[Senate Hearing 110-23]
[From the U.S. Government Publishing Office]
S. Hrg. 110-23
OVERSIGHT OF THE ENFORCEMENT OF THE ANTITRUST LAWS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MARCH 7, 2007
__________
Serial No. J-110-17
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York LINDSEY O. GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
Bruce A. Cohen, Chief Counsel and Staff Director
Michael O'Neill, Republican Chief Counsel and Staff Director
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
HERB KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York SAM BROWNBACK, Kansas
BENJAMIN L. CARDIN, Maryland TOM COBURN, Oklahoma
Jeffrey Miller, Chief Counsel
Peter Levitas, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 1
prepared statement........................................... 138
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 4
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa. 3
WITNESSES
Barnett, Thomas O., Assistant Attorney General, Antitrust
Division, Department of Justice, Washington, D.C............... 6
Majoras, Deborah Platt, Chairman, Federal Trade Commission,
Washington, D.C................................................ 7
QUESTIONS AND ANSWERS
Responses of Thomas Barnett to questions submitted by Senators
Biden, Grassley, Kohl, Leahy and Specter....................... 26
Responses of Deborah Majoras to questions submitted by Senators
Leahy, Kohl, Specter and Grassley.............................. 59
SUBMISSIONS FOR THE RECORD
American Antitrust Institute, Albert A. Foer, President,
Washington, D.C., statement and attachment..................... 83
American Homeowners Grassroots Alliance, Arlington, Virginia,
statement...................................................... 104
Barnett, Thomas O., Assistant Attorney General, Antitrust
Division, Department of Justice, Washington, D.C., statement... 109
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, prepared
statement...................................................... 136
Majoras, Deborah Platt, Chairman, Federal Trade Commission,
Washington, D.C., statement.................................... 140
National Association of Exclusive Buyer Agents (NAEBA), statement 178
OVERSIGHT OF THE ENFORCEMENT OF THE ANTITRUST LAWS
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WEDNESDAY, MARCH 7, 2007
U.S. Senate,
Subcommittee on Antitrust, Competition Policy
and Consumer Rights,
Committee on the Judiciary,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 2:25 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
Chairman of the Subcommittee, presiding.
Present: Senators Kohl, Feingold, Hatch, and Grassley.
OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Chairman Kohl. Good afternoon, ladies and gentlemen. We are
glad to have you here today.
Today's hearing marks the first time in more than 4 years
that we have held an oversight hearing to examine the
enforcement of our Nation's antitrust laws. Today we will hear
from Assistant Attorney General Barnett and FTC Chairman
Majoras--both able and talented public servants. We commend
Chairman Majoras for her leadership and her efforts to bring
more competition to the prescription drug market.
However, we are concerned with the direction that the
Antitrust Division has taken under this administration. With
the exception of criminal enforcement, there is an alarming
decline in the Division's antitrust enforcement efforts across
the board, particularly with respect to mergers. Compared to
the last 4 years of the Clinton administration, the number of
merger investigations initiated by the Justice Department in
the most recent 4 years has declined by nearly 60 percent, and
the numbers of mergers actual challenged has declined by 75
percent.
These are not just statistics. These are real cases
affecting consumers in many sectors of our economy. Whether it
is the Whirlpool-Maytag deal, AT&T's acquisition of BellSouth,
or anticompetitive conduct in agriculture, this Division has
simply not done enough, in our opinion, to protect consumers.
As a result of this hands-off approach, the Division is
encouraging even more consolidation, including companies who
have lost their attempts to merger to try again in this
environment. To quote the New York Times, merger policy ``often
appears to be little more than `anything goes.' ''
Now, while all of these issues are worthy of significant
attention, the most important antitrust issue for me and my
constituents in Wisconsin this year is AirTran's bid to acquire
Midwest Airlines in a hostile takeover. Midwest Airlines, which
is based in Milwaukee, Wisconsin, is a true extraordinary
success story. Midwest Airlines is a unique company in the
airline industry, home-owned and operated, an airline that
offers the highest quality of service and is actually beloved
by its customers. Midwest Airlines has been recognized as the
best domestic airline more than 45 times in the past 17 years
by a variety of industry surveys. Beyond this, Midwest Airlines
is vital to the economy of Wisconsin and to the Greater
Milwaukee area. It offers direct service to 33 key business
center severy day from its hub in Milwaukee. Should AirTran
acquire Midwest Airlines and decide in the future to reduce
service from Milwaukee, the negative consequences for the
Wisconsin economy would be enormous.
Unfortunately, the business model of AirTran is very
difficult for Midwest Airlines. It is a no-frills, discount
airline with low ratings for quality and customer service in
industry ratings. No one doubts that the quality of Midwest's
stellar service offered to consumers will suffer should AirTran
complete this acquisition. Even more worrisome is AirTran's
history of promising high levels of service when they enter a
market and then abruptly breaking these promises and sharply
reducing customer service. Dallas-Fort Worth, Washington
Dulles, and Pittsburgh arejust three examples of cities in
which AirTran has sharply reduced service in recent years,
contrary to optimistic promises made just a few years earlier.
In sum, an acquisition of Midwest Airlines by AirTran would
very likely cause a substantial injury to consumers, and also
to business--specifically the many thousands of travelers and
businesses throughout Wisconsin and around the Nation who rely
on Midwest Airlines for reliable, high-quality, and
competitively priced air travel.
I was, therefore, very disappointed and surprised to learn
that the Justice Department recently closed its investigation
of the proposed AirTran-Midwest deal after only a cursory
review lasting fewer than 30 days. Despite the obvious dangers,
as I detailed, of this acquisition in terms of frequency of
service and quality of service for the many thousands of
Midwest Airlines customers, your Division off the Justice
Department did not initiated the full ``Second request''
investigation that most in the industry did expect. I cannot,
frankly, understand how the Justice Department could conclude
after such a brief review that this deal with pose no risks to
competition and consumers, considering the comments that I have
made here today. So, Mr. Barnett, I will ask you about this
very important deal and for a commitment to reopen this
investigation to examine its impact to consumers and businesses
in Wisconsin.
We will discuss this essential issues and, if time permits,
others, which include consolidation in the oil and gas
industry; reverse payments in the pharmaceutical industry;
mergers and investigations in the agriculture sector; the
interpretation of the Tunney Act, among many others. We will be
monitoring your agencies carefully, Mr. Barnett and Chairman
Majoras, with respect to these and other issues as you carry
out your vital responsibilities on behalf of American
consumers.
Senator Grassley, would you like to make a comment or two?
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE
STATE OF IOWA
Senator Grassley. Please, yes. First of all, with your
comments about the airline issue and also the agriculture
issue, I would associate myself with your remarks and probably
extend a little bit on agriculture at this point.
First of all, we need to ensure that the Justice Department
and the Federal Trade Commission are being aggressive in the
enforcement of antitrust laws. It critical that companies
compete in a fair manner so that consumers can enjoy more
choice as well as lower prices for goods and services. Vigorous
of antitrust laws will help create and maintain an open, fair,
and competitive marketplace. And, of course, if that is good
for the American consumer--and it is--it is also good for the
American economy. We also need to ensure that the department of
Justice and the Federal Trade Commission have the necessary
resources and expertise to do a good job.
I probably will not be able to be here, so I am submitting
some questions in writing for you to respond in writing. I
would appreciate it if you would do that. There are a couple
points, though, that I want to make, and they follow on one of
the things that the Chairman said.
First, I am concerned about the state of American
agriculture. There is just too much concentration in the
industry. I am concerned about reduced market opportunities,
possible anticompetitive and predatory business practices,
vertical integration, and fewer competitors. For example, late
last year I wrote a letter to the Antitrust Division expressing
my serious reservations about the proposed Smithfield Foods and
Premium Standard Farms merger. Because of my concern about
agriculture business consolidation, I am particularly
interested in how the Antitrust Division and the FTC review
agriculture culture mergers. The antitrust laws are supposed to
protect consumers, but they are also supposed to keep the
market fair and open for all market competitors.
