issue them is illustrated by
the fact that a large majority of those transactions that receive
second requests result in some form of enforcement action. In addition,
most second request investigations are resolved without major document
production. Over 60 percent of the investigations result in productions
of fewer than 20 boxes of responsive documents, and over 85 percent of
thesecond request investigations are resolved without the parties'
having to complete their document production (i.e., ``substantially
comply'' with the second request).\23\
---------------------------------------------------------------------------
\23\ Many companies indicate a willingness to settle a case before
completing their document production. Other companies work with staff
from the Commission or Department of Justice (``DOJ'') to determine
some subset of documents that will enable a ``quick look'' at certain
issues, so that resources can be focused on the topics of greatest
debate.
---------------------------------------------------------------------------
Nevertheless, we believe that there can be significant improvements
in this process. Thus, we are engaged in a dialogue with members of the
private antitrust bar, business representatives, and Members of
Congress on how to reduce burdens by streamlining the process. We
believe this can be done without legislation. Both antitrust agencies
and the private bar have a long history of cooperating in this fashion.
Cooperation will lead to effective reforms that will meet the worthy
goals sought by the proposed legislation, without the delays and
impediments to thorough investigation that could result from the
procedures contemplated by the legislation. Indeed, the FTC has already
undertaken a number of internal reforms to expedite merger
investigations and to provide parties with more complete information on
the issues that give rise to an investigation. We will continue our
efforts to make the process as efficient as possible and work with the
business community to address their concerns.
In sum, we can all agree that the process can be improved, and we
acknowledge the concerns of Senators Hatch, DeWine and Kohl that are
reflected in the proposed legislation. Over the past several months we
have been working with Congress, the business community and members of
the private bar to find common ground for improving the process. We
continue to believe that the issues can and should be resolved without
legislation.
COLLABORATIONS AMONG COMPETITORS
Let us now shift gears and briefly discuss conduct in which
competitors do not merge, but instead collaborate with each other. In
today's markets, competitive forces are driving firms toward complex
collaborations to achieve goals such as expanding into foreign markets,
funding expensive innovation efforts, and lowering production and other
costs. Most of these collaborations are procompetitive business
arrangements that will benefit consumers; some, however, are not. Last
October, the Federal Trade Commission and the Antitrust Division of the
Department of Justice jointly issued draft ``Competitor Collaboration
Guidelines,'' which describe an analytical framework to assist
businesses in assessing the likelihood of an antitrust challenge to a
collaboration among two or more competitors. The draft Guidelines were
placed on the public record for comment, and they have received praise
from sources as diverse as the Chamber of Commerce; \24\ antitrust's
leading treatise author, Professor Herbert Hovenkamp; \25\ and
practitioners, who found that ``[b]y synthesizing the existing cases
into an analytical framework, the Federal Trade Commission and the
Department of Justice will have made antitrust analysis vastly more
accessible to smaller law firms and their clients.'' \26\ At the same
time, useful suggestions have been made for clarifications and other
changes to the Guidelines. The agencies are now considering those
suggestions before issuing final Guidelines.
---------------------------------------------------------------------------
\24\ ``[The Guidelines] no doubt will make a net positive
contribution as a statement of agency thinking in this complex area of
law.'' Comments of Chamber of Commerce at 2.
\25\ ``[The Guidelines] are quite good overall.'' Hovenkamp Comment
at 1.
\26\ Comment of Thomas F. Purcell, Lindquist & Vennum, St. Paul,
Minnesota, at 1.
---------------------------------------------------------------------------
RETAILING
As a result of global and innovation-based changes, consumers are
becoming aware that a ``retail revolution'' is underway. To remain
competitive, retailers--whether brick-and-mortar or online--are seeking
new ways to market new and old products. This dynamic is leading to
much pro-consumer innovation in retailing. For example, the Internet
has changed traditional sales and distribution patterns for products of
all types, providing faster, cheaper, and more efficient ways to
deliver goods and services. A market study by Jupiter Communications
estimates that annual consumer sales on the Internet will explode from
$15 billion in 1999 to $78 billion by 2003. There appears to be
tremendous demand for Internet-based services.
However, whenever there is great upheaval in the marketplace,
traditional retailers sometimes respond by trying to forestall new
forms of competition. Some of those actions may be legitimate defensive
maneuvers, but when conduct steps over the lines of the antitrust laws,
enforcement action is needed to ensure that anticompetitive practices
do not deter development or procompetitive innovations.\27\ In 1998,
for example, the FTC charged 25 Chrysler dealers with an illegal
boycott designed to limit sales by a car dealer that marketed on the
Internet. These brick-and-mortar dealers allegedly had planned to
boycott Chrysler if it did not change its distribution of vehicles in
ways that would disadvantage Internet retailers. The competitive danger
of such a tactic is obvious: a successful boycott could have limited
the use of the Internet to promote price competition and reduced
consumers' ability to shop from dealers serving a wider geographic area
via the Internet. An FTC consent order prohibits the dealers from
engaging in such boycotts in the future.\28\
---------------------------------------------------------------------------
\27\ In addition, on the consumer protection side, we must maintain
vigilance to protect consumers from fraudulent practices by the few
unscrupulous providers of such services. Since the agency's first
Internet case in 1994, the FTC, primarily through its Bureau of
Consumer Protection, has bought over 100 Internet-related cases
involving over 300 defendants. The Commission has obtained injunctions
stopping illegal schemes, collected over $20 million in redress for
victims, and obtained orders freezing another $65 million in cases that
are still in litigation. Most of these cases have involved the
migration to the Internet of traditional kinds of fraud, such as
business opportunity schemes, credit repair scams, pyramid schemes, and
false claims for health-related products, to name a few.
\28\ Fair Allocation System, Inc., C-3832 (Oct. 30, 1998) (consent
order).
---------------------------------------------------------------------------
The Internet is not the only place where we have seen popular new
forms of retailing. Another example involves the Commission enforcement
action against Toys ``R'' Us, the nation's largest toy retailer,
alleging abuse of market power. As alleged by the Commission, Toys
``R'' Us used its market power to try to stop warehouse clubs, such as
Costco, from selling popular toys such as Barbie dolls in ways that
allowed consumers to make comparisons to the prices charged by Toys
``R'' Us. Warehouse clubs, as you know, are a relatively new retailing
format that has grown significantly in the past decade. Toys ``R'' Us's
concern was that warehouse clubs were selling some toys at lower prices
and beginning to take market share away from traditional toy retailers.
In response, Toys ``R'' Us allegedly pressured toy manufacturers to
deny popular toys to warehouse clubs, or to sell them on less favorable
terms. The FTC issued an administrative order to stop these practices,
and the matter is now on appeal to the U.S. Court of Appeals for the
Seventh Circuit.\29\ Although the products were toys, and the rivalry
was between two different kinds of brick-and-mortar firms, the
enforcement principles underlying the Commission's action apply with
equal--and perhaps even greater--force to the new world of online
retailing.
