Competition Laws in Conflict: Antitrust Jurisdiction in the Global Economy

May 13, 2004

Unedited transcript prepared from a tape recording

Proceedings:
MR. GREVE:  We will start promptly, which is now.  We will end even more promptly at 11:45 because Richard Epstein has to rush off and join the competition across town, the Cato Institute, and we want to facilitate that because here at AEI we believe in competition.

I thank all of you for coming, and I am especially grateful to Chairman Muris, soon to be ex-Chairman Tim Muris, for joining us for the presentation of this book.

In contrast to the kind of things that Richard and I sometimes tend to write, this book, I think, needs no inventive news hook and no labored explanation because the quick answer to the question of what is this all about is well, does the word Microsoft mean anything to you.

When we first developed the conceptual framework for this book and for the year-ago conference on which it's based, Microsoft was of course entangled in various U.S.-based antitrust proceedings which some states refused to terminate even after the Federal government had settled the matter, and as we were planning this particular event here, the book rollout, of course, the same company was hit with a very expensive verdict by the European Commission over substantially identical conduct and alleged violations, and regardless of what you think of the merits, the particular controversy, I think multiple and duplicative prosecutions obviously present a problem, a jurisdictional problem as it were, and that is what this book is about, jurisdictional problems in antitrust or competition law, both in the United States and on an international scale.

Now having mentioned the headline of the Microsoft matter, I will promptly add a disclaimer.  Neither Richard, I think, nor I myself nor, in fairness to the contributors, any of the contributors know exactly what to do about a case like that.  No one here, I think it is safe to say, has a fully worked-out set of institutional recommendations.  The value added here, I think, and elsewhere, which is Richard and I think that it's a mistake to conceptualize an entire legal field from the vantage of the hardest possible case.  And the hardest possible case is the international megamerger or the application of traditional antitrust doctrines to network in declining marginal cost industries that operate on a global scale.

Those controversies, I think, signal broader, larger problems with the general legal arrangements here, the existence of multiple antiregulatory and enforcement agencies in a world where private transactions routinely cross borders, and we ought to at least as a first step get, we think, the humdrum recurring cases right, even if we don't quite know what to do about Microsoft or what to do about the GE-Honeywell merger.

So with that intuition, a wide range of scholars, and a very wide range of Federal judges, all of them from the Seventh Circuit Court of Appeals to examine to various aspects of the basic question, it was a true joke, it was a necessary joke.

Look, if the world were your oyster, if you could choose an antitrust constitution for the world, what would it look like?  How would you assign antitrust regulatory and enforcement authority here and abroad?

I have learned a great deal from the authors, both with respect to these basic conceptual ideas and with respect to the basic conceptual framework.  We have learned so much that the task of sketching that framework and the basic of it has fallen to Richard because he talks much faster than I do.  I will simply confine myself to illustrate, with few remarks, the astounding range of problems with a few examples, some domestic, some international.  And all of them interestingly enough, just occurring with the past four weeks.

Example one:  There is a little case now pending before the Texas Supreme Court and it affects an industry that Chairman Muris knows a great deal about.  The lower Texas courts there held that Texas antitrust law -- Texas antitrust law -- bars certain marketing arrangements between soft drink bottlers and retailers.  These agreements are supposed to be impermissible vertical restraints, and the glitch here is that the agreements are by region, that's the way the soft drink industry works, and none of the regions at stake in this case is in Texas.  They are all in Alabama.  And the theory here is, on which this was adjudicated in the Texas courts, is that, to go legal on you for one minute, is that Texas has prescriptive jurisdiction to bar agreements that are perfectly legal in most other states because its courts in this case have personal jurisdictions over the parties because some of the contracts were allegedly drawn up in Dallas.

This is, just to show you the structural similarities to the international setting, something like this is arguably the doctrine of the Hartford Insurance case, which on that view held that there is nothing wrong with American courts at the behest of American plaintiffs adjudicating the legality of reinsurance agreements conducted in London.

So here in this case, a court and jury is Morris County, Texas presumes to dictate soft drink sales taxes in Birmingham, Alabama, and the way that industry is organized, in Chicago and Milwaukee as well.

Now speaking of Milwaukee, the Wisconsin courts are currently confronted with an antitrust case where defendant company Microsoft, as it were, argues that the state's antitrust laws apply only to conduct within that state.  So now here the theory is the reverse.  Even if the anticompetitive conduct has price effects inside Wisconsin, but the conduct all occurred elsewhere, Wisconsin law doesn't reach it.

Interestingly enough, that is how a few other states, including, of all places, Alabama, already read their own antitrust laws.

It's the bright rule here.

Now as it happens, personally I think both the Texas and the Alabama positions are both wrong, but the larger point is that the courts in these cases are approaching the question unassisted by anything resisting a systematic thought on the larger issues that are at stake here.

Moving a little further up the public recognition chain, the Supreme Court in April heard and by June will decide the far-famed Empagran case, and most of you know that this case presents the question whether anticompetitive conduct that has price effects principally abroad can still be heard in the United States courts and at whose behest.

Most of you also know that the appellate courts have ruled -- have issued conflicting rulings in that matter, but I think it is safe to say here that the delicate statutory interpretation issues in these cases obscures the larger jurisdictional conflict.  So put aside the narrow statutory question of what Congress actually did here in 1982 or '83 or whenever it was; what should it have done?  With what presumptions should our courts approach the statutory question?

So finally you move abroad to Brussels, rapidly emerging as antitrust capital of the world, and I think there are three developments, all again within the last four weeks merit a brief mention.

First, Mr. Monte (phonetic) has over the few years taken a licking in some recent antitrust matters in his courts.  Putting aside the short-term tactical calculations, is that good or bad for us?

Generally, should we internationally treat merger disputes and other antitrust matters as trade questions, which institutionally speaking means negotiation with our trade partners, or as legal matters, as antitrust questions, where we have no such leverage?

And if the answer is somewhere in between, what sorts of disputes do fall into the trade arena?  What falls into the competition policy basket?

Second European issue:  The Microsoft order in Europe contains, in addition to its mind-blowing penalty, a rather striking provision for permanent monitor to be paid for, but obviously not appointed by Microsoft.  So Microsoft is now effectively being taken into receivership there and maybe can ask the Boston school districts what to do about that.