In 2003, the Judiciary Committee held a hearing on
monopsony in agriculture culture and looked at the buying
powers of processors in our Nation's agriculture cultural
markets. Former Assistant Attorney General Pate agreed that
agriculture cultural markets can be very different from other
markets, although Mr. Pate indicated that the Justice
Department does look at vertical concerns in specific mergers.
I am not convinced that the Antitrust Division is considering
all the anticompetitive effects of monopsonies and bargaining
power. I am not sure that they are looking at all the right
things when they review agriculture culture mergers. We should
seriously consider whether the Antitrust Division should issue
guide lines specific to agriculture culture, as it has done
with specific guide lines, for instance, in the health care
industry, or whether it should issue general monopsony guide
lines. I hope that the Chairman of the Committee as well as the
Chairman of the Antitrust Subcommittee will work with me to
craft legislation to deal with the unique antitrust concerns
facing agriculture culture today.
In addition, I would want to compliment Commissioner
Majoras on the FTC's efforts in ensuring that drug companies,
both name brand and generic, play by the rules and do not stiff
the American consumer. I would particularly like to compliment
the Commission's proactive efforts in pursuing reverse
payments. I am working with the FTC, Senator Kohl, Senator
Leahy, and others to refine the legislation that recently was
approved by the Judiciary Committee to put a stop to these
anticompetitive deals.
On another matter, I urge the FTC to quickly complete a
study on the practice of authorized generics that I requested
with Chairman Leahy and Senator Rockefeller so that we can move
forward on these issues.
I appreciate this opportunity, Mr. Chairman, to make a
statement at this point.
Chairman Kohl. Thank you, Senator Grassley.
We also have a statement for the record from Senator
Harkin, and now to the Ranking Member on this Committee,
Senator Hatch.
STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE
OF UTAH
Senator Hatch. Well, thank you, Mr. Chairman. I appreciate
your leadership on this, and we welcome you two leaders to the
Senate, and we appreciate the work that you do down there. It
is very important stuff.
It is a pleasure to be with you today for the first of what
I hope will be several hearings which thoroughly explore and
examine the vital subject of antitrust law. Today's topic is
the Federal Government's enforcement of those laws.
You might ask, Why is this important? Why is so
distinguished a panel with us here today? In one word:
competition. Competition is the corner stone of our economy. It
ensures efficient markets which, in turn, provide consumers
quality goods at market prices, and antitrust laws are the
rules that ensure that the American economy maintains that
competition or that competitive effect.
In effect, antitrust law ensures one of the fundamental
tenets of the American dream: If you build a better mousetrap,
you will be successful in the American marketplace. That is why
effective, efficient, and fair enforcement is so important.
Today's hearing is intended to assist us in our on going
oversight of the enforcement efforts of the two Government
entities that are charged with enforcing these crucial laws. As
with any endeavor, I am sure that there is some room for
improvement with respect to current enforcement efforts, but I
have personally been generally pleased with the enforcement
efforts of both the Antitrust Division and the Federal Trade
Commission.
Now, this can be seen in the vital area of merger review.
Assistant Attorney General Barnett has just instituted a
revision to the Merger Review Process Initiative that holds the
promise of moving the Division's resources more efficiently to
those cases that truly require further review and
consideration.
However, we have already seen some progress. In 2006, the
Antitrust Division brought more merger challenges than the
previous 2 years combined. It should also be noted that during
the same period, the Division increased the number of criminal
fines that it obtained by 40 percent to $470 million. That is
the second highest level in the Division's history.
Change can also be seen in how the Antitrust Division
analyzes mergers. No greater change can be seen than in the
Whirlpool-Maytag merger. Under a traditional analysis, the
Division would have placed great reliance on the market share
that the resulting corporation would have enjoyed. However,
these are different times when globalization and the speed of
commerce are rapidly changing markets.
Therefore, the Division worked with the parties to the
merger and developed a detailed market analysis. What didthat
show? That the merger would not have an ill effect on
competition since overseas competitors were quickly expanding
their market share. It also showed that appliance retailers
could and do quickly change the appliance brands that they
choose to carry in their stores--only further under lining the
premise that a traditional market analys is might not be as
effective in this situation. Equally as impressive in the
Whirlpool-Maytag merger was the fact that the Division's
decision was made in 6 months. The Federal Trade Commission is
also making strong strides.
Just as the Division has sought to create a newopenness
about how it reaches its conclusions on merger reviews, the
Federal Trade Commission has also issued detailed decisions in
such cases as frustrated--``frustrated,'' I think that is a
Freudian slip--as Federated Department Stores' acquisition of
May Department Stores. The FTC has also sought greater
transparency with there forms to the merger review process.
These reforms, which generally formalize practices that the FTC
currently uses, aim to reduce the transaction costs that are
accrued during an investigation.
However, most impressive is that even though pre-merger
filings have increased by 28 percent since fiscal year 2004,
the numbers of requests for additional information kept pace
and increased by approximately 40 percent during the same
period.
I am also very interested in the role that the FTC is
playing in maintaining competition and protecting consumers in
energy markets. The Commission has performed admirable work in
this by consistently monitoring the retail gasoline and diesel
prices in 360 cities.
Now, in closing, I would like to thank both of today's
witnesses for being here today and for their responsiveness to
our requests for information prior to the hearing. And while I
am sure that we will all disagree from time to time on
particular issues, I have been generally impressed by the
strong commitment and leadership both of you have demonstrated
as you have served in these very, very important positions. And
I look forward to working with you through out the coming
years, and I hope that this Committee will become a great help
to antitrust enforcement in this country and the knowledge of
antitrust and what we need to do in this country as well. And I
am sure under Chairman Kohl's leadership we will be able to do
that.
Thank you, Mr. Chairman.
Chairman Kohl. Thank you very much, Senator Hatch.
At this time we will introduce our two witnesses. Assistant
Attorney General Thomas Barnett was confirmed by the Senate on
February 10, 2006. He has served within the Antitrust Division
and other leadership positions since April 18, 2004. Prior to
joining the Justice Department, Mr. Barnett was a partner in
the law firm of Covington & Burling. Mr. Barnett graduated from
Harvard Law School, received an economics degree from the
London School of Economics, and received his B.A. from Yale.
Our second witness will be Chairman Deborah Platt Majoras,
who was sworn in to lead the Federal Trade Commission on August
16, 2004. Prior to this position, she was a partner at the law
firm Jones Day in Washington, D.C. Before that, she served in
leadership positions in the Antitrust Division of the Justice
Department for 3 years. Ms. Majoras graduated from Westminster
College and received her J.D. from the University of Virginia.
We welcome you both, and would you please stand and raise
your right hand? Do you affirm that the testimony that you will
give here today will be the truth, the whole truth, and nothing
but the truth, so help you God?
Mr. Barnett. I do.
Ms. Majoras. I do.
Chairman Kohl. We thank you.
Mr. Barnett, would you please proceed with your testimony?
STATEMENT OF THOMAS O. BARNETT, ASSISTANT ATTORNEY GENERAL,
ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, D.C.
Mr. Barnett. Thank you, Mr. Chairman. It is an honorand a
privilege to testify before this Committee, with which there is
a long and productive working relationship. I have submitted
written testimony, and I will confine my oral remarks to a few
points.
The United States economy is truly one of the great wonders
of the world, and it is our free enterprise system and the
antitrust laws that we have that drive the creativity, the
innovation, and the growth that is the hallmark of that
economy. I am proud of the efforts and the successes of the
Antitrust Division in enforcing the antitrust laws and
providing support for that key under pinning of our free
enterprise system. I will touch briefly on a few areas.