---------------------------------------------------------------------------
\29\ Toys ``R'' Us, Inc., Docket No. 9278 (1998), appeal docketed,
No. 98-417 (7th Cir. Apr. 16, 1999).
---------------------------------------------------------------------------
Of course, even more traditional retailing practices can raise
competitive concerns. Earlier this month the FTC and the Attorneys
General from 56 U.S. states, territories, commonwealths, and
possessions settled charges that Nine West, one of the country's
largest suppliers of women's shoes, engaged in resale price
maintenance, resulting in higher prices for many popular lines of
shoes. To settle the charges with the states, Nine West agreed to pay
$34 million, which will be used to fund women's health, vocational,
educational, and safety programs.
Slotting allowances are another retailing-related topic of current
interest at the Commission. The term ``slotting allowance'' typically
refers to a lump-sum, up-front payment that a supplier, such as a food
manufacturer, might pay to a retailer, such as a supermarket, for
access to its shelves.\30\ These allowances can amount to tens or
hundreds of thousands of dollars. Slotting allowances can be either
beneficial or harmful. They can be beneficial if they fairly reimburse
retailers for the costs and risks of taking on an unproven new product,
or when they result in lower prices to consumers. On the other hand,
slotting allowances can be harmful if they permit one manufacturer to
acquire a degree of exclusivity, across many retail outlets, sufficient
to prevent other firms from becoming effective competitors. Still other
situations fall in an intermediate grey area. To sharpen our
understanding of the circumstances under which slotting allowances can
be beneficial or harmful to competition and to consumers, the
Commission will hold a two-day workshop in May 31 and June 1. This
session will bring together people from manufacturing, retailing,
economics, and other relevant disciplines to discuss the issues
involved in this very complex subject.
---------------------------------------------------------------------------
\30\ See ``Slotting: Fair for Small Businesses and Consumers?''
Hearing before the Committee on Small Business, United States Senate
(Sept. 14, 1999).
---------------------------------------------------------------------------
The Commission recently examined charges of price discrimination in
a related retailing context. By majority vote, the Commission charged
McCormick & Company, the world's largest spice company and by far the
leading supplier in the United States, with engaging in unlawful price
discrimination in the sale of spice and seasoning products. Some
retailers allegedly were charged substantially higher net prices than
were others, and discounts to favored chains allegedly were conditioned
on an agreement to devote all or a substantial portion of shelf space
to McCormick products. McCormick agreed to settle the charges by
accepting an order that would prohibit the selling of spices at
different prices to different retailers, except when permitted by the
Robinson-Patman Act.
HEALTH CARE
Health care is an increasing part of overall consumer expenditures,
and the significant rise in health care costs is felt by all consumers.
For many years, the Commission has been at the forefront in bringing
enforcement actions to protect the competitive process in all types of
health care markets, including services provided by hospitals and
health care professionals as well as products provided by the
pharmaceutical and medical equipment industries. In the past two years
alone, the Commission has brought more than a dozen enforcement actions
involving health care, pharmaceuticals, and medical devices.
In one of these cases the Commission, jointly with several states,
sued Mylan Laboratories, one of the nation's largest generic
pharmaceutical manufacturers, charging Mylan and other companies with
monopolization, attempted monopolization and conspiracy to eliminate
much of Mylan's competition by tying up the key active ingredients for
two widely-prescribed drugs, used by millions of patients.\31\ The
FTC's complaint charged that Mylan's agreements allowed it to impose
enormous price increases--over 25 times the initial price level for one
drug, and more than 30 times for the other. For example, in January
1998, Mylan raised the wholesale price of clorazepate from $11.36 to
approximately $377.00 per bottle of 500 tablets, and in March 1998, the
wholesale price of lorazepam went from $7.30 for a bottle of 500
tablets to approximately $190.00. In total, the price increases
resulting from Mylan's agreements allegedly cost American consumers
more than $120 million in excess charges. The Commission filed this
case in federal court under Section 13(b) of the FTC Act seeking
injunctive and other equitable relief, including disgorgement of ill-
gotten profits. In July of last year the district court upheld the
FTC's authority to seek disgorgement and restitution for antitrust
violations. Trial is set for the Spring of 2001.
---------------------------------------------------------------------------
\31\ FTC v. Mylan Laboratories, Inc., CV-98-3115 (D.D.C., filed
December 22, 1998; amended complaint filed February 8, 1999). The drugs
in question are used for treatment of anxiety.
---------------------------------------------------------------------------
Just last week, the Commission charged four other companies with
entering into anticompetitive agreements that allegedly delayed the
entry of generic drug competition, potentially costing consumers
hundreds of millions of dollars a year. The administrative complaint
issued against Hoechst Marion Roussel (now Aventis) and Andrx
Corporation charges that Hoechst, the maker of Cardizem CD, a widely
prescribed drug for treatment of hypertension and angina, agreed to pay
Andrx millions of dollars to delay bringing its competing generic drug,
or any other non-infringing version, to market while Hoechst sued Andrx
for alleged patent infringement.\32\ Cardizem CD is a form of
diltiazem, and Hoechst accounts for about 70% of the sales of once-a-
day diltiazem products in the United States. Hoechst's Cardizem sales
in 1998 exceeded $700 million (over 12 million prescriptions). The
complaint further alleges that, because the Hatch-Waxman Act \33\
grants an exclusive 180-day marketing right to Andrx, Andrx's agreement
not to market its product was also intended to delay the entry of other
generic drug competitors.
---------------------------------------------------------------------------
\32\ Hoechst Marion Roussel, Inc., Docket No. 9293 (complaint,
March 16, 2000).
\33\ Under the Hatch-Waxman Act, the first company to file an
Abbreviated New Drug Application (ANDA) with the FDA for a generic drug
(in this case, Andrx) has an exclusive right to market its generic drug
for 180 days. Under the alleged Hoechst-Andrx agreement, Andrx could
not give up that exclusivity right. Thus, by allegedly agreeing not to
market its drug, Andrx prevented the 180-day exclusivity period from
beginning to run, so that other sellers of generic versions of Cardizem
CD also could not enter the market.