Maybe if you buy the EU's theory here, you need something like that remedy, but you have to worry about the institutional implications.  A few cases and a few more monitors down the line, somebody will say that, well, look, we have all that already, so why don't we have a more institutionalized permanent global agency, and the beleaguered companies at that point may well join the parade, and you have to ask yourself, well, is that what we want.

Finally, on May 1, the big bang occurred in Europe.  As part of its enlargement, the EU delegated or decentralized some of its antitrust enforcement authority to the member states, and that's supposed to be a first step toward what we already have, what the Europeans don't yet have, which is private antitrust enforcement.

Now arguably one of the very few good things you could say about European competition policy is that it was to date a monopoly, de facto.

Is it the case that we in the United States cannot at some level afford to live with private enforcement and with a very fragmented system because our substantive law is very disciplined, or relatively disciplined?  And if that's the right view of the relation between substantive and formal arrangements, what should we expect to come of the EU reforms?

More broadly, how does the increased fragmentation of antitrust authority in the EU and, I might add, here in the United States as well, fit together with the ambition which the Europeans also have to harmonize competition law worldwide?

Again, nothing but questions, and the book doesn't have all the answers, but it has some of the answers, and it has at least a general conceptual framework for approaching these devilishly difficult issues.

With that, I will turn the microphone over to Richard.

[Applause.]

MR. EPSTEIN:  Well, first of all, I want to say how much of a pleasure it was to work on this particular project with Michael and with Kate.  There's a certain amount of chaos in trying to plan conferences and volumes, and when you manage to do both of them, you get the volume out within the year after the papers were presented, I regard that as a moral victory if nothing else, even if it's private enterprise.

I think it was Robert Bork who said famously that the strongest case for socialism is the private publishing business, and there's some sense in which I think that to be true.

Now I think the way in which the division of labor between myself and Michael shaped up is what he has done is given you a number of events since the conference and not covered in the book, which are the salients of the topics that we are covering, and my job in this particular occasion is to give you some sense of what it is that we talked about when we talked about the various kinds of arrangements in the book, so you get some sense as to how it is that the thing plays out.

Here in effect I'm going to start even a little earlier because my own view about every modern controversy is that you will always find some medieval or ancient controversy which covers exactly the same kind of proposition.  And if you go back, one of the famous statements of Sir Henry Mayne (phonetic), who was a good Roman lawyer, writing about ancient law, said that we always have to understand that the development of substantive law is secreted within the interstices of procedure.

What he meant by that is if you are trying to figure out how it is a legal system starts to develop, it is not simply a discourse of moral philosophy by people who are trained in the higher arts.  These are all concrete disputes, and they are necessarily and often irreparably shaped by the kind of jurisdictional, procedural, and general adjutival framework in which they take place.

When I took conflicts law back at the Yale Law School, I was taught by a foreigner named Levantin (phonetic) who is an Israeli, and we began with an 1806 case by Lord Evanborough (phonetic), and the question that we had was whether the courts of Tobago, that's located in Trinidad and Tobago, shall the courts of Tobago bind the world.  And if you start to think about it, that in some sense is exactly the same kinds of problems that we are facing here.

The issue then is what do we do about the intersection between substance and procedure and how do we understand it.

Well, the first point that we have to do is to figure out whether or not we understand something about the substance, because if in fact you could show, as we never can show, that there is perfect substantive agreement on the way in which we ought to treat any particular issue, then the way in which you parcel out that work amongst different courts and different jurisdictions and different institutional agencies will have at most a minimal level of friction amongst them.

If, in fact, most people have the same sound kinds of views, that the variation in the world was roughly the variation that you found on this particular panel, we would never bother to write a book which had to do with the procedural issues.  We all would have understood that the major function of the antitrust laws is to sort of put a little slap on the wrist or maybe even a big slap on the wrist of cartels and other kinds of horizontal arrangements, that fancy theories associated with attempted monopolization and predatory pricing generally aren't worth the power to blow them to hell, and that when you start looking at vertical kinds of arrangements, they are rather difficult and in between, and generally speaking, inside every vertical arrangement you want to see a horizontal cartel waiting to come out.

You would then also realize in some sense that antitrust is actually a second-order effect, not a first order of business.  The first order of business is making sure that there aren't formal barriers by way of protection in trade and so forth, which would generally interfere with the flow of commerce.

So we think, and I think it is probably accurate, that whatever you want to do in the antitrust area is to some extent, if you don't get wholly mischievous within the realm of our region of the world, small potatoes compared to protective tariffs and Balkanization and division of markets, which only governments can start to create.

Now it turns out, as usual, three people sitting around this table -- I'm speaking for you in your capacity, not your public capacity -- don't represent the full range of opinions on any kind of issue, and that you then have the question of how it is that you try to organize/harmonize, and it's not necessarily the same word, the same sorts of questions as you go with people who fundamentally disagree with one another, understand that they have to make some degree of accommodation, and the question is how that you do it.

The first thing you do when you approach a problem like that is you develop a form of humility which only comes, I'm sorry to say, with age, a dread commodity for somebody who has been around this business as long as I have been.

When I started out teaching 35 years ago and so forth, I was very much into the strong libertarian tradition of finding radical, conceptual, clean, analytical solutions to complex social problems.  And what I tended to do, as most of us tend to do, is to pick the series of issues which actually lend themselves to those kinds of analyses.  The analysis of the rules of proximate causation and the law of tort is in fact where I started my academic life, and it seems so long ago that I wondered why I even concerned myself with such kinds of questions.

 But I'm still interested in it, don't get me wrong, but the questions you get on here are not so much conceptual.  Essentially the thing that makes one a coward and gives you the sort of cautious tone of voice that Michael took was that you realize that the basic problem in every legal world is that when you are dealing with complex phenomenon, the only questions that are worth considering are those which in fact involve some degree of tradeoff between various values, both of which in some sense you regard as reasonable.

To sort of illustrate this at the highest and loftiest conceptual level, if it turns out that you happen to like a fixed rule in a given circumstance, you talk about the certainty that is created which allows other people to plan their lives.  But if you dislike that same kind of rule, what you do is you talk about the procrustean bed and the virginity that is created by a rule which is simply insensitive to the way in which cases have to play out on their individual level.

