Sanctions and Remedies in Abuse of Dominance Cases

Sanctions and Remedies in Abuse of Dominance Cases

Theodore A. Gebhard, J.D., Ph.D.U.S. Federal Trade CommissionBureau of CompetitionWashington, D.C. U.S.A.

Budapest, HungaryApril 2007

The views expressed are those of the speaker and not necessarily those of the Federal Trade Commission or any other agency or person

OECD 2007 Conference on Topics in Competition Policy

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• Goals of remedies and sanctions in abuse of dominance matters:

o Restoration of competition.

o Deterrence.

o Compensation.

o Punishment.

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• Restoration of Competition/Deterrence.

o Forward looking.

• Compensation/Punishment.

o Backward looking.

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• Types of Abuse of Dominance Cases.

o Unlawful acquisition of dominant position.

o Unlawful maintenance of dominant position.

• Crafting an appropriate remedy or sanction requires careful consideration of the theory of competitive harm.

• Should never bring an abuse of dominance case if a workable and practical remedy is not available.

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• Objective: Match the remedy or sanction with the unlawful act in order to achieve the desired goal.

o “Abuse” = an exclusionary act. Focus is on conduct.

o Neither market power nor bigness, absent exclusionary conduct, is bad.

o What constitutes “competition on the merits” remains controversial and may differ across jurisdictions.

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• Terminology:

o Remedies v. Sanctions.

o Behavioral v. Structural.

o Largely artificial/often much overlap.

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• Remedial Options:

o Injunctions (“negative” injunctions, e.g., cease and desist orders).

o Civil fines (note: USFTC does not have authority except in non-compliance situations; USDOJ does have authority, but elects not to seek).

o Damages.

o Restitution.

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• Remedial Options (cont.)

o Disgorgement.

o Other equitable relief (“positive” injunctions, e.g., requiring the sharing of intellectual property with competitors; setting royalty rates).

o Divestiture (horizontal, vertical, partial, e.g., sale of some intellectual property).

o Criminal fines or imprisonment.

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• Factors to consider:

o Severity of the exclusionary act (proportionality).

o Intent of the dominant firm (e.g., general intent v. specific intent; repeat offender?).

o Certainty of the harm to economic welfare (Type 2 error).

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• Factors to consider (cont.)

o Distribution of the harm from the exclusionary act (difficulty in identifying harmed parties).

o Degree to which the “abuse” has succeeded prior to discovery and litigation (actual amount of harm).

o Administrability (very important – will return to this issue).

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o Effect of the remedy on future behavior.

Actual litigant.

Other firms (sui generis situation?).

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o Goal of the remedy. Restoration of competition:

– Stop the act but otherwise leave the market as is?

» Injunctions (cease and desist orders).

» Civil fines (paid to whom? e.g., competition authority or treasury?).

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• Factors to consider (cont.) o Goal of the remedy.

Restoration of competition.– Restore pre-act state of the world?

» Divestiture (costs and benefits – e.g., lose scale economies, inefficient unscrambling of eggs, hardship on local communities).

» Disgorgement (paid to whom?).

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o Goal of the remedy.

Deterrence:

– Severe enough to deter? (ability to detect? – expected value = cost X probability of detection)

– Risk of over-deterrence? (possibly chill pro-competitive conduct?)

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Sanctions and Remedies in Abuse of Dominance cases


o Goal of the remedy. Compensation:

– Who? (direct purchasers v. indirect purchasers; ability of intermediaries to “pass on”)

– How?» Damages (competitors’ lost

profits?).» Restitution (consumers?

indirect purchasers?).

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o Goal of the remedy.

Punishment.

– Civil fines.

– Criminal fines or imprisonment.

» Due process concerns.

» Burden of proof.

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o Likelihood of Private litigation

Supplements government actions, may rely on prior government cases.

Treble damages.

– Over-deterrence? stimulant for frivolous litigation?

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• Practical and Policy Issues for an Enforcement Agency.

o Competition Authority should have the power to settle cases short of litigation.

Scarce enforcement resources: Absent power to settle cases means that the agency must bear litigation costs and risks.

Settlement: Necessarily a compromise. Remedy may be less than what agency originally contemplated.

Important to avoid reputation of being too willing to settle.

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o Administrability of Remedy or Sanction.

“Negative” injunctions:

– May be relatively easy to design.

– Focus on the “exclusionary” act.

– Likely requires ongoing monitoring.

– Duration?

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o Administrability of Remedy or Sanction (cont.)

“Positive” injunctions:– Usually more difficult to design than

“negative” injunctions.» Risk of unintended consequences.

– Almost always requires ongoing monitoring.

» Issue of what constitutes a violation.– Duration?

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o Administrability of Remedy or Sanction (cont.) Monetary Fines:

– Fairly easy to administer– May adequately deter future bad

behavior.– Do not restore lost competition.– Usually difficult to determine

“optimal” amount.– Requires plan for who gets the

money?

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Damages, Disgorgement, and Restitution:

– May be difficult to calculate.» Amount due only to “abuse” v. competition on the

merits.– May be difficult to identify individual victims and amount

of harm each incurred.» Competitors; direct purchasers, indirect

purchasers.– Risk of multiple recovery.– If agency collects, must set up distribution program.

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Divestiture:

– May be easy or difficult to design: Horizontal; Vertical; Partial.

– Minimizes agency ongoing monitoring.

– May lose efficiencies or may be disruptive to local communities.

– Must find “right” buyers.

– Market may self-correct by the time divestiture is complete (e.g., innovation).

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USFTC Case Examples:

o U.S. Supreme Court:

USFTC has wide discretion in its choice of remedy.

USFTC has a special competence in formulating remedies to deal with problems in the general sphere of competitive practices.