---------------------------------------------------------------------------
The complaint against two other companies, Abbott Laboratories and
Geneva Pharmaceuticals, Inc, which the companies agreed to settle,
involved allegations of similar conduct in connection with a
proprietary drug--called Hytrin--that Abbott manufactures, and a
generic version that Geneva prepared to introduce.\34\ Hytrin is used
to treat hypertension and benign prostatic hyperplasia (BPH or enlarged
prostate)--chronic conditions that affect millions of Americans each
year, many of them senior citizens. BPH alone afflicts at least 50% of
men over age 60. In 1998, Abbott's sales of Hytrin amounted to $542
million (over 8 million prescriptions) in the United States. The
complaint alleges that Abbott paid Geneva approximately $4.5 million
per month to keep Geneva's generic version of the drug off the U.S.
market. This agreement also allegedly delayed the entry of other
generic versions of Hytrin because of Geneva's 180-day exclusively
rights under the Hatch-Waxman Act. Abbott was charged with
monopolization of the market, and both companies were charged with
conspiracy to monopolize. The proposed consent order enjoins such
practices.
---------------------------------------------------------------------------
\34\ Abbott Laboratories, FTC File No. 981 0395 (proposed consent
order, March 16, 2000); Geneva Pharmaceuticals, Inc., FTC File No. 981
0395 (proposed consent order, March 16, 2000).
---------------------------------------------------------------------------
Another recent enforcement effort was directed at an
anticompetitive patent pool between Summit Technology, Inc. and VISX,
Inc. Summit and VISX compete in the market for equipment and technology
employed in laser vision correction. Most of the approximately 140
million people in the United States with vision problems correct their
vision with contact lenses or eyeglasses, but an increasing number are
turning to laser techniques. Until recently, VISX and Summit were the
only firms with FDA approval to market the laser equipment used for
this surgery. The complaint charged that the two companies eliminated
competition between themselves by placing their competing patents in a
patent pool and agreeing to charge doctors a uniform $250-per-procedure
fee every time a Summit or VISX laser was used. In essence, this was
price-fixing under the guise of a patent cross-licensing arrangement.
After the Commission issued an administrative complaint charging that
the patent pool and related agreements were unlawful, the companies
dissolved the patent pool and settled this portion of the case in
August 1998, with an agreement not to enter into such agreements in the
future.\35\ The per-procedure fees charged by VISX and Summit did not
immediately change as a result of the settlement--an example of
``stickiness'' of prices in a tight oligopoly--but competition
eventually prevailed. Last month, VISX announced that it would reduce
its per-procedure fee from $250 to $100 per eye, and Summit announced
that it too would reduce its fee for one of its laser products.\36\ Had
the Commission not taken action, the millions of consumers using this
procedure likely would still be paying substantially higher fees.
---------------------------------------------------------------------------
\35\ Summit Technology, Inc. and VISX, Inc., D. 9286 (Feb. 23,
1999) (consent order).
\36\ CBS Market Watch, Visx gets black eye from price cuts, Feb.
23, 2000 ().
---------------------------------------------------------------------------
The Commission also plays an important role in studying the
changing health care marketplace. Last year the FTC's Bureau of
Economics issued a detailed report on the rapidly evolving
pharmaceutical industry.\37\ The report found that developments in
information technology, federal legislation, and the emergence of
market institutions such as health maintenance organizations and
pharmacy benefit managers have accelerated change in this industry. The
report attempts to provide a more complete understanding of the
competitive dynamics of this market and discusses possible competitive
problems and procompetitive explanations for pricing strategies and
other industry practices. These kinds of studies help inform
regulators, enforcers, and Congress on the important public policy
issues involving health care.
---------------------------------------------------------------------------
\37\ FTC Bureau of Economics Staff Report, The Pharmaceutical
Industry: A Discussion of Competitive and Antitrust Issues in an
Environment of Change (March 1999).
---------------------------------------------------------------------------
CONCLUSION
In closing, we believe that antitrust enforcement by the Commission
has demonstrable benefits for consumers--benefits that for outweigh the
resources allocated to our maintaining competition mission. We are
concerned, however, that our growing workload--largely the result of
the continuing merger wave--has outstripped our ability to keep pace.
Over the past decade, the FTC has performed its mission in the face of
a rapidly changing marketplace, with staffing at about half the size it
was in 1979. We have done so primarily by stretching our resources,
streamlining our processes, and simply doing more with less. In no
small measure, that is attributable to our dedicated, hard-working
staff. We have also shifted resources from non merger enforcement to
mergers as a stop-gap measure. That has left us understaffed in
nonmerger matters, but still not at full strength in mergers. If we are
to keep up with the growing demands that will be imposed by the 21st
Century marketplace, we need significantly more resources. The
President's proposed budget for fiscal year 2001 asks for an additional
69 workyear, over the current fiscal year, for our antitrust
enforcement efforts.\38\ We ask the Committee's support for additional
resources for this important mission.
---------------------------------------------------------------------------
\38\ The President's proposed budget also includes additional
resources for the FTC's consumer protection mission.
---------------------------------------------------------------------------
Mr. Chairman and Members of the Subcommittee, we appreciate this
opportunity to provide an overview of the Commission's efforts to
maintain a competitive marketplace for American businesses and
consumers. We would be pleased to respond to any questions you may
have.
[GRAPHIC] [TIFF OMITTED] T2736.001
[GRAPHIC] [TIFF OMITTED] T2736.002
Senator DeWine. Before we move to the questions, I am going
to at this point call on Senator Grassley for any opening
statement that he would like to make.
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE
STATE OF IOWA
Senator Grassley. What I want to do, because I have to go
to a three o'clock meeting with a large farm group that has
come from my State, is submit for the record my statement, and
then to each of you, I would have a series of questions.
But I would like to take just a couple of minutes outside
of my comments and my questions to visit with my colleagues
here as well as with Mr. Klein about a bill that I introduced.
The reason I am a little bit uncomfortable visiting with you
about it, Mr. Klein, is because you have been responsive to our
concerns about agribusiness mergers and you have put a person
on staff to look into those, and then you see that I introduced
the bill that I have introduced and you might think, well, I do
not think that you are at all concerned about what is going on
in rural America, and I feel that you have tried hard to get an
understanding of that and even to respond to it in some way.
So I have introduced the Agricultural Competition
Enhancement Act and I see it as a starting point, hopefully to
begin a constructive dialogue with both the Justice Department
and the Federal Trade Commission, as well as the Department of
Agriculture, about the best way to address farmers' concerns.
There are other members, in fact, I understand that before I
got here that Senator Leahy had addressed this issue, and so
there are going to be bills put in by other members, and so I
would like to work with Senator Kohl and I would like to work
with Chairman DeWine on this issue.
But most importantly, to Mr. Klein, we do not substantively
amend the antitrust laws. We do not change any of the powers of
the Justice Department. We do put the U.S. Department of
Agriculture at the table in those instances where it affects
the family farm, and probably the one thing you will not like
about the bill is that if through the regular process of
considering mergers the Department of Justice would decide that
they should not be challenged, we would allow, if the
Agriculture Department feels disagreement with the Department
of Justice after they have made their decision, to allow the
U.S. Department of Agriculture, through special counsel, to go
into court in narrow instances. The process is a fairly
dramatic departure from the practice of the last 110 years, but
I do not believe that the antitrust laws are substantively
changed in my legislation.