First, our cartel enforcement, our criminal enforcement
against price fixing, customer allocation, and other naked
agreements not to compete is clearly the world's leader ship
program, or leads the world. As Senator Hatch acknowledged,
last year we obtained over $400 million in fines. We continue
to--this year we have already almost tied the record number of
days for prison sentences imposed, and that is less than
halfway through the year. We are well on track to continue the
excellent record that the Antitrust Division has in the
criminal enforcement area, and continue our leadership position
in the United States and around the world.
Merger enforcement is an area where we also remain very
active. It is a fact-intensive investigation where we seek to
apply the law, and the general principles set forth in the
Merger Guidelines, to the facts developed in our investigation
to make a decision or determination as to whether a merger
threatens to harm the competitive process and consumer welfare.
Last year the Division had 16 mergers in which we either
filed a complaint or in which the parties modified the
transaction in response to our investigations. That is the
highest number of enforcement actions during the last 5 years,
and certainly since 2001, at the end of the so-called merger
wave. And these actions were in important basic industries,
including steel, nickel, the newspaper industry, and school
milk.
At the same time, we have made progress in terms of
improving the efficiency of our merger review process, reducing
the average length of investigations, and reforming the second
request process to reduce the burdens on the parties, as well
as on the Division.
Our non-merger civil enforcement program encompasses a
broad range of activities. One stellar example includes the
real estate industry where we have engaged not only in
enforcement activity but also advocacy efforts to try to remove
impediments to competition. This is a critically important
industry in that it affects almost every American. It is the
largest asset most Americans own, the largest single
transaction most Americans engage in. That is one of the
reasons why we focus particular attention in this area, and we
believe that we have had some significant successes.
No discussion of Division activities would be complete
without addressing our extensive activities on the
international front. It is truly a global economy and a global
competition enforcement network. We engaged in more than 100
jurisdictions that now have antitrust regimes on multiple
levels. We are active in leadership positions in the
International Competition Network which the FTC and the DOJ
helped to found in 2001. We are active in the leadership of the
Competition Committee of the OECD. We engage in bilateral
discussions with many of our partners, including the European
Commission, Canada, Mexico, Japan, Korea, Australia, and
others. It is a truly important area of our work, and we devote
substantial resources to it. China is another country that we
have been paying particular attention to, given its importance.
None of the activities and none of the accomplishments of
the Division would be possible--and I would be remiss if I did
not underscore this--without the talent, the dedication, and
the experience of the many people who serve within the
Antitrust Division. It is certainly a pleasure and an honor for
me to be a colleague with them and to serve the United States
economy in this manner.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Barnett appears as a
submission for the reord.]
Chairman Kohl. Thank you, Mr. Barnett.
Ms. Majoras?
STATEMENT OF DEBORAH PLATT MAJORAS, CHAIRMAN, FEDERAL TRADE
COMMISSION, WASHINGTON, D.C.
Ms. Majoras. Thank you, Chairman Kohl, Ranking Member
Hatch, other members of the Subcommittee. I am very pleased to
appear before you today to discuss the FTC's significant
efforts to ensure that competition, which we have all
acknowledged today is so critical, remains robust. We endeavor
to focus our enforcement efforts on sectors of the economy that
have extraordinarily significant impacts on consumers, such as
health care, energy, real estate, and technology.
Merger enforcement, with its increasingly global component,
continues to consume a significant amount of our resources.
Using the streamlined merger review procedures that I
introduced last year, in fiscal year 2006, we identified 16
transactions that raised concerns for competition, obtained
relief in 9 cases, and the other 7 were abandoned or
restructured. So far in this fiscal year, the Commission has
issued 12 second requests, and already 10 cases have resulted
in enforcement action or withdrawal.
In the health care sector during the past year, the agency
achieved substantial relief in seven mergers by obtaining
consent decrees in the area of generic drugs, over-the-counter
medications, injectable analgesics, and other medical devices
and diagnostic services. Outside of mergers in health care, the
Commission continues to be aggressive in challenging price-
fixing agreements among competing physicians, and in the
detection and investigation of agreements between drug
companies that delay generic entry.
Our Federal court challenge to an alleged anticompetitive
agreement involving Ovcon has led to the introduction of lower-
priced generic products. Under threat of preliminary
injunction, Warner Chilcott waived the exclusionary provision
that was preventing Barr from entering with its generic, which
Barr almost immediately then began selling.
Beyond enforcement, we continue to stand up against
exclusion payment settlements by working with Congress on
bipartisan efforts to advance a workable legislative remedy,
and we thank the members of this Subcommittee for your
leadership in this critical area.
We continue to devote significant resources to the energy
sector. During the past year, Chevron and USA Petroleum
abandoned their proposed transaction after the FTC raised
questions. The FTC challenged EPCO's proposed $1.1 billion
acquisition of TEPPCO's natural gas liquids storage business,
and we challenged a proposed $22 billion deal involving energy
transportation storage and distribution firm Kinder Morgan.
The Commission continues to monitor, as Senator Hatch
noted, retail gasoline and diesel prices in 360 cities and
wholesale prices in 20 urban areas in an effort to detect early
any evidence of illegal conduct.
Recognizing that purchasing a home is the most significant
investment that most Americans will ever make, the FTC has
actively investigated restrictive practices in the residential
real estate industry. In the past year, the agency has brought
eight enforcement actions against associations of realtors or
brokers who adopted rules that with held the valuable benefits
of the Multiple Listing Services that they control from
consumers who chose to enter into non-traditional listing
contracts with brokers.
In the all-important technology area, last month the
Commission issued a final opinion and order in the non-merger
proceeding against technology developer Rambus. The Commission
determined that Rambus unlawfully monopolized the markets for
four computer memory technologies that had been incorporated
into industry standards for DRAM chips. In addition to barring
Rambus from making similar misrepresentations or omissions to
organizations again in the future, the order requires Rambus to
license there levant technology and set maximum allowable
royalty rates.
Our efforts to stand up for consumers and competition do
not end with law enforcement. In the past year alone, the FTC
has formally provided competition advice to policy makers on
issues related to attorney matching services, contact lens
sales, real estate services, pharmacy benefit managers, wine
distribution, patent rules of practice, and online option
trading assistance, to name a few. Our amicus program remains
active, and we have aided the Antitrust Modernization
Commission in its examination of our Nation's competition laws.
To ensure that our knowledge remains fresh, we are actively
engaged in market research, with recent hearings, for example,
exploring the boundaries of impermissible conduct under Section
2 of the Sherman Act and a recent workshop to examine broad
band connectivity competition policy.
In April, the FTC will host a 3 day conference entitled
``Energy Markets in the 21st Century: Competition Policy and
Perspective,'' bringing together leading experts from around
the energy area.
And, finally, because educated consumers are empowered
consumers in the market, we recently launched a
multidimensional outreach campaign targeting new and bigger
audiences with a message that even as markets rapidly change,
one thing remains the same, and that is that competition counts
to consumers. And so we are building a library of materials,
both in print and online, in our efforts to better reach
consumers and educate them on the vital importance of vigorous
competition in this economy.
Mr. Chairman, members of the Committee, you have my
commitment that I and the fine men and women of the Federal
Trade Commission will continue to work tirelessly to preserve
competition and protect consumers. And I will be happy to take
your questions. Thank you.
[The prepared statement of Ms. Majoras appears as a
submission for the record.]
Chairman Kohl. Thank you very much, Ms. Majoras.