So in effect what happens is if you go the other way and you start doing one of these fact-based kinds of determinations, what you say in effect is we now have the flexibility to command these situations and to respond to these nuances, and then somebody on the other side turns around and they say, oh, no, no, what you do is you have a radical amount of indeterminacy which is necessarily going to result in conflicting and uncertain decisions by arbitrary judges who take advantage of the gaps within the legal system in order to engineer some private kind of an arrangement.

All you are trying to say is what's the optimum level of fixity associated with a given kind of rule where you know if you start moving to one pole, you are going to miss the outlier, and if you move toward the other pole, you may be messing up the core, and until you know something about the distribution of cases across the spectrum, you are not quite confident as to what the optimal rule is going to be.

So what happens is it's kind of a Newtonian version of the law, which is for every force there is an equal and opposite force moving -- there is an opposite force, but you don't want to treat them as being equal, because sometimes if you could get rid of a big problem and create a little problem, that's well worth doing, whereas if you get rid of a little problem and start to create yourself a big problem, that's not worth doing.

The question in all of these cases is essentially one of proportion and judgment and how you start to do these.

So now let me just give you a couple of simple examples or at least one simple example, which starts to show the way in which this thing goes.

One of the principles that we talk about in this book is a European term which actually has a modicum of sense, which you would never be able to derive from the word itself, and that is called the principle of subsidiarity.  I finally learned how to pronounce the term.  Now I will clue you in if you don't know as to what it actually means.

This is an argument which says that we wish to have that jurisdiction decide a particular question, such that all of the relevant effects are internalized in the jurisdiction that makes the decision.

So you don't want the smaller such jurisdiction, you don't want something to be decided at a world level if the question is where you put the traffic light at 5th and Main, and you don't want the thing to be decided at a local level if the question is going to be what sort of Internet protocols are going to be used to handle global traffic.

The theory is you want to be large enough to cover the subject but no larger than it turns out to be necessary.

Now in some ways people say aha, this turns out to be a wonderful argument in favor of localism with respect to local kinds of disputes because you can get the benefit of all this kind of local knowledge, local infrastructure, and you are not going to have any sort of powerful externalities.

Well, the answer to that question is not that you are wrong, it is that you are incomplete, which is why it is all of these problems are so difficult.

Why does it turn out that you are incomplete?  Well, it turns out we also have other instances of localism which aren't so pretty.  Has anyone seen the operation of a local zoning board, which takes certain minority members within a given community and gives them a run-around, while giving all sorts of preferences to other people within that community who have greater levels of political power and influence?

If you go back and think over the battles over segregation and civil rights in the United States, essentially the question was how could we make this a Federal question so as to be able to take this out of the Alabama courts.  And one of the issues which I don't think people realize is that if you ask yourself why it was that New York Times v. Sullivan was decided by the Alabama Supreme Court back in 1963, before it was reversed by the United States Supreme Court, it's because it turned out the New York Times lost on a removal motion in the Federal court because the local distributor was brought in the suit with it and complete diversity was not obtained.

I don't know if you knew that little bit of history, but that's exactly the same kinds of issues that arise today with respect to these antitrust kinds of issues when you are worrying about on the domestic level of the relationship between the local and the national governments or the smaller and the larger governments.

So we start with this principle of subsidiarity.  What we are going to do is simply trace out the three positions, all of which are found resident in larger political theory, and then indicate to you that Michael and I at least regard ourselves on this question as moderates.

Listen carefully.  Moderates, by virtue of taking what we think to be the middle position.

Here is essentially what the name of the game is.  If you go back to my sometimes favor political philosopher, John Locke (phonetic), and he's trying to figure out how it is you put the government and the society together, he manages to engage in one of the most famous cheats in the history of political philosophy.  He says at the first point that once we get ourselves out of a state of nature into the government, private property can be taken by the government from any given individual only with his own consent.  And that seems to be that you can't tax anybody unless he personally agrees to the tax in question, which in effect translates itself into a unanimity rule, the single holdout can disrupt the entire operation.

And there is a great advantage to unanimity rules in that nobody will be left worse off with unanimity than they would be in a world in the prior state of affairs because they're not going to join a contract.

In the next sentence he tells us what his own consent means, i.e., majority rule, which is exactly the opposite kind of a situation, and that's because what majority rule says is if you've got a community, 51 percent can vote on some kind of a general law and may do so in a way in which will systematically exploit the other side.

So essentially the problem that you get in political theory is that the two most obvious forms of governance each have fatal objections to them.

One of them, unanimity, invites holdouts, which are impossible to deal with in many circumstances, and the other majority rule invites exploitation which turns out to be --

[TECHNICAL INTERRUPTION IN RECORDING.]
. . . to solve this problem is by a compromise principle which says that the majority may rule, but it may do so only to the extent that it is bound to the same incident and extent as the minority which it is going to govern.

So you have a kind of a just compensation principle.  You can call the shots, but you have to be in the same boat as the people who are outside the majority, who are going to be subject to your particular rules.

Within the framework of the commerce clause and jurisdictional issue, this cashes out into what we call the nondiscrimination principle, and I think if you are going into the international region, they call it the national treatment principle.  Is that the term?  As the sign of intermediate sort of position.

International trade, it turns out, and domestic trade within the United States gives rise to exactly the same kind of an issue.

Within the American federalist system, what is very clear is that the full faith and credit clause in the presence of a national government means when the states start to operate with one another -- I'm not in this particular compact unless I sign on -- has in effect been abrogated by a larger national government, and our large sort of overview is that although you can find the occasional blunder that has been associated with the application of dormant commerce clause principles in the United States, we think that amongst illegitimate constitutional doctrines, this has been by far the most productive and shall we say salutory one that you can imagine.  It has gone an enormous way to create a free trade zone in the United States which reflects the differences that different states have with respect to lots of matters that take place within their borders on such issues as zoning, on such issues as labor regulation, and so forth.

So when it comes to the international sphere, our book in effect is, I think, quite unusual because we have authors that express all three basic positions.  Paul Steven of the University of Virginia says I never met a contract I didn't like, and I never met a social contract I did like, so I'm in favor of the autarchic solution.  Either each nation does its own darned policy, whatever it chooses, or it enters into bilateral agreements and the impulse from gain that you could get through trade will be large enough to lead to a slow level of liberalization without running into any of the complications associated with national government.