So I just throw that out for consideration to my
colleagues, because I believe you felt the concerns of famers
in September when you were in Iowa. It is still there, and I
think even if economic times get better, it will still be there
because there is just a feeling that there is just a lack of
competition and too much concentration. So I just throw this
out to you and to my colleagues for your consideration. I
intend to move ahead with the bill, but I also know that the
reality of it is that there are a lot of other ideas that are
here regarding agriculture concentration, as well, and then
probably a lot of people that think that nothing needs to be
done. But I feel strongly that something needs to be done.
Thank you, Mr. Chairman.
Senator DeWine. Senator Grassley, thank you very much. Of
course, your full statement will be made a part of the record,
as will your questions, and they will be submitted to the two
witnesses.
Let me also state that I intend to look at your bill,
Senator Grassley. I am anxious to take a good look at that, as
well as Senator Leahy's bill.
[The questions and answers of Senator Grassley were not
received at presstime.]
[The prepared statement of Senator Grassley follows:]
Prepared Statement of Senator Grassley
Chairman DeWine, thank you for holding this hearing today. As you
know, I've been very interested in antitrust matters and how they
impact my constituents, such as whether the high price of airline
tickets for Iowans is the result of anti-competitive business
practices, or whether mergers and acquisitions in agribusiness are not
being reviewed as carefully as they should. In particular, I've been
following the merger mania trend, because so many of my constituents
are concerned about rapid consolidation in a number of industries, and
the impact mergers have on rural America. I've received phone calls and
letters on practically every industry experiencing consolidation. From
telecommunications to railroads, banking to meat packing, airlines to
the entertainment industry, you name it, I've gotten constituent
communication expressing concern. I am the first to say that mergers
and acquisitions can be beneficial, bringing efficiencies, innovation,
and other benefits to our economy and to consumers. But these
transactions need to be reviewed carefully to make sure they do not
stifle competition. I know that we have the antitrust laws to ensure
that the market functions properly, bad actors are stopped, and
consumers are not harmed. But many of my constituents are concerned
that either the antitrust laws are not being enforced, or they are not
producing effective outcomes. Farmers and small independent producers
are particularly concerned about this issue, because they believe that
vertical and horizontal mergers and acquisitions occurring in agri-
business are not being reviewed appropriately for all possible
ramifications in the marketplace.
Earlier this week, I introduced a bill addressing agriculture
competition issues, and enhancing USDA's role in reviewing and
challenging agri-business transactions. The Agriculture Competition
Enhancement Act, the ``ACE'' Act, is just a starting point, hopefully
to begin a constructive dialogue with both the Justice Department and
Federal Trade Commission, as well as the Department of Agriculture,
about what is the best way to address farmers' concerns. Other members
are working on agriculture competition proposals, so I'd also like to
express my desire to work with Chairman DeWine and Senator Kohl, as
well as other interested members of the Judiciary Committee, on this
important matter.
I look forward to hearing from the Justice Department and Federal
Trade Commission about their efforts to enforce the antitrust laws and
to ensure competition is not harmed by anti-competitive behavior or by
bad mergers and acquisitions. I am interested in hearing from Mr. Klein
and Mr. Pitofsky about the concerns my constituents have, and how they
are being addressed. Thank you.
Senator DeWine. Let me move, if I could at this point, to
the questions. This first question will be to either of you or
both of you. A recent Washington Post article mentioned a study
that analyzed the 700 most expensive mergers during the past 3
years and found that 83 percent of these mergers failed to
increase shareholder value and more than half had reduced
shareholder value.
Now, we certainly understand that shareholder gain in and
of itself is not the focus of antitrust review, but does this
statistic indicate that some merging parties may be overselling
the efficiencies to be gained from their deals, and if so, how
should these types of concerns be addressed, if at all, during
merger reviews? Mr. Klein, Mr. Chairman, either one.
Mr. Klein. I think the way----
Senator DeWine. It is an interesting statistic.
Mr. Klein. It is an interesting statistic. It is also a
little hard to know how you measure post-merger shareholder
value versus what it would have been had the company stayed
separately. There is no control group.
Senator DeWine. That is true.
Mr. Klein. But having said that, I certainly take the point
in the following sense. From our point of view, Mr. Chairman,
the focus of our inquiry, first and foremost, is on the
anticompetitive effect. In other words, we look to see where
the action is. Now, in that process, we do look at efficiency
claims, but I have actually spoken to this and we and the
Federal Trade Commission together actually adopted some
efficiency guidelines.
We know the minds of lawyers and the minds of economists
can be quite imaginative in the merger process, and so we are
pretty tough in analyzing efficiency claims. I would say, on a
transaction, we might get claims that there will be $100
million or $200 million, and much more often than not, we cut
those down in our assessment significantly. But even then, what
we look at first and foremost is if there is any significant
anticompetitive effect, that is what drives the analysis. It is
only when you see a very small anticompetitive effect and
potentially significant efficiencies that you are likely to
come out the other way.
The second point I would make in terms of that study, Mr.
Chairman, is whether there are efficiencies or not, in a lot of
mergers where there is no anticompetitive effect, the merger
may not take. The new company may not work well with the old
company and management styles may be different, particularly
now when we are seeing such dramatic stuff.
And so a lot of times, even though mergers have no
competitive impact in any significant way, in terms of
shareholder value or company benefit, they do not work out
particularly well. That is not an antitrust problem, that is
really a kind of a business problem.
Mr. Pitofsky. I agree with that. I, too, at times wonder
about some of the deals that we see going by. Someone mentioned
inflated stock and inflated value of the acquired asset. I know
it has been said that there is some irrational exuberance in
the stock market. I sometimes think there is irrational
exuberance in the capital market, as well.
I take courage from the fact that a very similar thing
happened in the 1980's. That conglomerate merger frenzy in the
early and mid-1980's, in which everybody seemed to be buying
one of everything, but subsequent studies showed that about, I
think it was about two-thirds of those mergers came apart.
Senator DeWine. How many? I am sorry.
Mr. Pitofsky. I think it was about two-thirds. I can get
the number. Mike Sherer's book discusses this matter. But if
they are a bad idea, then the market will exact its vengeance
over foolish corporate acquisitions.
I do not think the government should be blocking mergers
because they are a bad idea. I think the government should be
alert to blocking mergers that have an anticompetitive or an
anti-consumer effect, and that is where I think we ought to be
putting our resources.
Senator DeWine. Let me follow up to something that Senator
Leahy said and Senator Grassley said. Mr. Klein, I also am very
glad to see that you appointed a counsel, special counsel to
focus on the antitrust issues involving the agriculture
industry. I wonder if this, in your opinion, has this
appointment been useful and what type concerns does the
division have in this area that need to be addressed?