Now, Mr. Barnett, many questions have been raised about the
Antitrust Division's reluctance to challenge important mergers
and acquisitions that may harm consumers. One proposed
acquisition that very much worries me, as you know, is
AirTran's plans to acquire Midwest Airlines, an airline based
in my own home State of Wisconsin. Midwest Airlines is a true
huge success story. It is beloved by the millions of travelers,
both travelers who personally get on the airplane as well as
businesses, who use it every year for its high quality of
service. Midwest Airlines has been recognized as the best
domestic airline more than 45 times in the last 17 years by a
variety of industry-rating surveys. The 2005 Zagat Air Travel
Survey rated Midwest Airlines as the top-rated domestic
airline. And, most recently, Midwest Airlines placed first
among single-class service in the 2006 Conde Nast Traveler
Business Travel Awards Poll.
Now, by contrast, AirTran ranked last among the ten
airlines rated. As a no-frills, discount airline, AirTran has a
very different business model from Midwest Airlines, and
acquisition of Midwest by AirTran would very likely result in a
substantial decline in the quality of service currently
realized by the many thousands of travelers throughout
Wisconsin and around the Nation who use Midwest.
Additionally, businesses in my home State have enormous
worries regarding the consequences of such a merger. Should
AirTran decide in the future to reduce service to the 36 major
business centers served every day from Midwest's Milwaukee hub,
substantial economic damage would be the result of that kind of
a decision. The frequent and efficient service offered by
Midwest to dozens of key business markets from Milwaukee is
essential to the Greater Milwaukee and the overall Wisconsin
economy.
The history of AirTran causes me special worry in this
regard. AirTran has a history of entering new markets,
promising to enhance services, and then, in fact, reducing
service, despite its promises. For example, since 2004, AirTran
has exited 29 markets it had promised to serve, sometimes
returning in a scaled-down version and sometimes not returning
at all. Notably, at Dallas-Fort Worth, AirTran promised a mini-
hub with 30 flights a day to 7 destinations by the end of 2004.
The reality was far different. AirTran never attained more than
17 flights a day at Dallas-Fort Worth and presently has only 8
flights a day to 2 destinations. Similarly, AirTran has reduced
service at Washington Dulles from 16 to 7 daily departures and
at Pittsburgh from 13 to 6 daily departures.
I have special personal experience of what can happen when
an out-of-town company without ties to the local community
acquires a respected local business serving local consumers.
Years ago, my family sold our chain of grocery stores to an
out-of-town buyer. We were the dominant Wisconsin grocery store
chain. We were successful mainly because of our superior
service to customers and our dedication to serving the needs of
the local community, which we as the founding family understood
in a way that outsiders could not understand.
The new owners of the Kohl's Food Stores lacked this
commitment to the local consumer, and they eventually closed
the local supermarkets entirely that our family had spent a
lifetime building, much to the disappointment of thousands of
Wisconsin consumers. This experience has taught me first hand
how crucial local ownership can be in operating a particular
business and what dangers can ensue and, in fact, happen when
people from somewhere else take over a business, the success of
which was not entirely but heavily dependent on the quality and
the knowledge of local ownership.
So, therefore, I was very surprised and disappointed to
learn that the Justice Department had recently closed this
investigation of AirTran's planned acquisition after just a
brief review of fewer than 30 days. Despite the obvious
competitive implications of this acquisition and its potential
danger for reduced service for the many thousands of Midwest
Airlines customers, your Department did not initiate the full
second request investigation that most in the industry
expected.
Question: I understand that AirTran does not presently have
many overlapping routes with Midwest Airlines, but I do not
think that that should be the end of your inquiry. Isn't one
important consideration in an antitrust review whether the
merger is likely to harm the quality of service offered to
consumers? Do we not have reason to worry that if acquired by
AirTran, the very high quality of service Midwest currently
offers to its customers will possibly be severely degraded? And
isn't this a basis for investigating this merger more fully,
Mr. Barnett?
Mr. Barnett. Thank you, Mr. Chairman. Certainly, the air
transportation industry is a critical and highly important part
of our economy, and we take threats to competition in that
industry very seriously. When we examine mergers, we look at
the breadth of competition, which would include price
competition as well as competition on quality. And in that
respect, yes, that is certainly a consideration that weshould
take into account.
I am more than happy to take the comments that you have
provided today as well as any other information that you, your
staff, or any of your constituents may have to bear on this
transaction back with me to examine it and to consider whether
there is any appropriate antitrust concern there that we should
pursue. And if we identify such a concern, we are certainly not
precluded from pursuing it and will do so.
Chairman Kohl. Well, I am really pleased to hear that. What
you are indicating is that, you know, you are flexible and
open-minded on this, that you want ultimately to do the right
thing. And if we can bring additional facts to bear, you are
indicating that your Department is willing to take another look
and, who knows, perhaps arrive at a somewhat different
conclusion based on evidence. Is that what you--
Mr. Barnett. Yes, Mr. Chairman.
Chairman Kohl. Well, I thank you so much. That makes me
feel really good.
Mr. Barnett, many consumer advocates and independent
antitrust experts are concerned with what they believe is a
significant cutback in antitrust enforcement in recent years.
Particularly since you became the Assistant Attorney General,
they cite several problems with antitrust enforcement on your
watch.
First, as I mentioned in my opening statement, there are
the Antitrust Division's own stats which show a sharp decline
in enforcement activity in recent years.
Second is the fact that you refused to take any action to
block or modify several large controversial mergers among
direct competitors. Prominent among these was your approval of
the Whirlpool-Maytag merger, reportedly over the objections--
reportedly--of your career staff.
Another example was your approval of the AT&T-BellSouth
merger last fall without placing a single merger condition on
the deal or requiring any divestitures of any sort. Several
weeks later, the FCC insisted on and obtained a series of pro-
competition conditions on the merger.
And, third, many analysts believe that now is the best time
in decades to get previously unthinkable mergers through your
Department review process. The announcement 2 weeks ago of the
merger of the only two satellite radio companies, XM and
Sirius, and Monsanto's attempts to acquire the seed business of
Delta and Pine Land, the very same deal rejected by the Justice
Department 8 years ago under the last administration, are just
two examples.
To those of us who care about antitrust enforcement, Mr.
Barnett, this adds up to a picture that causes us concern. So
my question to you is this: Are your critics correct or are
they incorrect that your Department has adopted too much of a
hands-off approach to merger enforcement and that some of them
say that now is the best time to get deals done? But, however,
whatever your critics may suggest or say, we are interested in
your opinions and your thoughts on this matter.
Mr. Barnett. Thank you, Mr. Chairman.
The short answer is that the critics are not correct. The
Antitrust Division has consistently applied the merger
guidelines set forth basically in the 1992 guidelines and
subsequently amended consistently.
What is important to remember is what those guidelines make
quite clear is that merger review is a very fact-intensive
analysis. We do much more than look at just the market shares
of the companies. We look at the complete competitive process
to try and get an understanding of what effect the merger is
likely to have in the particular situation.
In the instances of Whirlpool-Maytag, for example, we
issued a closing statement, and I have previously publicly said
the initial market shares gave all of us concern, gave us
pause, indeed created a presumption of concern. But once we had
conducted a very extensive 6 month investigation, we ultimately
concluded that the competitive dynamics of the market place
indicated there were other competitors that could, had, and
would be in a position to expand rapidly in the face of an
anticompetitive price increase. Based on traditional
principles, we did not take action in that case. Similarly, in
the other transactions.
I would note just very briefly, if I may, that there are
many other transactions, 16, in which we did take action that
those critics seem to be ignoring.
Chairman Kohl. I thank you. My time in this round is up. I
will have questions for Ms. Majoras in the nextround, but let
me turn to Senator Hatch.
Senator Hatch. Well, thank you, Mr. Chairman.