At the other end we have our friend Andrew Guzman, and he takes the position no, this is absolutely crazy.  You get duplicative, noncooperative games whenever you play in this particular sense, so I'm in favor of global harmonization which will allow a single supernatural body to pass one set of particular rules.

In between it turns out to be Michael Trabilco and Education Jakobuchi (phonetic) on the one hand, and John McGinnis on the other, take the basic kind of proposition, both of these extremes seem to us to be unworkable.  The autarchy leads to degeneration and trade wars, harmonization in the European style leads to the creation of massive cartels by organizations that are too far removed, the principle of subsidiarity does go.  So we like some version in effect of American or even Canadian federalism.

Michael and I, I think, by and large move pretty much to something like that middle position as a kind of compromise between what we would like to do substantively, but since we are not the rulers of the world, cannot impose at least unilaterally and the proceduralism that we have talked about.

We understand that this requires cooperation, we understand that there are going to be major breakdowns that take place under this situation.  We understand that if there are really deep substantive divisions such as those between the United States and Europe on matters like Microsoft and monopolization, that they are not going to be papered over, but all in all in a world in which the stakes are as enormous as this and you have to choose between one or another high-cost alternative, we think you are going to have fewer errors with this particular principle than any other, and that's the difference between a young Richard and an old Richard.  The young guy always knew what the right answer was; the older guy is just trying to avoid disaster in the hope that you can create some incremental improvements.

Thank you.

[Applause.]

MR.           : Thank you, Richard.  Chairman Muris.   And thank you again for joining us today.

MR. MURIS:  I knew that sometime in my life I would have to follow Richard on one of these platforms.  I have known Richard since 1979 when I had the great intellectual experience of spending an academic year at the University of Chicago.  Actually, I met you at Henry's.  I probably met you in '76, but I got to know you well from that.  Twenty-five years ago.

Richard has more excellent ideas than any academic I know.  It is also true that he probably has more ideas than any academic I know, but I have long been an admirer of his and have known him for a while, and I have been an admirer of Michael Greve for a long time as well, although I had never met him until today.  He is one of the people writing about federalism who understands as well as the benefits of decentralization the benefits of centralized markets.

It is obviously customary at events like this to praise the organizers, and I certainly have done that, but I just want to make it clear in the words but not the spirit of a parent addressing a child, I want to say that I really mean it.

They are exceptional authors and editors, and this is an exceptional book which analyzes a topic, antitrust globalization, that clearly has more facets than the Hope diamond.

Given the broad scope of this book, I'm not going to try to summarize it.  I did have a good chance, thanks to taking Evelyn Wood when I was a kid, I managed to spend several hours on the weekend and absorb a lot of it.  But you are just going to have to read it.

What I want to do is make three observations.  Each is based on my experience at the FTC, and each, I think, sheds some light on the issues in the papers.

The first is the stunning rapid emergence of antitrust around the world.

The second is the enormous importance of the U.S. common market and how antitrust enforcement at the Federal level remains crucial to maintain our common market and the benefits that it offers.

Finally, the United States state action doctrine and how we can better deal with interjurisdictional conflicts within our country by clarifying that doctrine.

So let me start with antitrust going global.

The book here in front of us is a testament to this fact.  Everybody here today is familiar with the current multijurisdictional nature of antitrust, but I think it is worthwhile to step back and remember just how far and how fast we have come.

I spent much of my life in the academy, and have once or twice fallen to that affliction of making bold, confident predictions about the future.  These predictions, often wrong but never in doubt, like maybe the young Richard, sometimes form the basis of academic reputation.  And let me give you a case in point.

In 1963, Robert Heilbrunner (phonetic) published "The Great Assent," which was a very influential text on development economics.  He said that public officials must accept the need for "political authoritarianism and collectivism" to spur economic growth in less-developed countries.

He announced that capitalism "is unlikely to exert its influence beyond the borders of the west, at least within our lifetimes."

This assessment was not only quite a mouthful, but it was stunningly and wonderfully wrong.  When he wrote how many expected market ideas to reshape the global economy by the end of the century, who foresaw that competition policy would become a prominent instrument of economic reform throughout the less-developed economies.

When I reflect on my professional life outside the academy, the scope of the transformation never fails to astonish me.  My competition policy career began in 1974, when I first worked at the Federal Trade Commission.  The book whose launch we celebrate today could not have been imagined, much less written, at that time.

Think about the status quo three, even two, decades ago.  Few countries had antitrust laws.  Most enforcement was exclusively domestic.  There was no broad international consensus about the value of stringent prohibitions against cartels like there is now.

Then cross-border competition issues mainly involved attempts to use blocking statutes and claw-back laws to blunt the reach of United States antitrust enforcement.

I have a clear memory of visiting London as an FTC official 20 years ago this month and listening to the Department of Justice in Her Majesty's Government argue over a blocking statute.  It got so nasty that an official who is now a judge -- you have probably forgotten who I mean -- accused Her Majesty's Government of acting like a banana republic.

Of course, given the state of the global economy then, I suppose that and Heilbrunner's prediction 20 years  before weren't surprising.  As a model for economic organization, capitalism was the exception.

In 1974, when I first started in this field, to predict that a wave of economic liberalization would sweep the globe by century's end would have seemed like then predicting the renaissance of the New York Yankees, heroically optimistic.

But that's exactly what happened on both fronts.  Unfortunately, the Yankees were reborn.  More important, however, most countries today agree that markets form the core of a vital economic.  Over 90 nations have adopted antitrust laws, including more than 50 in the last 20 years.

This trend reflects a basic change in how nations around the world define government's role in the economy.  Because antitrust views the government as a referee, not as the manager or star player.  Antitrust, like the referee, is essential, but again like the referee, its job is to let them play so that all may benefit from what competition can produce.

One of the great lessons I have learned from Richard and others in the law and economics tradition is that markets need rules, and that some of the rules that antitrust and consumer protection, what we do at the FTC, enforce, are so basic we don't even think of them as rules at all.  They are rules against cartels, rules against fraud, rules against deceptive advertising.

So if you ask do I believe in the globalization of antitrust, I respond like the fellow who was asked whether he believed in baptism.  He responded, believe in it?  Sir, I have seen it.

Thus, this book, which was inconceivable when I began my career, is now three decades later indispensable.  I commend those who conceived it and those who produced it, and I am proud to say at the FTC we back up these words with resources.

