February 2004
European and American Approaches to Antitrust Remedies and the Institutional Design of Regulation in Telecommunications
While the United States continues to resolve the ambiguities in the Telecommunications Act of 1996, the European Community has embraced a new regulatory framework for telecommunications that relies to a greater extent on antitrust principles. Using "European and American Approaches to Antitrust Remedies and the Institutional Design of Regulation in Telecommunications," a forthcoming chapter in the Handbook of Telecommunications Economics, vol. 2, as a starting point, participants at a February 23 AEI conference analyzed the growing use, in both the United States and Europe, of antitrust law in network industries traditionally subject to sector-specific regulation. They discussed how the institutional design of regulation in such industries can increase or decrease consumer welfare.
J. Gregory Sidak
AEI
In the United States and the European Community, the topic of remedies in network industries cuts across antitrust law and sector-specific regulation. The legal and economic understandings of a remedy are not always synonymous. In both legal systems, a remedy is the corrective measure that a court or an administrative agency orders following a finding that one or several companies had either engaged in an illegal abuse of market power or are about to create market power. Legal remedies generally are retrospective in their orientation. They seek to right some past wrong. They may do so through the payment of money, or they may seek to do so through a mandated change in market structure, as in the case of divestiture or in the imposition of affirmative or negative duties.
The economic meaning of a remedy emphasizes market failure. The market failure may result from the unchecked exercise of market power, from the uncompensated generation of an external cost or benefit, or from insufficient information with which to make choices concerning consumption, production, or investment. Whereas lawyers think of a remedy as what to do after a finding of illegal conduct, economists think of a remedy as what to do after a finding of market failure.
The difference between the legal and economic conceptions of a remedy highlights another important distinction: namely, the difference between ex ante and ex post interventions in the market. Under the ex post approach, a remedy is imposed if illegal conduct is first proven, and it is the government or a private plaintiff that bears the burden of proving their case. This arrangement describes the operation of monopolization law under the U.S. Sherman Act or under the EC concept of abuse of a dominant position.
Ex ante remedies are generally imposed through sector-specific regulation. This is the case when remedies are imposed as a condition for clearance of a merger between telecommunications operators. In both the United States and the EC, antitrust enforcement authorities have used merger control procedures as a way to extract significant concessions from the merging entities. Over the last two decades, antitrust law has evolved into another form of regulation as it now relies on numerous policy statements and guidelines that resemble the type of prospective rulings made by regulatory agencies. The approach followed by the FCC in its Local Competition Order and recently vindicated by the Supreme Court in the Verizon case could affect the development of antitrust-based remedies in network industries.
The recent decision in Trinco offers an interesting illustration of economic influence in U.S. courts. The words "consumer welfare" never appeared. Unfortunately, American case law does not consistently use the impact to the consumer as the measure for regulatory proceedings.
Damien Geradin
University of Liege and College of Europe
As in the United States, EC antitrust law has taken a regulatory tone with the multiplication of notices and guidelines, which resemble the prospective rulings made by regulatory agencies. Antitrust concepts and principles play a central role in the EC framework on electronic communications. Meanwhile, the enlargement process allows the EC to expand the number of nations to which its regulatory principles will apply.
There are several similarities in the approaches followed by the United States and the EC in their remedial efforts. Both regimes have developed hybrid remedies that combine ex-ante and the ex-post approaches. For instance, the Antitrust Division has used consent decrees as a way to regulate the telecommunications sector. In both the United States and the EC, the remedies imposed as a condition for merger clearance often take the form of long lists of behavioral requirements indistinguishable from prospective regulatory requirements. Furthermore, the growing amalgam between antitrust and regulation can also be illustrated by the increasing reliance by antitrust authorities on guidelines, policy statements, notices, and other tools containing abstract statements of the manner in which these authorities plan to address any future anticompetitive conduct. In this context, they very much act like bureaucracies adopting prospective rulings rather than as antitrust authorities deciding cases on the basis of past events. In the future, antitrust could be much less of a litigation practice than a regulatory compliance exercise whereby adepts go through checklists of predetermined regulatory interpretations.