One treatise in antitrust law points out that in 1977 the
Division boasted a staff of 421 attorneys. However, that number
had fallen to 229 in 1989. And a further example is cited that
during the 1980s the largest percentage of criminal indictments
for bid-rigging contracts for roads, airports, or other
construction projects for local government--and that is what
they were for, and it was a particularly active time, that
particular time. By comparison, in the 1990s criminal
enforcement focused on international price-fixing conspiracies
involving large firms and major industries. So it is easy to
see why statistics do not always mean anything, but if you
read--the initial reading of the information, you know, that
has been provided by the Department of Justice shows that there
maybe some standing to the argument because, for example, the
number of investigations of mergers has fallen from 139 in 2000
to 77 in 2006. The number of requests for additional
information has likewise fallen from 55 in 2000 to 17 in 2006.
But then, again, I would point out that improvements are
occurring, too, and you cannot just rely on statistics to
determine whether the Division is doing a great job of not.
In 2006 alone, the Antitrust Division brought more merger
challenges than the previous 2 years combined. And it should
also be noted that during the same period the Division
increased the number of criminal fines that it obtained by 40
percent, like I say, to 470 million bucks, the highest ever--or
I guess it is the second highest level in the Division's
history. On the issues the Subcommittee will focus on, one of
them involves consolidation of the agriculture cultural sector
and recent mergers in that area. In that regard, the pending
Monsanto, Delta, and Pine Land transaction has, as you know,
generated some controversy. And as you know, this is Monsanto's
second attempt to acquire Delta and Pine Land. Monsanto
abandoned its previous proposed merger in 1989, if I recall it
correctly--1999, I guess it was, due in part to the Division's
opposition.
Now, in my view, this merger raises a number of interesting
questions that are rarely discussed in this type of forum.
While I do not intend to ask you, you know, about the details
of the merger review of this particular transaction, I think it
would be appropriate for you to discuss in general terms your
approach to analyzing the competitive aspects or effects, I
think would be a better word, of this type of merger.
Specifically, I am interested in how the Division views a
company's patent portfolio with respect to assessing its market
power. In general terms, I find myself in agreement with the
Government's position in the Independent Ink case, which
involved a question of whether a company's patent interest
should result in a presumption of market power for purposes of
antitrust tying analysis. But I really would be interested in
hearing more about how the Division analyzes the effects of the
patent interests and the absence of such a presumption, both
with respect to potential strategic behavior, such as vertical
foreclosure, and with respect to market power analysis in both
its merger and non-merger enforcement. I would love to have you
chat with us on that.
And then, Chairman Majoras, I know that the FTC has been
active in considering the competitive and strategic
implications of patent assets as well. So I would be pleased to
hear from you, after Mr. Barnett has responded to the first
part of this question.
Go ahead.
Mr. Barnett. If I may, if I can interject at the outset,
with respect to the overall level of merger enforcement, it is
important to note that the number of filings, merger filings,
in the late 1990s was well over 4,000 a year. It dropped to
under 2,000 after that, and that is a relevant consideration.
With respect to Monsanto, obviously, the Monsanto matter is
a pending matter, and so I will just note that it is a pending
investigation that we continue to look at. We have not made a
decision on it.
Patent portfolios, as you indicated, the Supreme Court has
confirmed our view that the existence of a patent by itself
does not create a presumption of market power. That does not
mean a patent cannot create market power. To the contrary, we
look at the particular facts and circumstances, and if a patent
portfolio, if you will, effectively precludes any other person
from providing a reasonably substitute product, something that
consumers would conside ran adequate substitute, without
infringing upon that patent port folio, then the patent owner
may well have market power. And that is fundamentally no
different than how we assess any other set of assets that a
company may hold. With respect to vertical considerations, we
do look at vertical issues. Indeed, the Department has brought
cases that involve vertical concerns. Several years ago, the
Division challenged a merger between Northrop Grumman and TRW
based on a vertical concern between different components of a
satellite system.
So what we are looking at is whether or not essentially
market power in a particular--one or both of the vertical
markets at issue will create some sort of anticompetitive
horizontal effect at one level or the other. And there are
certainly theoretical circumstances where that can occur, and
if the evidence substantiates that, we can and will pursue a
challenge to the merger under those circumstances.
We are also mindful of the fact that vertical merger scan
create significant efficiencies, and that is an additional
factor that we have to take into consideration.
Senator Hatch. Well, thank you, Mr. Barnett.
Ms. Majoras?
Ms. Majoras. Yes, thank you, Senator Hatch. The Federal
Trade Commission, as the Antitrust Division does, views the
inter face between competition and intellectual property policy
to be absolutely critical in today's economy, and we have come
at this from a couple of different ways.
As you are probably aware, a couple of years ago the FTC
published a report on patent reform recommendations. What we
learned over time in our enforcement cases is that while IP and
competition are designed to accomplish the same goals, if one
of the systems gets out of whack, so to speak, it can have an
adverse impact on consumers. And here our point in that report
is that if patents are not properly granted in the first
instance and the patent grants some market power, then
competition can be distorted. So we have a great interest in
the patent system, as many others do today, including many
Members of Congress.
The second area, of course, is in our enforcement cases,
Rambus being an example that I mentioned in my opening remarks,
in which Rambus had patents and also was seeking to acquire
more patent protection. At the same time Rambus was working
within a standard-setting organization in which the clear
expectation of all of the members was that if a member had
patents and there was a discussion of technology that would be
patented that would be incorporated into the standard, that
needed to be disclosed because members would want to know that
before incorporating it into the standard. Rambus did not, and
the Commission made the decision that by not doing that, Rambus
had illegally monopolized certain particular critical
technology markets.
And then, of course, in our cases in the Hatch-Waxman
context, in which we have looked at settlements between brand
and generic companies, obviously there, too, the issues of
patents have been critical.
So those are a few of the areas that highlight our work.
Senator Hatch. Do you share Leibowitz's position that we
should have a bright-line situation with regard to Hatch-
Waxman? Or is that debated at the FTC?
Ms. Majoras. Well, we have had great debate within the FTC
on that from the beginning. What I asked staff to do from the
very beginning was to look at all options, and we have looked
at all options.
My view is that having, if you want to call it, a bright
line, that is fine, that then excludes categories of
settlements that we know would be, more often than not, pro-
competitive would probably be the best way to go here, having
looked at all of the different possibilities, we think. And I
would be pleased to talk to you about that further.
Senator Hatch. Well, we would like your advice onthat. It
is not necessarily related to this hearing, but I just wanted
to ask you that question as a follow-on.
My time is just about up, so I will yield. I will submit
further questions in writing.
Chairman Kohl. Thank you.
Senator Feingold?
Senator Feingold. Thank you very much, Mr. Chairman, and
thank you for holding this hearing. During the past 6 years
there has been far too little oversight of the two agencies
that deal with antitrust issues. In fact, I understand that
this is the first hearing where the Assistant Attorney General
for the Antitrust Division has testified since September 2002,
which, of course, was during that brief period when you,
Senator Kohl, were the Chairman of the Subcommittee.
Obviously, the Chairman takes his oversight
responsibilities very seriously, and I think the public is well
served by the Chairman's approach. The major antitrust laws of
this country are just about a century old. They reflect the
basic underlying principle that the public receives over
whelming benefits from competition and that the Government has
an important role to play in ensuring that businesses do not
engage in anticompetitive behavior. As the Supreme Court said
in the Topco case, ``Antitrust laws...are the Magna Carta of
free enterprise. They are as important to the preservation of
economic freedom and our free enterprise system as the Bill of
Rights is to the protection of our fundamental personal
freedoms.''
These are lofty sentiments, but laws are just empty words
and dusty books without enforcement. And I am becoming
increasingly concerned that the Justice Department is not
acting to enforce the antitrust laws in the best interests of
the American people.
I understand that neither the Department nor the FTC has
challenged a merger in court since 2004. I suppose that could
be because no one is proposing anticompetitive mergers, but I
have my doubts. One case that was particularly surprising to
many was the Department's failure to challenge the acquisition
of Maytag by Whirlpool, giving the combined company a 75
percent share of the market in some home appliances. The New
York Times reported that the decision demoralized career
antitrust lawyers in the Department.