We have devoted thousands of staff hours to providing technical assistance here and abroad to developing countries' competition and consumer policy authorities and will continue to do so.

Now let me turn to a substantive issue that affects us here inside the United States, in which I disagree with some of the authors, and probably some of the people at this table.

I want to speak in praise of our common market.  A central theme of any book or discussion on antitrust globalization necessarily must be how to deal with overlapping jurisdictions who each want to enforce competition policy.

Now this, of course, is not solely a problem of international law and diplomacy.  It is also directly relevant to how we deal with antitrust at the national and state levels.

Although Bill Kovasek (phonetic), who is sitting in the audience today, is both a valued colleague and a close friend, I would be remiss here if I did not single out his excellent paper in this volume for the manner in which he clearly explains these concepts and their implications.

The political autonomy of our states, of course, is central to the political and economic health of the United States.  The states are rightly regarded as laboratories of innovation and as law enforcers who have their ears closely attuned to the people.

Regrettably, however, discussions about the competence of the states can sometimes lead to suggestions that Federal enforcers should abandon or be forced to abandon certain areas of antitrust concern to the exclusive control of state antitrust.

I think such suggestions are quite mistaken.  They are simultaneously the lessons of history, of economics, and of politics.

Well over 200 years ago the Founding Fathers created our common market.  It is an economic model not only for Europe  but for the world.  Central to the concept is the understanding that states within the market shall not inflict economic harm on other states, and that the common market has an overriding concern, indeed a common concern, with the overall welfare of the unit.

Markets are not zero-sum games.  We all gain when others prosper.  Proposals to abandon Federal antitrust enforcement over activities that are confined within one state ignore these principles.

Consider, for example, regulation of the professions.  I think it would be quite unwise for several reasons to leave such behavior solely to the states.  Some suggest people who prefer a strong antitrust enforcement can migrate to states that provide such enforcement.  This ignores Ronald Koss (phonetic) and the transaction cost literature, who plainly teach to leave consumers to protect themselves by migration would enable the professions in a weak enforcing state to extract surpluses from consumers up to the cost of moving out of the state.

These costs, both objective and subjective -- and I think the subjective costs can be particularly large -- can be substantial.  I think it is false to say, for example, that people can choose to stay where they are and pay higher dental fees or move to another state and pay less and ignore the transaction cost.

It is true that enforcers close to the ground might make very good assessors of what is anticompetitive.  To suggest, however, that they must make the best assessors ignores the countervailing point central to the public choice literature initially developed by Buchanan and Telleck (phonetic).

Regulation of the professions at the state level generates benefits and imposes costs.  A highly educated elite benefits from anticompetitive regulation.  The costs of such regulation are very diffuse, realized most significantly by people with limited resources.

Under these circumstances, to one versed in public choice analysis, state underenforcement of competition policy is as predictable as the sun rising in the east tomorrow.

Consider some of the cases and other initiatives involving local or statewide commerce that we have pursued during my various tenures at the FTC:

We sued cities for restrictive taxicab regulation.   We sued doctors, poverty lawyers, and title insurance companies, for price fixing.

We have attempted to stop local hospitals from merging to monopoly or duopoly.

We sued a state dental board for preventing dental hygienists from giving preventive care without the direct supervision of a dentist.

I'm quoting from our complaint.  Those of you who know that case, it is in litigation, and that's all I can do.

We filed in numerous state regulatory proceedings on behalf of consumers, most notably in several states to allow truthful advertising and argued against the necessity of a lawyer for even simple real estate closings.

In the vast majority of these cases, indeed in all of them, I think, except title insurance, there was no private or state agency enforcement even as a follow-on to our cases.

Some suggest that local activities are likely to have attenuated effects on our interstate commerce.  With the advent of the Internet, this is increasingly untrue, even when it comes to regulation of the professions.

Consider, for example, the extent to which drugs are prescribed over the Internet.  More important, the point of a common market is to enlarge the pie for everyone.  It does matter to someone in Indiana that consumers in idaho have greater wealth and enjoy more surplus from a competitive economy because in a common market these effects have beneficial spillovers.

To repeat, I do not doubt the value of local enforcement of antitrust.  Indeed, I applaud it.  To suggest, however, that local competence bruits national Federal incompetence is in my judgment to forget the lessons that history, both recent and venerable, public choice analysis, and economics teach so clearly.

Our common market is the envy of the world, and it should not be entrusted exclusively to those who have different priorities.

Finally, let me briefly address my third point, which is the need to clarify the antitrust state action doctrine.

Antitrust does not involve obviously just the question of how two or more authorities might apply the law to one person or activity.  There is a flip side.  What do you do when a jurisdiction says we don't want to apply antitrust at all, but instead wants some other form of regulation.

A local authority might want to control entry and regulate prices rather than let the market decide.  Now we regulate this in the United States with our state action doctrine.  Years ago the Supreme Court decided that the antitrust laws did not mean that all local economic activity had to be regulated by competitive markets overseen by antitrust.

Antitrust law currently reconciles our commitments to state autonomy and national competition policy by saying that antitrust will not reach private activity within a state if two conditions are met:

The first is that the state has clearly articulated and affirmatively expressed a state policy to supplant competition.

The second requires that if the state itself does not directly undertake the regulation, then the state has to actively supervise it.

Because the state action doctrine weakens antitrust, the doctrine must be under these tenets properly limited to matters that deserve antitrust immunity, which would mean deliberate decisions to substitute regulation for competition with true oversight of the results.

We recently released a state action report that concludes that the doctrine has grown without, to coin a phrase, clearly articulated and active judicial supervision.   Regarding the clear articulation requirement, you have many courts that have expanded the doctrine by inferring a state policy of displacing competition from no more than a legislative grant of general powers.

Once a state authorizes certain acts or implements a general regulatory scheme from an industry, these courts say any competitive effects are foreseeable.

In other words, these courts equate a state's mere general grant of -- I mean a mere grant of general authority with a state's clear articulation of a policy to restrain competition.

Thus, the more general the legislation, the more likely it is that the legislature intended to displace competition.

Sadly, this formulation stands the clear articulation test on its head.

Regarding active supervision, the problem has not been sins of commission but of omission.  Because the higher courts have not given guidance about what active supervision means, it hasn't functioned in practice to limit grants of authority.

Now to address both these problems, our report recommends six clarifications.

First is to reaffirm a clear articulation standard tailored to its original purposes and goals.