Mr. Klein. Well, first of all, I do think the appointment
is useful. I think we have a very distinguished lawyer with a
lot of prosecutorial experience.
Senator DeWine. And that appointment was made how long ago?
Mr. Klein. I would say probably 3 months ago now.
Senator DeWine. Three months ago?
Mr. Klein. And he has already had the opportunity to travel
out to the Midwest, a number of States, meet with affected
groups. A number of the groups that have been in town over the
last several weeks have had the opportunity to talk with Doug.
He is a very seasoned and distinguished lawyer with very long-
term ties to the State Attorneys General organization, which he
worked with, as well, which is obviously a critical liaison for
us in that regard.
So I am delighted, and really, the Senate Agriculture
Committee as well as this committee encouraged this actionand I
am pleased that we did it.
I think this is an important area in a variety of ways, and
I just want to sort of make a few comments, because a number of
members of the subcommittee have raised the issue. I personally
have been very concerned, and I think Senator Grassley alluded
to the fact, I had the privilege to accompany him and Senator
Harkin out to Iowa to meet with a large group of farmers. I had
the opportunity to go, as well, to Minnesota and meet with a
large group of farmers, and I have been privileged to have a
large number of these farm groups visit with me in my office
here in Washington.
There are a mixture of concerns, some of which are
antitrust related, a lot of which have to do with other
phenomena and other factors in the global market. Some of the
Asian crisis had a huge impact on demand for U.S. farm
products. There are other issues about the economy that are not
antitrust issues.
Having said that, I think, and the Attorney General has
said this, I think it is appropriate for the Department to
focus on these concerns. Agriculture has been a mainstay of
antitrust concern and enforcement. As people have pointed out,
if you go back to the original Sherman Act, these issues were
part of the genesis of why we are here today.
I think, from our point of view, we have had a very, very
powerful enforcement effort. I mentioned Continental-Cargill,
in which the farm community supported us strongly for the tough
monopsony action we took. We took a similar--I remember being
told at one of these meetings that there were going to be--
first, there were red tractors, then yellow tractors and green
tractors, and now it looked like the red and the green are
going to merge and we are going to have turquoise tractors and
this and that, and we did something significant on that merger,
as well.
I think on cotton seeds and corn seeds, two very, very
critical products for farmers, we took strong actions with
respect to Monsanto acquisitions, one of which, the Delta and
Pine Land matter, which was an important cotton seed matter.
Actually, the parties abandoned the transaction in the face of
our efforts.
The other point we have made clear is from the Archer
Daniels Midland through the vitamins cartel cases that we have
dealt with, we are dealing with farm products in which there
are inflated prices, which is an input that farmers have to
bear the cost and suck it in on. So I think that we have done a
lot, but I have personally said that given the concerns, I want
to make sure every stone is unturned. That is why we appointed
Doug. That is why my chief of staff, Adam Golodna, has probably
devoted more time to agriculture issues than any other issue in
the division, and that is why I personally have promised the
Attorney General that we are going to stay alert in these
matters. We will gladly review Senator Leahy's bill, Senator
Grassley's bill, and engage on that, as well.
Senator DeWine. We certainly would appreciate that.
Mr. Klein, have you put together internally any kind of
document that would summarize what you have done in the
antitrust area in regard to agriculture, or is there something
you could supply this committee that we could make a part of
the record of this hearing?
Mr. Klein. I would be delighted to do that, Senator.
Senator DeWine. Thank you very much.
Senator Kohl.
Senator Kohl. Thank you, Senator DeWine.
Mr. Klein, an antitrust issue that has been the focus of
enormous public attention, as you know, is the government's
lawsuit against Microsoft. I recognize that you are limited as
to what you can say regarding a pending court case, but this is
a matter of high public concern, so if I can, I would just like
to pose a few questions to you.
First, do you believe it is likely or possible that you
will be able to reach an out-of-court settlement with
Microsoft, or do you have some sense of the possibility of
this?
Mr. Klein. Senator, with respect to that particular
question, I think, as you may know, we are in the middle of a
mediation process and that is governed by the strictest of
confidentiality rules, and as an officer of the court, I would
not comment on the prospects.
What I can say is two things. I believe the District
Court's findings in this case reveal what the Department had
asserted, which was that Microsoft had engaged in a serious
pattern of anticompetitive practices, and I think that a remedy
ought to be commensurate with those practices. It has always
been my view and the Department's view that settlement is
better than litigation, but the settlement would have to be, of
course, appropriate to deal with the concerns that the court
documented in its opinion.
Senator Kohl. I will ask, and I hope you can make a
comment, is there any possibility of a resolution short of a
structural solution?
Mr. Klein. Again, I think with the matter pending at this
point, I think it would be better for me not to comment on it.
I think there are special sensitivities about a mediation
process, and actually, this process, although there have been
occasional breaches, has been remarkably confidential. So I
think it would be better at this point for me to observe those
rules, Senator.
Senator Kohl. All right. Mr. Klein and Chairman Pitofsky, I
would like to turn to another issue that has been the subject
of much public interest, namely the airlinecompetition. In our
subcommittee, we continue to be concerned about competition in the
industry. For example, start-up carriers face serious obstacles in
establishing competing service to the incumbent carriers. We plan to
hold a hearing shortly on how to improve competitive conditions in this
industry.
But, Mr. Klein, consumers in the upper Midwest have been
suffering from limited choice for much of their air travel due
to the dominance of Northwest Airlines in this upper Midwest
area. As I understand it, you are still investigating
Northwest's conduct and practices. If you conclude that
Northwest has engaged in anticompetitive practices, will you
bring an enforcement action to stop this conduct?
Mr. Klein. Yes, we will, Senator. If we reach such a
conclusion. Indeed, the proof of that is that we investigated
American Airlines' conduct in the Dallas hub and did, indeed,
bring a monopoly action challenging American with respect to
its practices and the way that it essentially tackled these new
low-cost carriers in Dallas. So we are, as you say, continuing
our investigation on Northwest and obviously that will be
decided on the merits of the investigation. But if we determine
there is a violation, I assure you we will proceed.
Senator Kohl. It may be that the conduct engaged in by
Northwest or other major airlines does not meet the legal
definition of illegal conduct under the antitrust laws or the
technical requirements to make out a predatory pricing case,
but as you know, the Transportation Act also authorizes the
Department of Transportation to prevent ``unfair, deceptive,
predatory, or anticompetitive practices in air
transportation.'' So, do you not think that the Transportation
Department could, if it wishes, use its statutory authority to
prevent anticompetitive practices to curb the unfair but
otherwise legal conduct that some airlines may perhaps be
engaging in?