I find this very troubling, and I sincerely hope the
Department is not relinquishing its historic responsibility to
protect the American consumer from anticompetitive behavior.
Mr. Barnett, based on my understanding about what happened
earlier in the hearing, I do want to indicate that I was
pleased to hear that you told the Chairman, Senator Kohl, that
you will take another look at the AirTran-Midwest merger. That
is a very big issue in our State, and I was very concerned that
the Department concluded its inquiry so quickly.
Let me turn to a couple of questions. Again, Mr. Barnett,
one of the concerns I have about the apparently lax attitude of
the Department of Justice toward merger cases is that it is
encouraging mergers and acquisitions that perhaps the parties
might not otherwise propose because the antitrust concerns are
so obvious. We saw, again, as I mentioned, the Whirlpool
acquisition of Maytag. XM Radio is proposing to merge with its
only satellite radio competitor, Sirius. And there is even a
company pursuing an acquisition that it had abandoned some
years ago because the Department at that time opposed it. I am
talking here about Monsanto, which is set to acquire cotton
seed producer Delta and Pine Land Company, known as DPL.
Monsanto already controls a majority of the biotech seed traits
used in cotton, corn, and soybeans. While DPL is focused on
cotton, many of the traits they are developing for cotton
apparently can be applicable to corn and soybeans as well.
My constituents in Wisconsin are very worried that the
merger would eliminate DPL as a competitor with Monsanto in the
development of biotech seed traits, an area that is already
fairly concentrated. Moreover, not all farmers want to grow
genetically modified crops, and they are concerned about this
merger's effect on competition in the conventional and organic
seed markets as well.
So my question to you is do we have reason to worry that
the Department's attitude toward mergers has changed so much
that this particular merger might actually be cleared this time
around? What steps is the Department of Justice prepared to
take to protect the farmers in Wisconsin and elsewhere, whether
they grow genetically modified crops, conventional crops, or
organic crops, from the possible anticompetitive effects of
this merger?
Mr. Barnett?
Mr. Barnett. Senator, the Monsanto matter is a pending
investigation, and this is not an appropriate forum for me to
go into the specifics of that matter. But I will tell you
generally that the Antitrust Division continues to apply the
same principles that have been applied for two decades to
antitrust enforcement in a bipartisan manner under the Merger
Guidelines.
We look to whether or not the merger threatens harm to the
competitive process and consumer welfare, and based upon the
extensive investigations that we undertake, the interviews, the
documents, and the other sources of information, we make an
assessment as to whether or not a merger violates Section 7 of
the Clayton Act.
If we conclude that it will do so, we aggressively pursue
relief. Now, that relief can be narrow if the threatened harm
from the merger is relatively narrow. Indeed, in such a
situation, we think it is beneficial to be able to carve out
and fix that narrow part of the merger and allow the remainder
of the merger to proceed forward, which may have efficiencies
and bring benefits to consumers. If that is not possible, we
will seek to block the merger in its entirety.
Whether we end up in court or not--you cited a statistic
about not going to court since 2004. I respectfully disagree.
We have filed complaints in each of the fiscal years. Indeed,
we filed ten complaints in the last fiscal year. The parties
chose not to litigate. They chose to cave, if you will, and
accede to the remedy that was being requested.
Indeed, last year we were on the eve of a jury trial in the
Southern Bell-DFA merger transaction when the parties decided
to enter into a settlement that gave us complete relief.
So the short answer to your question is that we will
investigate each matter on the merits, make a call as we see
it, and pursue aggressively whatever relief we think is
necessary to protect consumers, and if that involves litigating
in court, we will so do, are happy to do so. But if we can do
it through a more efficient consent decree proceeding, we will
happily pursue that as well.
Senator Feingold. I understand your hesitation to talk too
specifically, but you sort of generally talked about the way
this is analyzed. I guess I just want you to say whether the
concerns about the possible anticompetitive effects on farmers
in Wisconsin will be taken into account in this Monsanto
matter.
Mr. Barnett. Certainly. We take into account all potential
anticompetitive effects when we do a merger investigation. We
attempt to be as comprehensive as possible, and we would
certainly consider any potential anticompetitive effects on
farmers in Wisconsin.
Senator Feingold. What does it tell you about the
Department's merger policy that a company is coming back 8
years later with a merger that it could not obtain approval for
before?
Mr. Barnett. Well, it does not tell me necessarily much of
anything other than that 8 years have passed, and market
conditions can change quite rapidly. We are not evaluating this
merger based upon the conditions that existed in 1999. We are
looking at the proposed merger based upon the market, the
conditions, the competitors, the customers, the intellectual
property rights, et cetera, et cetera, that exist in 2007. They
may or may not have changed, and that may or may not have an
effect on the outcome.
Senator Feingold. But you do not think it is possible that
Monsanto thinks it has a better shot of winning now because of
the nature of the enforcement?
Mr. Barnett. I cannot comment on what is going on
subjectively in somebody else's mind. What I can tell you is
that we are consistently applying the same principles that the
Division has applied for at least 15 or 20 years under the
Horizontal Merger Guidelines.
Senator Feingold. Let's talk about the Schering-Plough
case, which, as you know, was brought by the FTC because of
allegations that Schering-Plough made payments to two companies
in a patent infringement case to delay their entry into the
market for a particular potassium supplement drug. These are
the so-called exclusion payment settlements that Senator Kohl
is attempting to prohibit in his bill, the Preserve Access to
Affordable Generics Act. And, I might add that bill has broad
bipartisan support, and I am pleased to be a cosponsor of it.
In the Schering-Plough case, the Eleventh Circuit reversed
the FTC's action, and as I understand it, the FTC wanted to
appeal that ruling to the Supreme Court. It has been reported
that the Solicitor General acted on your advice in arguing to
the Supreme Court that it should not take the case.
Did you recommend that the Solicitor General oppose Supreme
Court review in the case? And if so, can you explain your
reasoning?
Mr. Barnett. Well, Senator, I was, in fact, recused from
that matter, so I did not participate in it. So the Solicitor
General would not have been responding to a recommendation from
me.
Having read the brief, I would just observe that the brief
did not actually go to the merits, the underlying antitrust
merits, but addressed specifically the cert worthiness of the
case, which is a distinct issue. So the short answer is that I
did not participate, though.
Senator Feingold. Commissioner, do you want to comment on
that case?
Ms. Majoras. Thank you, Senator. You know, at the FTC we
believe it is an extremely important case. We believe billions
of dollars are at stake for consumers, and it was very
disappointing to us, obviously, that the Eleventh Circuit did
not see it our way. I think it is possible that the Supreme
Court may take a similar case within the next year, and we are
hopeful that that may happen. But we are not waiting. We are
doing two things: we are working with Congress to determine
whether we can come up with a workable legislative fix that
will benefit consumers; and, second, we are continuing, as we
are obligated to do, to look at the agreements between brands
and generics to settle patent litigation, to determine whether
we believe that any of them are anticompetitive. And we are
opening investigations and continuing our work in the area.
Senator Feingold. Thanks to both the witnesses.
Thank you, Mr. Chairman.
Chairman Kohl. Thank you, Senator Feingold.
Just to get a little bit more on the record on that issue,
one of my--as well as Senator Feingold, and I am sure Senator
Hatch also, one of the priorities we have is finding ways to
bring more competition to the prescription drug market. And one
of the best ways to do this is by generic drug competition, as
you both know. Generic drugs, as you know, have the potential
to save consumers many billions of dollars. One of the biggest
obstacles to competition from generic drugs is the practice of
brand-name drug manufacturers to settle patent cases by paying
generic companies millions of dollars to simply stay off the
market. And along with several of my colleagues, we sponsored a
bill and now have passed it through the Judiciary Committee to
make this practice of paying off--of disallowing companies to
pay off generic companies and there by harming consumers in the
process.
