FTC Official Addresses Covisint and Electronic B2Bs

(September 18, 2000) The FTC's Susan DeSanti gave a speech to a legal group in Washington in which she stated that the FTC is unlikely to adopt guidelines for electronic B2Bs. She also offered recommendations on how not to run afoul of antitrust regulators when creating and operating electronic B2Bs.

Susan DeSanti, Director of Policy Planning at the Federal Trade Commission, gave a speech to a small gathering of antitrust lawyers at the U.S. Chamber of Commerce's Legal Affairs Council on Thursday morning, September 14.

DeSanti's address came just three days after the FTC announced that it closed its investigation of whether the Covisint automotive electronic B2B violates Section 7 of the Clayton Act, and that it terminated the Hart-Scott-Rodino waiting period.

Susan DeSanti also organized the FTC's workshop in June 2000 on B2B electronic marketplaces. Prior to joining the FTC, she was a partner in the law firm of Hogan & Hartson. This firm also represented GM, Ford and DaimlerChrysler in the FTC's Covisint proceeding.

Rick Rule spoke following DeSanti. Rule is the Chairman of the Antitrust and Trade Regulation Practice Group of the Washington DC law firm of Covington & Burling. He went to the Department of Justice in 1982 with William Baxter. From 1986 through 1989 he was head of its Antitrust Division.

DeSanti suggested the the FTC would not adopt guidelines for electronic B2Bs. Specifically, this is what she had to say:

"On the topic of whether guidelines are a good idea in this area, having just been through an exercise to come up with the competitor collaboration guidelines that DOJ and the FTC came out with in April of this year, which do have some relevance here, they don't provide all the answers, but a number of practitioners have said that, you know, that they found them useful in the area. I am very skeptical that guidelines are necessary or would be a good idea, for most of the ___ articulated. So, despite the fact that I know that there have been discussions towards this, suggesting that guidelines were coming here, I am pretty skeptical, I can definitely tell you that I will work at MacDonald's before I work on another guidelines."

After the laughter died down, she added, "It wouldn't involve me if it ever happens." She also added that the FTC might issue a "report" on electronic B2Bs this "Fall".

DeSanti began her address by commenting that the antitrust issues associated with electronic B2Bs are "very familiar ones to antitrust practitioners", and that they "are soluble through practical solutions." She cautioned practitioners to consider "antitrust issues at the front end". This includes "assessing the markets in which to operate, developing operating rules and bylaws, considering what activities to undertake, determining other matters, such as who will participate, and under what terms."

She then went into some detail on three types of antitrust issues raised by electronic B2Bs: information sharing, exclusivity, and future market development.

DeSanti stated that while "information sharing among competitors sometimes is procompetitive" and "can facilitate price transparency that will foster competition" it can also "increase the likelihood of collusion".

It can enchance "the ability to predict a competitor's prices from knowledge of its costs, or to project or monitor a competitor's output level."

She offered no concrete rules, but stated that a B2B should consider several factors, including whether the markets at issue are otherwise susceptible to collusion, whether the specific information divulged could facilitate collusion, and what firewalls, or other devices, might be employed to limit the exchange of competitively sensitive information.

She also added that the appointments to the Board of Directors of a B2B can constitute antitrust issues, because directors who work for member companies may have access to competitively sensitive information about competing companies.

She cautioned that "there should be an antitrust assessment that takes a look at, among other things, whether there will be sufficient volume for competing marketplaces to continue operating, or to enter into the relevant market for B2B marketplaces. In other words, in an extreme case, if you use exclusivity tactics to tie up almost all available volume on your B2B, rather than competing on the merits to attract that volume, may raise significant antitrust concerns."

DeSanti's also addressed "future market development." There are "some possible antitrust issues for the future that could pose more difficult problems, such as whether B2B markets may have a tendency to tip toward one or two dominant B2Bs, and what that could mean for assessing how B2Bs operate in those circumstances."

"The potential for tipping could cause a greater scrutiny for such issues as whether a particular B2B has exclusivity practices." She continued that "restraints that are designed to keep insiders in, whether it has exclusivity practices that could exacerbate network effects, and encourage tipping, or, on the other hand, whether there were exclusion policies, that is, was it restraints designed to keep outsiders out, that significantly raise the cost of competitors excluded from the B2B, and that it has thus ended up harming competition in the downstream market."

DeSanti also discussed the FTC's Covisint decision of September 11. However, she cautiously read from published materials, such as the FTC's press release and letter to the participants.

Rick Rule followed DeSanti. He stated that this is "a fairly familiar area to antitrust lawyers. It is a joint venture analysis at bottom." He added that the "classic statement" is the Supreme Court's decision in the Chicago Board of Trade case.

Rule went into detail on a number of specific issues, including firewalls, directors, price information sharing, 35-20 and 20-20 rules, disintermediation, and network effects.

He argued that the FTC should not write guidelines for electronic B2Bs.

	Charles (Rick) Rule

He also advanced an argument regarding network effects that might have been aimed at the regulators in the room. "I hope the agency is sensitive to the fact that network effects are actually a reflection of efficiencies. I mean, if you really understand the argument, the reason that you tend to have a single platform, is because it is more efficient to deal with a single platform than multiple platforms, for a variety of different reasons. And, if you establish rules that prevent efficient single platforms from arising, or somehow, impede that, the problem is you are going to lose a lot of the efficiencies of B2B."

Rick Rule also represents Microsoft. The Department of Justice does not share his views about network effects.

During the question and answer segment of the program questions were asked about other electronic B2Bs that might be under review by the FTC, Department of Justice, state agencies, or the EU. DeSanti said nothing. Rule referenced a pending review concerning "beef" and the EU's Myaircraft.com completed review.