Mr. Klein. There is no question, Senator, that they do have
the statutory power, and I think they are continuing to look at
an appropriate response. Let me just say, though, I think
something significant has happened. I think the case against
American Airlines, which is scheduled to go to trial, I think
is a watershed case because I think that this will be one that
has a real opportunity to set the rules nationally. I
acknowledge what you said, so-called predatory pricing or
predatory capacity cases are tough cases in the antitrust laws,
but I think this is a strong and a meritorious case. Of course,
that will be ultimately for the court to decide.
But I think this case will have significance. This is the
first case since deregulation in which any Antitrust Division
has challenged these kinds of practices and they go to the
heart of the concerns that you are articulating, which is that,
given the opportunity for these new low-cost carriers to grow
and develop and create real competition in the United States,
we can see instead of a single hub dominance structure, we
could see multi-carriers providing real choices throughout the
United States.
I think that this American Airlines case could give us some
real guidance on that. That is not to say there is not an
appropriate role for DOT, but I think this is a major event,
even though I understand right now we are focusing on one
airline, but this will have national repercussions, I have no
doubt.
Senator Kohl. Talking about the telecommunications
industry, gentlemen, Chairman Pitofsky, you have been eloquent
in the past expressing your view, which I share, that when
dealing with mergers in the media, unlike mergers in other
industries, such as cereal companies, banks, or oil companies,
for example, we must give them a different type of scrutiny
because these media mergers affect competition in the
marketplace of ideas so central to the First Amendment.
Are you worried, Chairman Pitofsky, that the level of
consolidation in the media is beginning to threaten these
values by reducing the number of major sources of information
available to the American public?
Mr. Pitofsky. I am concerned about concentration in the
media. We were concerned about it when we reviewed Time-Warner,
Turner, TCI about 4 or 5 years ago, and we insisted upon an
order in that case designed to preserve access for smaller
companies and new entrants. Now, there are some major mergers
going on in this industry, but there is also innovation in the
form of the Internet, extension of cable resources to many
homes.
So whether there is more concentration right now or less
concentration, I am not exactly sure. I do look at each of
these mergers, and especially the mega-mergers, with heightened
concern. There is no question in my mind that we should give
these transactions the most careful review.
Senator Kohl. Mr. Klein, with all the consolidation we have
seen, are you concerned that we are in danger of a very few
companies controlling the broad band delivery of the Internet?
Mr. Klein. Well, we have got some investigations ongoing
into those issues right now. What I think is the following on
this, Senator Kohl, that it is very early in the process of
broad band rollout and there are going to be some very
interesting and tricky developments with respect to both the
cable modem, the DSL on the telephone lines, satellite, and
other forms of delivery.
What I think is encouraging for the first time is because
of digitalization, we now have the possibility that instead of
having a single cable pipe--that always worried me much more, a
single telephone line, because if you control the means of
distribution, whether you force access or not, the consumer
still only has one means of distribution.
And my own view, the model that I have really cared for and
we made a big dent in it, not a complete solution, in the
Primestar case is let us get lots of means of access to the
home so that then, through digitalization, you can bring voice,
you can bring data. The cable modem, for example, can now,
instead of just bringing you cable TV, can bring you voice, can
bring you Internet access, can bring you data, and then you
want to see that happen on the other means of access to the
home or to the business.
Once that happens, if there are three or four pipes and
digital transmission and broad band, we will see competition
that we have not seen in any of these media. If anything, I am
going forward more encouraged because my hope is that through
the multiplicity of pipes, we are going to see something that
we have not seen, which was one copper wire or one cable into
the home.
I agree with the chairman, of course, that I think these
mega-mergers in the media deserve very, very careful and
thorough scrutiny and both agencies, and we consult a lot about
this because we are both involved in it, but both agencies, I
believe they are getting that thorough scrutiny.
Senator Kohl. Chairman Pitofsky, we have heard complaints
from small medical device manufacturers about the conduct of
large buying organizations that buy medical supplies for
hospitals, the group purchasing organizations. The small
medical device manufacturers claim that hospitals will not buy
their products because these products are not on the approved
lists of devices kept by the GPO's. They claim that hospitals
will not buy products which are not on the GPO list because
hospitals would lose the significant discounts they get for
buying products which are on the approved list.
We understand that buying medical devices through GPO's
lowers hospital costs generally, but could there be a problem
here, namely that the smaller medical device manufacturers are
insulated from competition, and just as important, will you
commit to looking at this, and if necessary, revisiting your
health care guidelines which permit GPO's?
Mr. Pitofsky. Yes, I certainly would commit to do that, and
I think you framed the question exactly right. On the one hand,
you want these joint buying organizations to have the advantage
of introducing efficiencies, especially, or primarily, when
they are passed on to consumers in one way or the other.
On the other hand, these joint organizations do raise the
question of whether or not they can be a device to exclude
smaller competitors or new entrants, and you are trading that
sort of thing off constantly. We have some matters in this
area. The health care guidelines address it. Our new draft
joint venture guidelines address some of these issues, and we
certainly will keep a very careful eye on the issue that you
raise.
Senator Kohl. Do you have a view on that, Mr. Klein?
Mr. Klein. I agree with Chairman Pitofsky.
Senator Kohl. Thank you, Senator DeWine.
Senator DeWine. Senator Kohl, thank you very much.
Senator Hatch is in a meeting at the present time with
Attorney General Reno, and he has asked me to express his
regrets to both of our witnesses for not being able to be here
today. But he has requested that on his behalf I pose to you
the following two questions. So assuming that I can read the
honorable Senator's writing, I will read the questions to you.
These are Senator Hatch's questions.
Mr. Klein, as you well know, our antitrust laws allow for
extraterritorial prosecution of anticompetitive acts abroad. In
recent years, you have used this extraterritorial jurisdiction
to prosecute anticompetitive behavior, such as those in the
Bilkington Glass matter, and you have done this to the benefit
of U.S. consumers and I want to commend you for that.
Now, we are all aware of the recent increases in gasoline
prices at the pumps. Much of this is attributable to the
anticompetitive restrictions on oil production by OPEC and by
the OPEC countries. My question is this. I would like to know
if you have examined the possibility of applying our antitrust
laws to examine any anticompetitive behavior on the part of
foreign oil producers, that is, whether these producers are
private actors or government bodies acting in a commercial
capacity, which, as I understand, will not afford them
protection under our foreign sovereign immunity laws. Do you
believe this might be an avenue the administration, through
trade negotiations, might address?
Mr. Klein. Senator, you can tell my friend, Senator Hatch,
that this is actually an area in which the Federal Trade
Commission has taken the lead, so----
Senator DeWine. Would you like to defer the question?
Mr. Klein. I would like to have Chairman Pitofsky respond.
Senator DeWine. All right.