In 2005, the Eleventh Circuit Court of Appeals issued a
decision that these payoff settlements do not violate antitrust
law, reversing a decision of the Federal Trade Commission. The
Justice Department filed a brief opposing Supreme Court review
and sided with the Eleventh Circuit against the FTC.
Mr. Barnett, why did the Justice Department take that
position?
Mr. Barnett. Mr. Chairman, as I indicated, I did not
personally participate in that matter, so it is difficult for
me to answer the specific question. I can make two observations
in an effort to try to be responsive and helpful.
The first is that, you know, these are--well, as I
previously indicated, the brief, upon my reading of it after it
was filed, did not feel that the--indicated it was not
necessarily the best vehicle for the Supreme Court to address
the issue that was presented, the legality of these reverse
payment settlements. It did not get to the bottom-line question
as to what the standard ought to be in that case.
More generally, you know, this is an area which I would
readily agree is very important to consumers. Access to health
care generally and to effective drug treatments that are
affordable is also extraordinarily important.
I would further agree that the settlement of these cases
can be anticompetitive and can be harmful. I would also add,
however, that there are considerations on the other side. There
are reasons why our system encourages settlement as a general
matter. Resolving litigation early can not only avoid out-of-
pocket costs, but the uncertainty that surrounds this set of
assets while litigation is pending can have real costs and
consequences as well.
And so I have great respect for and sympathy with what
Chairman Majoras was saying, that a complete per se approach
here, one should think carefully about that because there are
considerations on both sides.
Chairman Kohl. Getting back to you, Ms. Majoras, I know
that the FTC, as you have said, has done much good work in
attempting to take action to prevent these payoff settlements.
However, after the Eleventh Circuit's Schering decision, the
ability of the FTC to enforce the antitrust laws to prevent
these settlements is in doubt. Doesn't it make the bill that I
have referred to, which you are very much aware of and have
worked on, doesn't it make the bill all that much more
necessary?
Ms. Majoras. Well, there is no question that our ability to
attack these settlements from an antitrust perspective has been
hampered by the Eleventh Circuit decision. No question. And we
think it is important enough that we should work the problem
from several different fronts. One is we want to work with you
on this legislation, and I do think that that is extremely
important. And, second, as I said, we will continue in the
meantime investigating the settlements we have before us;
settlements with the reverse payments, not surprisingly after
the Eleventh Circuit decision, have gone way up from where they
were before. And while I agree whole heartedly with Mr. Barnett
that we have to look at all aspects of this because we do not
want unintended consequences, I just note that during the years
in which there was great antitrust risk for entering into these
agreements, parties still settled lots of patent litigation.
They just did not do it by having the brand pay the generic
consideration in exchange for staying out of the market.
So we are not trying to prohibit settlements. We are trying
to prohibit settlements which--as a very prominent antitrust
law professor said last week at a conference at which we both
spoke, if these agreements were being reached outside this
patent settlement context, they would be subject to criminal
enforcement under the antitrust laws. So we need to, yes, weigh
the benefits of patent settlement, but we also have to think
about what is really going onhere.
Chairman Kohl. That is good.
Mr. Barnett, many shippers who depend on railroads to
obtain their raw materials or ship their products to market,
such as electric utilities who need coal or farmers who are
shipping grain, believe that they have been victimized by the
dominance in their area of a few freight railroads that they
must use. In many cases, these so-called captive shippers have
only one railroad that serves them. These captive shippers
report that they have been the victims of price gouging and
other monopolistic and anticompetitive conduct by the one
railroad that they have to use, leading to price increases that
will ultimately be passed along to consumers. This problem
exists in my own State of Wisconsin, among many States.
Over the past 20 years, the railroad industry has
consolidated to the point where only four Class I railroads
provide over 90 percent of the Nation's rail capacity, and they
rarely compete with each other. The railroad industry is
protected by obsolete antitrust exemptions that in many cases
exempts them from antitrust scrutiny, prevents private parties
from availing themselves of antitrust remedies, and prevents
the Justice Department from reviewing railroad mergers. These
exemptions do nothing more than shield very often
anticompetitive, monopolistic conduct by railroads.
Yesterday I introduced a bill to repeal the railroad's
antitrust exemptions. Do you support such a repeal of these
antitrust exemptions? Do you recognize that in many cases the
present situation puts these people who must use that railroad
and have no other opportunity at a competitive disadvantage in
a way that almost prohibits their ability to operate their
businesses if, in fact, there is nowhere else that they can
receive shipments except through this one railroad which enjoys
antitrust exemption?
Mr. Barnett. Well, Mr. Chairman, the Antitrust Division has
a long history of promoting the view that exemptions should be
rarely granted and, when granted, narrowly construed. Further,
when I testified before the Antitrust Modernization Commission,
I expressly encouraged them to recommend that Congress re-
examine existing immunities and exemptions from the antitrust
laws to see whether they are still warranted under current
conditions. I believe that is a view that Chairman Majoras and
I are in complete agreement on. And so I applaud your efforts
to introduce such a bill and to look at this issue.
Given that it was just introduced, I do not believe that
the administration has yet had time to form a position on it,
but as I say I underscore that I applaud your efforts and
commit the Division to trying to work with you on that bill as
you examine the issues.
Chairman Kohl. That is great.
Are you familiar enough to make a comment, Ms. Majoras?
Ms. Majoras. Well, like Mr. Barnett, I can tell you that I
am almost always opposed, as I believe the rest of the Federal
Trade Commission likely is, to exemptions to the antitrust
laws. And I absolutely think that particularly when exemptions
have been on the books for a long time--and in the United
States, we have several like these that have been in existence
for a very long time when markets were very different and,
quite frankly, the way we thought about markets was very
different--we should examine them.
I am not as familiar--I looked at your bill, and I think it
is something we would be very happy to work with you on because
it is just so rarely the case that I think an exemption should
continue.
Chairman Kohl. That would be great. I thank you for your
comments, both of you. Mr. Barnett, perhaps the biggest merger
announcement so far this year are the plans by the only two
satellite radio services--Sirius and XM--to merge. Many of us
are concerned that this merger appears to create a monopoly in
satellite radio. Many commentators cite the XM-Sirius merger as
an example of a merger between companies that would not have
been attempted in the past, but now feel are worth attempting
because of your, as some people say, lax attitude towards
merger enforcement. How do you respond to that?
Mr. Barnett. Well, Mr. Chairman, without commenting on the
specific pending matter, the XM-Sirius matter, I would
reiterate that we have diligently applied the same principles
to the evidence that was collected in each of our merger
investigations and made a call as to whether we believed the
merger was competitive or anticompetitive, threatened harm, as
cognizable under Section 7 of the Clayton Act.
Where we have found evidence to support a finding of
aviolation, we have aggressively pursued that. That includes
not only issues like the Mittal-Arcelor steel deal last year,
but it includes Echo Star-DirecTV, which were two television
direct broadcasts satellite providers that the Division
aggressively challenged just a few years ago.
Chairman Kohl. All right. Again, trying to get some comment
out of you on this one--and I know you cannot make a comment on
a merger which is not before you but likely may be before you--
can you explain how the Antitrust Division might look at this
merger in the area of satellite radio and whether it is a
separate market or whether satellite radio competes with
terrestrial radio and other entertainment sources, especially
new technologies like iPod and Internet radio, which is
probably--which might be central to this merger. Just in
general, do you think there are separate markets or they are
all the same market?
Mr. Barnett. Well, Mr. Chairman, I will do my best. It is
frequently the case in merger review, when we are arguing with
parties about what the proper conclusion is, that the
definition of the relevant market is very central. Parties
frequently put before us assertions that various other
alternative products or services should be included in the
relevant market, and we do our best to assess whether that is
actually the case. And we do that through a variety of means.
