Legal News

Section 2 of the Sherman Act: Back from the Nearly Dead

By Ashby Jones

Let’s circle back to Monday’s news, broken by the WSJ’s Amol Sharma, that the Justice Department has launched an initial review of telecom giants AT&T and Verizon. At issue: whether the companies abused their sizable market power, in violation of Section 2 of the Sherman Antitrust Act. (Click here for our blog post on the matter.)

In Tuesday’s WSJ, we wrote this brief primer to the Sherman Act, in which we explored (quickly) the history of the Act’s Section 2, which, generally speaking, prohibits companies with monopoly market power from acting anticompetitively to hold onto or increase that power. The Act was largely dormant under President George W. Bush, but the Obama administration has so far indicated it tends to dust off Section 2 and start going after entities with big market share.

The folks at the WSJ editorial pages aren’t too happy about the development. As a threshold matter, the article lays out the situation nicely:

What’s going on? Well, AT&T is the exclusive U.S. distributor of the Apple iPhone, and other big carriers like Sprint (Palm Pre) and Verizon (BlackBerry Storm) have cut similar distribution deals. Device makers like such arrangements because they can share the financial risks of developing and marketing new products. The partnerships lead to more choices and lower prices.

Nevertheless, some smaller carriers that lack the scale and resources to cut similar deals want Congress to ban them for everyone.

That said, the article’s not too keen on the smaller players’ arguments:

What these smaller carriers really want Congress to do is prevent bigger rivals from reaping the benefits of scale. But the government’s role is to ensure competition, not protect competitors. AT&T, Verizon and other large carriers have invested billions to build the networks that device makers find so attractive.

There’s also no denying that these distribution deals have benefited consumers. More than 30 devices have been introduced to compete with the iPhone since its debut in 2007. The fact that one carrier has an exclusive has forced other companies to find partners and innovate. In response, the price of the iPhone has steadily fallen.

In any event, the move — which may or may not morph into a more serious formal investigation — didn’t surprise many practitioners.

“The pendulum is swinging back,” said Shepard Goldfein, the practice leader of the antitrust group at Skadden. DOJ antitrust head Christine Varney “is clearly rejecting the policies of her predecessor. But how far she goes is an open question.”

Marc Schildkraut, a partner at Howrey, says he “doesn’t fully understand” why Varney picked telecom to look at first, but imagines two factors were at play: that there’s been “substantial concentration in telecom over the last eight years,” leading to a consolidation in market power and adds that “Varney has always been interested in vertical issues — issues pertaining to buyers and suppliers.”

So what, precisely, might Varney look for in deciding whether to push forward with an investigation?

Schildkraut says the lawyers in the previous administration used a test that weighed whether the anticompetitive effects of behavior disproportionately outweighed any good that such behavior might bring consumers. “Varney seems to be saying ‘we’re going to do a straight balancing test,’” said Schildkraut. “She might see a violation even if the anticompetitive effects outweigh the benefits only by a little.”

Still, said Schildkraut, the ultimate focus of any Section 2 inquiry will continue to be what it has been for decades: whether and to what degree consumers are hurt by a company’s behavior. “That’s the ultimate test.”

Full post as published by Law Blog - WSJ.com on July 07, 2009 (boomark / email).