Mr. Pitofsky. What an unusual honor. Let me say that I want
to answer the question, because I notice I was quotedin the
paper this morning as saying that we have opened an investigation of
the antitrust aspects of the OPEC cartel. Not quite true. Not quite
true.
We have been asked to testify, and our bureau director will
testify next week before a House committee, and we have been
asked to address the question of whether or not the antitrust
laws could apply to OPEC. I am aware that there are some old
cases, one in the Ninth Circuit about 15 years ago that said
OPEC was protected by the state action doctrine.
So we are looking at this question and we are reviewing the
old cases. We want to see how they would apply to the modern
situation with respect to the international oil industry, and
Rich Parker, our bureau director, will testify next week. But
we have not opened a formal investigation, but we will look at
these questions.
Senator DeWine. And you have not opened a formal
investigation, why? Why have you not done that?
Mr. Pitofsky. I think, given the history of antitrust
enforcement in this area, we really have to take the measure of
these older cases, the state action doctrine. I know the state
action doctrine has been interpreted by the Supreme Court in
recent years in the non-oil context, so before we fire off with
anything approaching an investigation, we want to do our
research and answer the questions that are put to us by the
Congress.
Senator DeWine. Mr. Chairman, let me ask you the second
question. Now, this one is directed at you, but if you want to
send this over to Mr. Klein, I am sure that would be more than
fair. This is Senator Hatch's second question.
The administration has asked for substantial increases for
the budget of both the Antitrust Division as well as the FTC.
The administration proposed to pay the requested increases with
significant increases in HSR antitrust filing fees. The
justification for the increases are yet to be provided, and
both this committee and the appropriators will determine the
appropriate funding level in due course.
What I want to address, Senator Hatch continues, is the
FTC's funding in general, and specifically the funding of the
FTC's worthy but non-antitrust activities with antitrust fees
imposed on those in the business community. Do you believe it
is justified to fund the FTC's expanding non-antitrust
functions with increased fees imposed on merger parties as the
President proposes, or should we begin to consider other
appropriate avenues for funding the Commission?
Mr. Pitofsky. A very interesting question because, until
recently, merger fees covered our antitrust mission, but the
Treasury covered our non-antitrust mission. It is only in the
last few years that our entire budget has been covered by
merger fees. It is a call that is made by Congress and our
appropriators rather than appropriate for me. There is enough
money right now in merger fees to cover our entire budget, and
if we amend the merger filing fee approach, which I know
Senator Hatch has proposed and each of you has supported, then
there would be enough money to cover even an expanded operation
at the FTC.
I support a sliding scale and raising the threshold amount.
I can only say that whether it should cover only our antitrust
function or all of our functions is a question that I am going
to leave to Congress to decide.
Senator DeWine. This is my question. Mr. Chairman, let me
ask you one additional question. As you know, this subcommittee
held a hearing in 1998 concerning the BP-Amoco merger and what
its impact would be within the petroleum industry. At that
time, we anticipated the BP-Amoco merger was the beginning of a
wave of consolidation, and in fact, we have seen a good deal of
consolidation since then.
At that time, however, some representatives in the industry
asserted that larger oil companies would be in a much better
position to compete in the global market for oil production,
and/or oil exploration. Is there any evidence thus far that
this has been the case, and have you seen any other benefits to
consumers as a result of mergers in the oil industry, or is it
too early to tell?
Mr. Pitofsky. We have struggled with the question of
whether or not oil companies in this country and around the
world are not large enough to achieve all the efficiencies that
they possibly could. I have always been very skeptical about
the argument that you need to be larger and larger and larger
to be better. I have heard the quote from Steve Case, actually,
of AOL, that larger is not better, better is better, and I
think that is exactly right.
As to these particular mergers, and BP-Amoco is the second
in the string, then Exxon-Mobil and then BP-ARCO, we have been
presented with contentions, claims that these mergers will
reduce costs. We never were required to address that issue in
Exxon-Mobil because the company agreed in a clean sweep to
divest great amounts of assets that overlapped. So having
eliminated what we felt was the competitive problem, we did not
have to get to the efficiency issue.
I think it is quite possible in an international, in a
global oil market, that some of these mergers would lead to
significant efficiencies. We have just never gotten to the
point in any of our enforcement efforts where we had to argue
pro and con on that issue. I think it is possible, but I would
not take it sort of as given that you have to be larger in
order to be more efficient. By and large, myexperience is that
is not the case.
Senator DeWine. I appreciate your answer. At the hearing
that we held, the proponents of the mergers were adamant about
this particular point, that they had to be this big in order to
be able to sustain the production and the exploration. I had
some questions about it at the time, and I guess time will tell
and maybe give us a better idea whether they are correct in
that area or not.
Let me address this question to both of you, or either one
of you. The increasing importance of the world market means
that companies need the capacity and ability to compete
globally. An effective international enforcement of the
antitrust laws is essential to enable U.S. businesses to
compete fairly.
In this setting, the agreements and cooperation we have
with foreign governments are certainly a critical aspect of
maintaining competition in the global marketplace. We have seen
advances during the past several years, especially with regard
to our work with the Canadian and the European enforcement
agencies, but we seem to be having less success, certainly a
lot less success in other markets, such as the Japanese flat
glass market. What are your thoughts on the overall progress of
international enforcement and what steps are you taking to
improve that enforcement?
And second, a related question, we have signed a positive
comity agreement with the Japanese government. Article 8 of the
agreement provides a mechanism under which you are able to
consult with the Japanese enforcement agencies on a yearly
basis on a variety of antitrust and competition issues. Are you
willing to use that provision to continue discussion with the
Japanese government on the flat glass issue? Mr. Klein.
Mr. Klein. Sure. I think it is a very important question,
and I think, as you know, really prompted by comments that you
and other members of the subcommittee have made, the Attorney
General, on my recommendation, appointed the International
Advisory Committee and they issued its report and addressed
some of the front-end issues you asked about, Mr. Chairman.
But my general sense is that you are right, that this
progress in terms of international cooperation is really at its
height with respect to our work with Europe and Canada and is
really at very beginning stages in many ways with respect to
the Pacific Rim, Japan, Korea.
I thought we took a major step last year in signing this
cooperation agreement. It took many, many years. But there is a
very long-term view in Japan about antitrust enforcement. Until
quite recently, they did not even review global mergers outside
their borders. They have really not been, I think, a major
player in the same way that the Europeans and Canadians have.
Having said that, I think this new cooperation agreement is
a very important first step. We have in the past consulted at
our annual consultations with the Japan Fair Trade Commission
respecting flat glass. We made inquiries not only during
consultation time, but separate inquiries, and we have met
numerous times and will continue to meet, I personally, my
principal deputy who I charged with making sure that we took
extra efforts in this area, to work with the parties to see
what actions are appropriate, and I will certainly in our next
bilateral consultation raise our concerns with respect to this
matter again, Mr. Chairman.