USFTC has ‘wide latitude for judgment’ in fashioning a remedial order.

– But, the order must bear a reasonable relationship to the unlawful practices that the USFTC has found.

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EXAMPLE 1

In The Matter of Rambus, Inc.

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• Basic Facts:

o Participation in a standard setting organization (SSO)

o Rambus and others met over several years to select and adopt various technical standards for DRAMs (dynamic random access memory).

DRAMs are widely used in personal computers, servers, printers, and cameras.

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USFTC Case Examples (cont):

• USFTC staff allegations:o SSO had a policy not to adopt a technical

standard if it were subject to royalty payments and an alternative standard existed that was not subject to royalty payments.

o Otherwise, the SSO would seek a “reasonable and non-discriminatory” (RAND) royalty from the patent holder.

o SSO had a policy requiring members to disclose any patents (or pending patents) that they have which could implicate a prospective technical standard under discussion.

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o In ex ante world: SSO members considered a number

of incipient technologies as viable alternatives.

SSO ultimately selected several technical standards for which Rambus was pursuing intellectual property rights.

Rambus did not disclose its patents or patent applications.

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o In ex post world: DRAM industry adopted standards

that implicated Rambus patents.

“Lock-in” effect occurred (significant sunk costs invested into the adoption of the standards).

Rambus disclosed its patents and demanded royalties.

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• USFTC found that:

o Rambus’s failure to comply with the SSO’s patent

disclosure policy was an “exclusionary act,” and

o The exclusionary act caused unlawful monopolization of relevant technology markets.

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•Remedy:o Commission ruled that Rambus must:

Not make misrepresentations or omissions to standard-setting organizations. (“negative” injunction).

License its relevant DRAM technology at maximum allowable royalty rates. (0.5% for certain technologies; 0.25 for others) (”positive injunction).

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Refrain from collecting or attempting to collect more than the maximum allowable royalty rates.

(“negative” injunction).

Employ a Commission-approved compliance officer to ensure that Rambus’s patents and patent applications are disclosed to industry standard-setting bodies in which it participates.

(“positive” injunction).

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o The Commission’s Rambus opinion made clear that:

“Having found liability, we want a remedy strong enough to restore ongoing competition and thereby to inspire confidence in the standard-setting process. At the same time, we do not want to impose an unnecessarily restrictive remedy that could undermine the attainment of pro-competitive goals.”

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USFTC Case Examples

EXAMPLE 2

FTC v. Mylan Lab, Inc. (1999)

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USFTC Case Examples

• Basic Facts:

o Second largest drug manufacturer in the U.S.

o Leading producer and seller of two popular anti-anxiety drugs.

o Entered into exclusive supply contracts with the only suppliers of an essential input.

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• Allegations:

o Exclusive supply contracts were an “exclusionary” act.

o Foreclosed competition in the relevant market.

o Caused unlawful monopolization.

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•Remedy:

• USFTC went to federal court, sought, and obtained:

o Termination of unlawful exclusive agreements.

o Injunction against future unlawful exclusive agreements.

o Disgorgement of ill-gotten monopoly profits.

Mylan agreed to pay $147 million to a special fund.

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• USFTC Policy Statement Regarding Disgorgement and Restitution: Available at http://www.ftc.gov/os/2003/07/disgorgementfrn.htm.

o Three key factors/questions:

Clear violation?

Reasonable basis for calculation of remedy?

Value added by the USFTC’s monetary remedy?

http://www.ftc.gov/os/2003/07/disgorgementfrn.htm

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USFTC Consumer Protection Example

EXAMPLE 3

FTC v. Skybiz.com, Inc. (2005)

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•Redress Defined:

Payment of money to consumers to compensate them for economic injury arising out of unfair and deceptive acts or practices in commerce.

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•Basic Facts:

•Skybiz.com was an Internet-based operation that promoted a work-at-home business opportunity with claims of quick riches.

•The cost to join the SkyBiz program was $125, ostensibly used to buy an “e-Commerce Web Pak.” Participants were urged to invest in more than one Unit to maximize their earning potential.

•Victims of the Skybiz scheme did not get-rich-quick. There were thousands of victims in more than 200 countries.

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•The FTC alleged that:

o The company’s claims that consumers who invested in SkyBiz would make substantial income were false;

o The company failed to disclose that most people in pyramid schemes lose money is deceptive;

o SkyBiz was actually an illegal pyramid scheme.

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• Remedy

o The FTC went to federal court seeking injunctive and other relief including restitution.

o The court granted preliminary relief, including an asset freeze and appointment of a receiver.

o Ultimately, the Skybiz defendants entered into an agreement with the FTC agreeing to pay $20 million in settlement.

o Each consumer will receive a distribution equal to the amount of their SkyBiz purchase, minus any commissions they received under the program. All eligible claimants will receive their portion of the Redress Fund via a stored-value MasterCard.

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USDOJ Case Example

EXAMPLE 4

United States v. Dentsply International (2005)

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USDOJ Case Example

• Basic Facts:

o Dominant seller of artificial teeth Approximately 80% of the relevant

U.S. market.

o Company distributed teeth through dealers.

o Strictly enforced a policy of not using dealers that carried competitors’ teeth.

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USDOJ Case Example

• USDOJ Allegations:

o Restrictive distribution practices excluded competitors and maintained dominant position.

o No colorable efficiency justifications for the practices.

• After trial and appeals, U.S. court found for the government.

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USDOJ Case Example

• Remedy

o Dentsply was prohibited from entering into an exclusive distribution agreement with any dealer.

o Prohibited from retaliating against any dealer that carried competitors’ teeth.

o Dentsply must certify annually its compliance with the order.

Sanctions and Remedies in Abuse of Dominance Cases

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