There are also significant differences between the U.S. and EC regimes of remedies in telecommunications. Regulatory remedies generally have been more intrusive in the United States. The 1996 Telecommunications Act and the FCC's implementing orders have produced an extremely dense regulatory framework. Although the EC regulatory framework adopted in the 1990s was also heavy-handed, the new framework has clear deregulatory features. The new EC regulatory framework no longer imposes remedies on predetermined categories of operators, but on operators holding significant market power (SMP); this latter concept corresponds to the notion of dominance under EC competition law. The EC system seems thus better equipped to limit the imposition of ex ante remedies to circumstances where market failures can be identified. No other circumstance should warrant ex-ante regulatory intervention.
In recent years, antitrust rules have played a greater role in the EC than in the United States in telecommunications. Although the U.S. government has not initiated any major telecommunications antitrust lawsuit since the modified final judgment that led to the breakup of AT&T, the European Commission has launched proceedings to address a variety of anticompetitive behaviors in telecommunications. Moreover, although it is true that U.S. antitrust increasingly takes a regulatory tone, antitrust principles have barely penetrated sector-specific regulation. On the contrary, there is a risk that regulatory models developed by the FCC (such as the controversial TELRIC pricing methodology) could influence the design of antitrust remedies in the future. By contrast, EC antitrust principles play a crucial role in the new regulatory framework on electronic communications: key regulatory decisions-such as market definition, identification of SMP operators, and the adoption of remedies-must be adopted in conformity with antitrust principles. There is also a clear understanding in the EC that sector-specific regulation is to progressively give way to antitrust law.
Abbott Lipsky, Jr.
Latham & Watkins
Historically, regulators have had difficulty foreseeing the combined effects of regulation and technological innovation on any particular industry. In contrast to the European Union, the American legal system has very little innate commitment to the idea of competition. While the European Treaty of Union specifically refers to competition rules, Congress, through its power to regulate commerce, is authorized to dictate market structures in the United States. In contrast to Geradin's description of European antitrust law slowly replacing sector-specific regulation, the United States system will likely exhibit continued tension between antitrust and regulatory law. Still, legal systems in general have difficulty adjusting to industries such as telecommunications-which is itself becoming further integrated with the information systems and media industries-that are characterized by continual innovation. Though regulation by individual state PUCs creates a fragmented regulatory environment in the United States, consumer welfare and efficiency are accepted guides to interpreting American antitrust law. On the other hand, concepts of unfair prices and unfair competition are explicitly written into European law. It will be interesting to see who gets to the goal line first, who gets to a solution for electronic communications that is considered to be the proper mix of competition and antitrust remedies on the one hand and regulation and regulatory remedies on the other.
David S. Sibley
Antitrust Division, U.S. Department of Justice
Convergence can be viewed from two perspectives: how close the systems currently are and the historical trend. In response to the Telecommunications Act of 1996, the Justice Department closely scrutinized the telephone companies for violations. However, the Act did not call for perpetual enforcement or oversight-in contrast to regulatory agencies-and these activities are no longer conducted. While American and European regulatory and antitrust regimes are all ex ante, those enforced by regulatory agencies in the United States are far more intrusive and prescriptive then the corresponding European regulations described by Geradin or the antitrust guidelines followed by the U.S. Department of Justice. American regulatory agency behavior also differs from the DOJ's Antitrust Division. The Department of Justice focuses on compliance to its guidelines in specific instances, but does not conduct any further monitoring once compliance is verified. It is up to the aggrieved parties to address this issue through the courts. However, regulatory bodies oversee the industries that they were legislated to regulate as long as such legislation remains in force. For example, a 1968 study found that, following a win by the Department of Justice or Federal Trade Commission, the long-term outcome tended to go directly against the liability finding. While some convergence may occur, there is both a qualitative and quantitative difference between the actions undertaken by regulatory agencies and the Antitrust Division. While the EC has made progress in promoting competition in network industries, it is possible that lobbying in the form of "public input" and disparate regulation from various national agencies could cause problems similar to those facing the U.S. telecommunications industry. It is interesting to note that, during a workshop sponsored by the FTC and the Antitrust Division, some participants felt that an antitrust regime composed of clear rules-even if less perfect-would provide better outcomes than the present system. The speed and transparency it provided-allowing actors to make decisions based on more certain assumptions-would outweigh the occasional bad decision, which would probably be ironed out by the market with time and as new innovations appear.
The U.S. Constitution does not explicitly favor competition or competitive market structures, and America does have a greater predilection toward competitive outcomes than does Europe. Europe primarily relies on antitrust law because it does not have pan-European regulatory agencies like the FCC. In addition, as European regulation is considered an administrative matter with limited judicial review, decisions have been reached much faster than in U.S. antitrust cases.