Second is to clarify and strengthen the standards for active supervision.

Third is to clarify and rationalize the criteria for identifying those quasi-governmental agencies that should be subject to the active supervision requirement.

Fourth is to encourage judicial recognition of the problems associated with affording state action protection to behavior that generates overwhelming interstate spillovers.

Fifth is to clarify and strengthen what is called the market participation exception.

And, finally, we proposed and we are doing this to make a comprehensive effort to use amicus briefs to address these issues, as well as our own litigation.

Let me summarize and finish.

I do not think that my brief remarks are a substitute for reading this very fine integrated collection of essays.  I hope, however, that as you read the book, you will reflect on some of the arguments I have made today.  For good but unanticipated reasons, we have witnessed a stunning and welcome transformation to a world in which competition policy is now a principal instrument for market reform.

Interjurisdictional conflicts are a necessary byproduct of this explosive transformation.  These conflicts call for a careful working out of relative competencies, however, not complete elimination of any one jurisdiction or the rigid erection of barriers to various antitrust enforcement by those well positioned to provide that enforcement.

Thank you.

[Applause.]

MR.           : I would like to make a few comments about Tim's paper.  This is actually not all material covered in the book, but I think it sets the backdrop for it.

What ironically has happened, the laboratory language, as far as I am concerned, when it came up was in the New Ice Company case, and it came up in a dissent by Justice Brandeis in an opinion which by the Court struck down a statewide cartel.

So in effect although the thing starts to talk about experimentation and invention, it was in fact an illustration of how the term could be used to protect local monopolies.

Within four years after that decision, in Nebbe against New York, the Supreme Court essentially knocked down the limitations that the doctrine of public interest had on the ability of state to regulate prices, and Justice Robertson -- one of the dumbest opinions in the history of mankind -- said, oh, I don't care whether or not you are trying to set minimum prices to prop up a cartel or whether you're trying to set maximum prices to regulate a monopoly, it's all a matter of state discretion.

So the difficulty in many ways that we have here is we are trying through the FTC to do -- to control state cartel in ways which before 1937 were done as a matter of constitutional policy.  But I think the arguments that I have made on the constitutional level is if you look at our Constitution, it actually does make a choice between competition and monopoly.  It makes the choice in favor of the former, which should be protected unless you could show powerful justification as to why it doesn't work, and the latter, which essentially can be constrained under a much more liberal standard.

What we really are trying to do, it seems to me, by this kind of discussion is to figure out how it is we come back to the original understandings in which there is a kind of a built-in preference on one side of the line at a high enough level of generality that we don't have to fight the point over and over and over again on particular cases.

So I don't think -- I mean I'm not even sure whether you were after us or our office or whatever, it doesn't really matter, but the point that I mentioned about subsidiarity, in effect local governments being a two-edged sword, has simply been confirmed by what's going on here.

And to disagree with Tim, what you have to do is to explain, gee, it really is a wonderful idea why local dental services are subject to minimum price regulations and things of that sort.

I might add that even the Supreme Court on this issue has done some pretty terrible decisions.  The Montana tax severance decision, where in effect they start raising severance taxes on commodities that they have dominant market position, knowing that the taxes will fall on outsiders, and the sort of unwillingness to see that was a terrible mistake.

And Parker and Brown itself, which organized the raisin cartel in California, was done under the sort of New Deal silliness which says that private cartels are really terrible, but on the other hand they can erode, but if the state wants to back one with its force so it doesn't decay, that's really terrific stuff, even if 90 percent of the output gets sold outside of the state, and what we really are trying to see is how it is that you can undo those decisions.

The laboratories' misguided metaphor of Brandeis which later became law, the Nebbe decision which became law in Parker and Brown, and on the domestic front at least it seems to me that taking dead aim at those things would be a very welcome development indeed.

MR.           :  We have 20 minutes for questions, comments, and the like.  Kate has a microphone.  If you could identify yourselves, please, and let us know who your question is directed to.

TAPE CHANGE TO SIDE 2

MR.           : I'm interested, you were talking about the role of state and Federal enforcers, and you talked about efforts of the -- whether the Federal enforcers should not have jurisdiction in some instances.  But what about the reverse, when Federal enforcers assert their authority, should the states be allowed to come along for the ride?

MR.           :  I was asked this question, and you were probably there in November, and I said in all seriousness, although I suppose it has its humorous aspects, that I think the states are here to stay in antitrust.  The -- I think we need development just as we do internationally of systems of comity, the IT-wide form of comity, and I think -- my experience with the states has been superb.  I mean when we worked together, we haven't had one conflict in an antitrust or consumer protection case in three years.  I understand that the Department of Justice hasn't had the same happy track record.

But, look, I believe -- and this is something Richard knows a lot about as well -- I do believe that in certain ways good ideas can actually drive out bad.  I mean the reason Bill Baxter -- the horizontal merger guidelines have been adopted all over the world is not because we can make anybody adopt them, it's because they were an excellent idea.

I think if you look at the rise of the impact of something like the restatement of the Uniform Commercial Code in contracts which is something I used to teach, I think a lot of that has to do again with -- it was the persuasive nature of how good the ideas were.

And I think that's the kind of world that we are in.  I would -- in the consumer protection world, where the states spend a lot more resources than they do in the antitrust world, they are extraordinarily valuable partners.

For example, we have brought over -- the world in the last nine years has brought over 1,000 fraud cases under the telemarketing sales rule, and most of those cases have not been brought by the Federal Trade Commission.  The Federal Trade Commission has helped coordinate it, has helped organize what are called sweeps, where everybody gets together and decides they're going to focus on this area, but we have leveraged our resources enormously by using the states as partners.

I hope over time that happens more and more in antitrust, but part of the issue is the states apply, relative to consumer protection, a limited amount of resources.

MR.           :  I would put it in think following way.  If it turns out that you have a "presumptively local matter," and Tim is right to say all local matters have economic spillovers.  He sounds a little bit like Wickard and Fulbrim (phonetic) which gets me a bit nervous, but there is that.  And if they want to enforce the antitrust laws, say in a dental price-fixing case, it seems to me that the Federal government and the FTC should by and large yield to them, and only move in when they are inert because of local neutralization.  That's the first principle.

