FTC Chairman Pitofsky Wants to Change Antitrust Law for High Tech

(November 15, 1998) Robert Pitofsky, Chairman of the Federal Trade Commission, stated at a legal convention in Washington DC on November 14 that the U.S. Court of Appeals decision in the Microsoft case is "wrong", and that the antitrust law ought to be different.  The Department of Justice, rather than the FTC, is prosecuting Microsoft.  However, the FTC is currently prosecuting Intel for alleged violation of antitrust law.

Robert Pitofsky also argued for a greater role for antitrust regulators in high tech industries.  "That is where the action is.  That is were the dyanmic growth is.  That is were the innovative transactions are occurring.   And therefore, it requires, it justifies a fairly careful oversight."

He delivered his speech at the Federalist Society Convention, held at the Washinton DC Mayflower Hotel, on November 12-14.  Pitofsky spoke as part of a panel titled "Market Power and Competition in the Technology Age."  The other panelists were FCC Commissioner Harold Furchtgott-Roth,  Yale Law School Professor George Priest, and Irwin Selzer of the Hudson Institute.

"The law with respect to antitrust and intellectual property is not settled," said Pitofsky.  However, he rejected the legal argument that Intel has made that excercise of valid intellectual property rights do not amount to antitrust law violation.  "One possible position is that intellectual property is property," said Pitofsky.  "I am not entirely comfortable with that."

He also rejected the argument that government lawyers and bureaucrats are not capable of understanding and planning fast paced high tech industries.  "It is more technologically complicated than otherwise.  But I think of that as a challenge rather than as a reason to opt out.  We must learn the technology, just as business people ..."

Pitofsky argued that the main reason that high tech industries need more antitrust regulation is "network effects" which create "barriers to entry."   Pitofsky described these as "situations in which the ... value of [a] product or service is positively correlated with the number of people who use it."

Pitofsky not only said that the Microsoft decision was "wrong."  He referred to the Court of Appeals with disregard.  He did not refer to the ruling of the Court of Appeals as "a court ruling" or "legal precedent."  Instead, he called it something "in the literature", a phase more commonly used to describe any article in a law school publication, which has no legal effect.   Moreover, he did not use the words "ruling" or "holding," or even "dicta."  Instead, said Pitofsky, the Court of Appeals wrote a "notion."  Pitofsky, a lawyer, was speaking to an audience made up almost entirely of lawyers.

Pitofsky said the following about the Microsoft decision:

"Maybe, I can suggest one answer that I think is wrong.  It is in the literature.  And I thought it was in the Court of Appeals' Microsoft decision.  And that is the notion that once the Court finds any significant efficiencies, whether it is the integration of products, or network externalities, then the Court's job is over, having found some efficiency, it can go home, content that antitrust has no role to play.  That just can't be right.  It can't be right because suppose the efficiencies reduce the price to consumers by five percent, but the effect on barriers to entry raises the price to consumers by fifty percent.  It cannot be that a significant efficiency trumps the effect, the anti-competitive effect, on barriers to entry.  Also, quite often, um, the, uh, you might be able to achieve the efficiencies in a less restrictive way.  So, that, to me it must be a balancing process.  It must be more to it than simply finding a presence of some efficiency, and I believe that is what the law ought to be."

The following are excerpts from the June 23 decision of the United States Court of Appeals in the consent decree case brought by the Justice Department against Microsoft.  The following is a portion of the holding which Pitofsky criticized.

"The short answer is thus that integration may be considered genuine if it is beneficial when compared to a purchaser combination. But we do not propose that in making this inquiry the court should embark on product design assessment. In antitrust law, from which this whole proceeding springs, the courts have recognized the limits of their institutional competence and have on that ground rejected theories of "technological tying." A court's evaluation of a claim of integration must be narrow and deferential."

. . .

"We emphasize that this analysis does not require a court to find that an integrated product is superior to its stand-alone rivals. See ILC Peripherals Leasing Corp. v. International Business Machines Corp., 458 F. Supp. 423, 439 (N.D. Cal. 1978) ("Where there is a difference of opinion as to the advantages of two alternatives which can both be defended from an engineering standpoint, the court will not allow itself to be enmeshed 'in a technical inquiry into the justifiability of product innovations.' ") (quoting Leasco, 537 F.2d at 1330), aff'd per curiam sub nom. Memorex Corp. v. IBM Corp., 636 F.2d 1188 (9th Cir. 1980). We do not read § IV(E)(i) to "put[ ] judges and juries in the unwelcome position of designing computers." IX Areeda, Antitrust Law p 1700j at 15. The question is not whether the integration is a net plus but merely whether there is a plausible claim that it brings some advantage. Whether or not this is the appropriate test for antitrust law generally, we believe it is the only sensible reading of § IV(E)(i). On the facts before us, Microsoft has clearly met the burden of ascribing facially plausible benefits to its integrated design as compared to an operating system combined with a stand-alone browser such as Netscape's Navigator. (footnotes deleted)

Pitofsky also gave a speech on international antitrust enforcement to the European Institute's Eighth Annual Transatlantic Seminar on Trade and Investment, in Washington, DC, on November 4, 1998.