Senator DeWine. Mr. Klein, last month, Senator Kohl and I
announced the results of a General Accounting Office, GAO,
study that we sponsored, and this had to do with the
development of competition in local telephone markets. The
report concluded that local telephone markets are becoming
increasingly competitive, but that incumbent local telephone
providers still have 97 percent market share in the local
markets.
When we announced the study results, we knew the continuing
importance of competitor access to the local network. This
issue was raised yet again in a recent dispute between Bell
Atlantic and local competitors in New York. Specifically, Bell
Atlantic had some problems handling orders submitted by
competing local phone companies and had to pay $13 million in
fines. As you know, Bell Atlantic was the first company to
fulfill the requirements of Section 271 of the
Telecommunications Act of 1996, and we hope to see others do so
in the near future.
Specifically, Mr. Attorney General, what steps can be taken
to ensure that we do not have similar problems in other local
markets, and more generally, what is your assessment of the
progress in competition among local telephone service providers
under the Telecommunications Act? Why have we not seen more
applications under section 271?
Mr. Klein. Again, it is a series of very important
questions. Let me just say, I think the principal problem we
had with 271 and why it took a while before we saw our first
successful application in Bell Atlantic was arguments over the
price of access. When you have one company competing with
another over the same copper wire, then the charge that the one
company makes to the other can be very critical, and there was
a lot of litigation that the local incumbents brought to
challenge the pricing and, indeed, ultimately the
constitutionality of the Act. We won all those cases, in
essence and substantially, and I think we are now back on
track.
As a result, we saw the Bell Atlantic application. We have
an advisory role in that process and we were concerned about
Bell Atlantic. We thought they were very close to the finish
line, but were not over the finish line, and we communicated
that view in the 271 process.
The Commission did grant their application and it was a
tough call. It was one where I thought reasonable people could
disagree on. But I think it is very important, Mr. Chairman, to
make sure that all the ``i''s are dotted and ``t''s are crossed
so that we do not have the kind of post-entry problems we had
in Bell Atlantic.
As a result, we had another application quite recently by
SBC out of Texas, and again, this application is a serious
application in that it reflects real progress and the
beginnings of some real competition in Texas. But we still
thought, while SBC had gone a long way, it had not gone over
the finish line and we came in with a clear recommendation
against the FCC approving that, because I do think, again, in
order for this to stick--it is easy to get the application in,
but in order to make competition stick, we need to do it.
I am optimistic about this for two reasons, Mr. Chairman. I
think what I said to Senator Kohl before, because of what we
are seeing with respect to digitalization, there may be
alternative pipes that can conduct telephony. AT&T is now in
the process of rolling out and developing a roll-out plan for
telephone over cable, and there is going to be obviously
Internet telephony that is going to be expanded.
I think the solution will become that much better when we
have multiple means of access so that consumers can choose
different pipes. Until then, we will continue to work with the
FCC to ensure tough measures so that when people get in there,
we will see greater competition.
I want to say, we have seen tremendous success on the
business side. It has been a true success story in terms of
local competition. In large measure, that has been because the
businesses are typically in concentrated areas. You can lay
your own fiber. The competitive people can. But we are
beginning to see, and it is small but it is significant, we are
beginning to see 5, 6, some States 7, 8, 9 percent competition
in local markets.
Three years ago in this Congress, or 3\1/2\ years ago when
the Congress passed the Act, or 4 years ago, there was zero. So
we are moving in the right direction and it is going to move
more rapidly in the years to come. I have always said that this
is going to take some patience, but we are on the right track,
and I think that is being borne out.
Senator DeWine. Mr. Klein, I understand that you are
currently reviewing the application of American Airlines to
join in an alliance with Swiss Air and Sabina as a replacement
for Delta Airlines. My understanding is that the immunity for
alliances between KLM, Northwest, and United-Lufthansa are both
past the 5-year expiration and, therefore, eligible for review,
as well.
Now, without taking a position on the competitive merits of
any of these alliances, does it make sense to review one in a
vacuum without examining the entire array of alliances
currently in existence?
Mr. Klein. I think this is an issue we have been doing some
thinking about at the Antitrust Division in the following
sense, Mr. Chairman. These antitrust immunity agreements--we do
not favor antitrust immunity as a rule. We are in the
enforcement business, not the immunity business. These immunity
agreements come out of the fact that these deals are negotiated
on a bilateral basis with our trading partners throughout the
world in terms of issues of market access and the like. And so
often, in order to get open skies agreements, which still
increase competition, the Department of Transportation confers
antitrust immunity.
We are now moving into a new area. There are some important
policy considerations as we, shall we say, enter this next
phase, and I think we will certainly be taking a hard look and
meeting with our colleagues at the Department of Transportation
to talk about how to think about the second phase and what
changes might or might not be appropriate.
Senator DeWine. I want to thank our panel. Again, as
always, you both have been very eloquent and very helpful to
this committee and I think to the American people. I think that
today's hearing has made it clear that antitrust enforcement is
very important in today's economy, especially given the
increasingly global economy and the continuing impact of
mergers here at home.
Both our witnesses have been doing an excellent job to help
promote antitrust enforcement. Their testimony here today has
been very useful to this committee as we continue to work to
improve the competitive environment for businesses and
consumers in this country.
Let me conclude, though, by making two specific points
regarding issues that were raised during today's hearing.
First, with regard to the Hart-Scott-Rodino pre-merger
notification law, I think it is important that we continue our
efforts to reform it. The law has not been substantially
modified since it was enacted in 1976 and it is clear from our
discussions with the business community and members of the
antitrust bar that reform is long overdue. I look forward to
working with our witnesses, along with Senator Hatch and
Senator Kohl, to address this very important issue.
Second, I am also very concerned about the state of
competition in the Japanese flat glass market. I appreciate the
efforts of Mr. Klein and others at the Antitrust Division to
engage their counterparts in the Japanese enforcement agencies
on this issue, and I am hopeful that those efforts will succeed
in opening the market in Japan.
But I must say that my patience is wearing thin. American
businesses have been unfairly excluded from the Japanese flat
glass market for years and I am beginning to wonder if our
enforcement agencies have enough tools currently at their
disposal. If we do not see progress in the near future, I will
consider legislation to remedy this problem. For global trade
and commerce to flourish, we must have fair access to markets
all over the world, and the flat glass market in Japan is most
certainly not open to fair competition today. I will be
watching carefully to see if this changes.
Again, let me thank both of our witnesses for joining us
here today in what I think has been a very productive hearing.
The subcommittee is adjourned.
[Whereupon, at 3:31 p.m., the subcommittee was adjourned.]