The second principle is if you get something which is a national global settlement, the Tobago question is very important, and I do not think that anyone should have to negotiate to the satisfaction of some guy from West Virginia in a nationwide settlement with respect to whether or not Microsoft is going to work.  And under those areas I think if it's a clear nationwide situation, then it ought to be exclusive Federal jurisdiction.

I mean there was in fact a wonderful decision by Judge Nealy (phonetic) in Virginia, West Virginia.  This is what he said:

I think the crash word in this document as it's been developed is one of the dumber things on the face of the globe, but if every other state is going to apply it and have their residents milk General Motors, I don't want West Virginians to be the only ones sitting on the side not getting a dime, and paying the same price for the cars as people everywhere else.

So I mean, you know, you get that kind of a problem, but I don't think that's the situation that you have in the other cases.  And so there I would say I don't want the single state to be the holdout.  I think it's appropriate under those circumstances to have exclusive national jurisdiction.

MR.           :  The interesting question about all this is why, if you look at some of the disputes in the '80s and you look at my experience now, we haven't had a problem with the states at all, and in fact it has been quite good, and I sometimes when I have time, which is not often, to step back and think about this from a public choice perspective, I'm not sure why, but the states have been extraordinarily good partners.

On the consumer protection side, there's something interesting that really does help create uniformity.  All the states have adopted, virtually all of them have adopted little FTC acts, and in adopting those they have said we will defer -- the law says, and their state courts enforce this, we will defer to the big FTC in interpreting what these vague terms, deception and unfairness, mean.  And that is a very useful development.

MS.           :   All right, this question is only being asked in the absence of other questions to Chairman Muris.

In terms of your experience with the states and their economic sensibilities, the largest issue that has really caught my attention recently is this question of the states wanting to buy their drugs in Canada, making use of pricing in another country.  And even someone like myself understands the kind of ridiculousness of what's -- how this couldn't make any sense.  Do you have any comment on that as to --

[Laughter.]

MR.           :  Well, I'll say something.  Let me let Richard go first.

MR.           :  I have to tell you, I have been Pharma's lawyer on this question, at least in the outside, and worked closely with their general counsel, Bruce Kulick (phonetic).  But if you look at the current bill, which is 2328, the words "free trade" have gone to a level of internal mockery which makes them an oxymoron.  The current statute has the following provisions.  It is a new, unfair trade practice to refuse to sell to somebody as much as he wants of a good at a price determined by a foreign government with respect to consumption in its own borders subject to treble damage action.

So now free trade requires mandatory sales.  Then the stuff that is sold, how it can be resold in the United States, that's free trade, to be sure, although it's free trade of stolen merchandise to some extent --

[TECHNICAL INTERRUPTION IN RECORDING.]
. . . since the stuff you sell to Canada is often in dosages which are not authorized for use in the United States, the company which is under a prescription to sell it at these mandated prices is in effect required to get regulatory approval at its own expense from the FDA to allow the competitive product to come into the United States to be sold.

Essentially it is a form of price fixing which has the rather unattractive feature of longer chains of distribution with greater risk of contamination and impurities, coupled with higher expenses of sale, without any guarantee whatsoever of any rate of return with respect to the individual firms that are supposed to do this.

So as a matter of sort of traditional takings law, the patent infringements seem to be pretty clear.  And even if you were to assume that the only thing you applied is not the patent doctrine but the general "can we restrain prices" doctrine, the question there is usually you have to give a guaranteed rate of return for an efficient producer under these circumstances and to the extent that you allow the prices to go down by foreign fiat, essentially, if one of these nations decides to lower the price to a penny per drug, right, at that point you have to sell it in the United States, it gives rise to immense sorts of complication.

I think the deep difficulty that you have here, and I'll state it in a sensible way, is that the only -- we have never developed a clean system to be able to figure out who pays for the price of the first tablet of a new drug.  That may cost you $1 billion.  The second one may cost you a buck.

Everybody is willing to pay for the second pill or the third or the fourth.  Nobody wants to pay for the first.  And this is an effort to try to make sure on the trade stuff that Americans don't pay for the first tablets, but it doesn't make sure that anybody else is going to pay for it.

So what you do here is you have an illustration in which international trade disparities lead to massive systems of coercion.  If I were to try to recommend something, it would be to leave the domestic market untouched and maybe try to persuade the Canadians that they ought to get rid of their monopsony type situation, which is how this thing turns out to be enforced.  The benefit of being high rates of returns to a drug in a worldwide market means greater levels of innovation for people both here and abroad.

MR.           :  See, it's that last thing that Richard is talking about that makes this so complex, because the Canadians are not literally monopsonists in this time period because the marginal cost is so low.  They are monopsonists over time and they are free-riding, but it is worthwhile because the cost of producing the second pill is so low, it's worthwhile for the drug companies to sell under these price-fixing regimes.

The problem is intertemporal, and that is a hard problem to explain to people.  But it is exactly -- Richard did really an excellent job.  The first pill and the second pill is really an excellent way to think about it, and the solution ultimately -- you can understand why people are so frustrated, but the economics are complex to explain to them, and the solution ultimately -- there is serious free-riding going on here on what the U.S. drug companies do, and the solution, I think, is and I hope is to get people outside the United States to pick up some of the tab for the first pill, as Richard says.

MR.           :  But it doesn't necessarily follow.  If you could keep the segmentation between the two markets, it is a mistake to assume that the benefits in the United States that the Canadians pick up some portion of that first pill, or a larger portion, will be that American prices will go down.  If these are maximizing firms, they will try to do it.

The social benefit in the United States is that the higher rate of return will introduce a higher level of innovation, which in fact will get these things sooner to market, and the sooner they get to market, the sooner they go off patent, the sooner they become more generic.

It is understanding that whole interplay which is there.  You know, Tim talked about the rise of markets and intelligence in the world.  In the Pharma industry, the decline of understanding between 1984, when they passed Hatch-Waxman, which is an incredibly sophisticated piece of legislation, there is no public choice explanation as to how it came about.  It required intelligence, which of course is a rare commodity in political discourse, to the sort of silly rhetoric that you start to see on the current bill, showing that at the same time you have greater sophistication with antitrust, you have a complete decline in understanding about the way in which sort of the interaction between the patent law, the FDA, and international trade start to interact.   And it does have real implications here.  Because, remember, one piece of this legislation is in fact the modification of the Clayton Act to make it an unfair labor -- an unfair trade practice to refuse sell somebody at a price that you can't control in whatever quantities they demand, because the strategy of the American companies has been we'll sell to Canada, we know what their internal consumption rates are going to be.  We won't sell excesses, and that's the way we stop it.