We look at the parties' own internal documents, marketing and
sales strategies. We talk to customers. We talk to other
suppliers. We can do statistical or econometric analyses to try
and estimate cross-price demand elasticities or supply
elasticities. And we make an assessment that whether or not--
even if some consumers may view a proposed alternative as an
alternative, whether enough view it as an adequate alternative
to discipline the pricing of the merged parties' post-
transaction, whether or not they would be able to raise price
profitably even if they lost some customers.
That is a very fact-intensive analysis, and it would be
difficult for me to answer that question under any
circumstances in a matter in which we had just started looking
at it.
Chairman Kohl. OK. Mr. Barnett, as you know, the Tunney Act
requires the court to approve an antitrust consent decree to
ensure it is in the public interest before it can go into
effect. For several years, the Justice Department has been
allowing mergers to close prior to the court's review of the
settlement. This renders court review quite ineffective as the
merger has already been consummated before the court reviews
the settlement. The court is then left with virtually no remedy
should it decide that the settlement is not in the public
interest.
How is allowing parties to close mergers prior to court
review consistent with the intended command of the Tunney Act?
Mr. Barnett. Well, Mr. Chairman, as an initial matter, we
are not empowered to prevent the closing of a transaction. That
is something a court must order the--enter a preliminary
injunction in order to prevent it. Once the HSR waiting period
has expired, absent an order of the court, the parties are free
to close. We are, of course, free to continue with our
challenge.
We make an assessment--and it has been long standing
Division policy across administrations--as to whether or not
there is cause or reason to move the court for such a
preliminary injunction. There can be substantial cost or,
alternatively, there can be substantial lost benefits from
preventing a transaction from moving forward. In particular, if
you have a situation where you have a very large transaction
and we have identified a potential competitive harm in a
relatively small portion of that transaction, there could be
huge efficiencies that will be delayed for however long the
Tunney Act review takes until a closing is allowed.
By not getting in the way of that and allowing the parties
to close, you can allow the realization of those efficiencies
in circumstances where we have made the determination and the
judgment that we believe the remedy that is on the table will
adequately address the threatened harm to competition.
Chairman Kohl. All right. Mr. Barnett, I would like to turn
to the issue of media consolidation. Some believe that there is
nothing special about mergers and acquisitions in the media
marketplace, that they should be treated just like any other
mergers. For example, former Antitrust Chief Charles James said
at his confirmation hearing in 2001 that the only thing that
mattered in reviewing a media merger was ``economic
consequences of the transaction.'' Many of us would disagree
with that. Mergers in the media are different, in our judgment,
because they affect competition in the marketplace of ideas so
central to our democracy. Diversity in media ownership is
essential to ensuring that competing views are heard. I would
think you would agree with that. Therefore, I believe that we
must give mergers in the media special and more exacting
scrutiny than when we review mergers in other industries which
do not affect the free flow of information.
Former FTC Chairman Petofsky agrees with this view.
What is your view, Mr. Barnett? And then I will ask you,
Ms. Majoras. Is the conventional view of antitrust review of
media mergers focused solely on economic factors and ad rates
correct? Or do you agree with many that the Justice Department
should also consider a media merger's impact on diversity of
news and information and not limit your analysis to strictly an
economic kind of consideration?
Mr. Barnett. Well, Mr. Chairman, I could not agree with you
more strongly that the marketplace of ideas is one of the core
values of our political system and one of the fundamental
sources of strength of our political system. And I believe that
those First Amendment principles are just--it is impossible to
over rate their importance. And we do look closely and take
very seriously competition issues raised in the media industry.
We have taken enforcement actions even recently. In the
McClatchy-Knight Ridder transaction, for example, we required
the divestiture of one of the daily papers in Minneapolis. We
have other pending investigations within the industry because
we do take it so seriously.
Your question raises some complicated issues. I would like
to think that by preserving competition and an effectively
free-flowing competitive market in the media industries, to the
extent that there is a demand for a diversity of viewpoints in
the populace, people will be able to supply a diversity of
viewpoints. An effectively functioning market should
effectively meet the demands of consumers.
I hesitate to say, however, that I as a Government official
should be in a position of deciding that this particular
viewpoint should be protected and that particular viewpoint
should not be protected. And to that extent, I would be very
hesitant to get into that kind of consideration, but would
focus on trying to ensure that there are multiple providers in
the marketplace and that a freely functioning marketplace can
respond to the demand for diversity of views.
Chairman Kohl. Ms. Majoras, do you have some opinions you
would offer?
Ms. Majoras. Thank you, Mr. Chairman. There is no question
that media mergers are extremely important, and I think it is
fair to say that we give--and I have talked to former Chairman
Pitofsky about this extensively, and I think it is fair to say
that we give them a certain type of heightened scrutiny because
of their importance to our very democratic underpinnings.
Mr. Barnett is right, though, that we have a certain method
for reviewing mergers that has been blessed by the court,
which, of course, has an economic tone to it; but in making
sure that, for example, advertisers have plenty of outlets in
which to advertise, they essentially act as surrogates, so that
there are plenty of avenues in the media, not only, of course,
to advertise, but, of course, you have got to have some content
in it to provide that content.
So I think those two view points are not so very far apart
at all. And I also do--you know, I agreed with Mr. Barnett. We
do have to be careful so that it does not look like Government
is regulating speech. That you absolutely would not want. And
the FCC, of course, has a little more leeway probably than we
do to look at some more content-related issues, although for
protection they have to do it really out in the open. But they
have a public interest standard, of course, when they look at
media mergers, mergers within their jurisdiction. And we do not
have such a broad standard within which to review those
mergers.
Chairman Kohl. All right. Just to go back to the Whirlpool-
Maytag merger, which was approved about a year ago, I
understand, shortly after that announcement it was raising
prices up to 12 percent on its washing machines, and it also
announced plans to cut 4,500 jobs. This all occurred within a
matter of months after the merger was approved.
Does this massive layoff and the sharp price increase lead
you to have any reconsideration thoughts in your mind?
Mr. Barnett. Mr. Chairman, I would require some additional
information. With respect to price increases, it is important
to note that there can, for example, be increases in input
costs. It would be far more relevant for us to know whether or
not the operating margins of the company had increased.
In addition, we tend to think in slightly longer time
frames than 1 year. It can take the market a little bit of time
to respond, but if it does so reasonably quickly or is expected
to do so reasonably quickly, we would still consider that not a
sufficient threat to competition to bring a challenge. And so
the short answer is that I would need some additional
information.
Chairman Kohl. All right. Mr. Barnett, we have received
allegations of anticompetitive and monopolistic conduct by DFA,
the Nation's leading milk marketing cooperative. One allegation
in Florida is that independent dairy co-ops could not have
their milk processed in plants affiliated with DFA unless the
independent cooperative paid the processor millions of dollars
around the cost of processing the milk. It is alleged that this
and other anticompetitive conduct destroys the ability of
independent co-ops to compete and ultimately results in higher
milk prices to consumers.
Mr. Barnett, we have been informed that the staff of the
Antitrust Division recommended to you in September of last year
that the Justice Department pursue an antitrust case against
DFA, but that you allegedly have not taken any action on that
recommendation.
Question: Is this true? And what is the status of that
investigation?
Mr. Barnett. Well, Mr. Chairman, we do not generally get
into the specifics of internal deliberations. I will go so far
as to say your information is not entirely accurate. But it is
a pending investigation. We are looking at the milk processing
industry, the specific issues that you raised, and I continue
to be very focused on it.
Chairman Kohl. That is very good.
Well, I thank you both for being here. I think you have
shed a lot of light on issues that are really important to our
society and to our consumers, and I appreciate your frankness
and your willingness to say what is on your mind. And I think
you have made real contributions.
This hearing is concluded.
[Whereupon, at 3:45 p.m., the Committee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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