This statute makes it impossible to apply that kind of strategy.

Now this has important implications in another regard.  Myself and Roger Pellone and Ed Crane (phonetic) of Cato had a rather spirited debate on this in which they defended parole importation.  But they never defended it in a world in which it was a mandatory sale, which is what you have now.

MR.           : I just want to say a few quick remarks apropos nothing, not on the economics of drug importation, but apropos of the role of the states.

It is my duty to hawk this book, right?  There are two excellent essays in this book on the role of the states, and in particular the role in multistate prosecutions, including Microsoft, one by Richard Posner (phonetic), who has practical experience with these matters, and one by Michael DeBow (phonetic).  Both of these essays document sort of at some greater length Tim Muris' observation.

The role of the states here is rather limited.  I mean Microsoft is a real outlier.  It's worth worrying about, okay, for the reasons Richard mentioned, but it doesn't happen all that often.

Having said that, it doesn't happen all that often because I think of two things:

One principal reason is that there is much more potential for the kinds of things that Richard worries about, extrastate cost exploitation, that kind of thing, under general purpose little FTC acts.  And the reason is simply there the law isn't as disciplined as it is in the antitrust area, where the Federal courts have sort of fairly good understanding, I mean as these things go, of the underlying law.  Whereas my impression from reading these cases is that they understand what constitutes an unfair and deceptive trade practice -- who knows.  I mean the FTC guidelines in the real world, it is my sense at least, aren't quite as robust as the antitrust doctrine we have.

There is one additional comment on these multistate prosecutions.  Now only about a dozen of them, since the Hart-Scott-Rodino enactment, which really got this going because it allowed treble damages in parent patria actions -- the interesting fact is that -- and I have looked at Judge Posner's cases and his list which he has compiled -- they almost always involve foreign defendants, and sooner -- so it's Panasonic, the London reinsurers, and on and on it goes.

Sooner or later we have no doctrine that sort of has a water's edge stopping point for state enforcement, right?  And sooner or later this is going to create a problem for us in a major way.  I would be very surprised if that didn't happen.  It's one of the things I really worry about.  I wonder whether the FTC is worried about it, too, or whether I am just making this up.

MR.           :  Look, the whole realm of multijurisdictional conflicts is something we pay a lot of attention to.  You know, Bill's suggestion of a domestic competition network is obviously an excellent idea, and it's not just antitrust.  It would be great to get the utility regulators involved because, you know, deregulation there has gone, because of what happened in California, has slowed down and gone astray, and having competition ideas would be -- direct competition ideas from -- and we actually do a fair amount with electricity -- would be helpful.

But it is -- the interesting thing to me, the comment I made before, is we haven't seen the kind of problems that you are talking about.  I mean the system seems to be set up to create them.

Now in mergers one reason that we don't have problems with the Europeans is that mergers are divisible.  In other words, it's not a question of you stop the merger or you don't.  There are various undertakings, as the Europeans call them, or divestitures, as we call them.  So you can actually get people to have different positions and still let the merger go through, and that seems to be the reason that GE-Honeywell was unique in the sense of approved by one place and by another.  And even that had its idiosyncratic aspects because it occurred with a transition in the U.S. agencies, and if there had -- and that transition period may have contributed to what happened.

MR.           :  We will take one more question.

MR.           :  Thank you.  And picking up on that international dimension, you probably can tell from my accent that I come from a jurisdiction that was once dismissed as a banana republic.  Great Britain.

Hopefully now our reformed antitrust rules are worthy of a better title than that.

Actually, just picking up on the international dimension, the chairman said that, you know, interjurisdictional conflicts were going to be a necessary byproduct of the success of rolling out sort of antitrust and competition enforcement regimes.

We recently had the Empagran case and obviously going through court cases and going up to the U.S. Supreme Court can lead to clarity on some sides, but the Microsoft case doesn't seem to be amenable to such a fix, and while GE-Honeywell might be an exception, I wonder if something like Microsoft and the increasing problems of intellectual property rights in high-tech companies means that actually we are going to run into more of those problems, not fewer, and how do we answer those who say that actually the only answer is to create some sort of global competition regime which is not probably our first preference?

MR.           :  Well, the most interesting thing about intellectual property in competition is not Microsoft, it's the technology transfer block exemption, where the proposed guideline raised a lot of problems, and John Vickers (phonetic), for example, who is superb and head of the OFT in the U.K., and others talked to Brussels.  We had lots of conversations with our counterparts in Brussels, and what they produced was -- you know, eliminated the problems.  That would have been a much, much bigger point of divergence than the Microsoft case, because that would have affected -- I mean these are world markets in a lot of the intellectual property areas, and that would have had a major adverse impact, but yet it didn't happen.

You know, the interesting -- there are -- I gave a talk at Brookings a couple of years ago.  There are -- the divisibility of mergers being one of the biggest reasons, there are lots of reasons why these points of divergence will be relatively few, and I hope that -- you know, we have something called the international competition network where we are trying to establish best practices.  Ultimately on mergers, you know, I hope more and more that happens is that the countries -- this is Richard's point -- the countries that are most affected, the other countries will give way to the countries that are most affected in terms of analyzing the merger.

MR.           :  Just as a simple remark, one of the dangers that one sees here, in addition to having the clear conflict between the patent law and the antitrust law, both dealing with monopoly, there is no question that international price regulation is another way to attack the validity of patents.  And that could be done domestically as well, so that I give you the exclusive right to sell, and then I subject you to a unique price control regime.  The regulation will negate the regulation.

The traditional view has been to try to run this through TRIPS (phonetic), which has had some success.  The difficulty with that, of course, is that the quid pro quo for TRIPS was always agriculture reform which never came, and so that you now have the sort of stupid American and EU policies on protectionism there undermining the protection of IT rights which has a very different intellectual sort of flavor to it.

MR.           :  I have learned one other thing today from Tim Muris, which is that -- which probably we may have underestimated in this book, which is that we have to give thanks for all the rabid dogs that didn't bark.

And on that cheerful note, thank you all for coming.  Thank you, Richard, thank you, Tim Muris.

[Applause.]