FAIRNESS IN COMPETITION LAW: EUROPEAN AND U.S. EXPERIENCE

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1 FAIRNESS IN COMPETITION LAW: EUROPEAN AND U.S. EXPERIENCE Prepared for Presentation at a Conference on Fairness and Asian Competition Laws held on March 5, 2004, in Kyoto, Japan David J. Gerber Distinguished Professor of Law Chicago-Kent College of Law Copyright, 2004, by David J. Gerber The rapid proliferation of competition law regimes in the 1990s has raised important issues about the goals that such laws should serve. Competition law is a relatively new form of law in much of the world, and there is little agreement as to what purposes it can and should serve. This issue is particularly pressing in Asia, as states such as China move toward more central roles for both legal processes and market competition. Even in many more developed competition law systems, there is often much debate about goals. The central idea behind competition law is that law should be used to protect competition, but there is little agreement as to what this means. One result of this uncertainty is that most competition law systems have embraced multiple goals, including, for example, fairness, economic efficiency, and wealth distribution. This has been true in both the United States and in Europe. In the United States, however, antitrust law has been reconceived over the last twenty-five years to serve a single and far narrower goal -- economic efficiency. Given the political and economic weight of the United States and the central role of US perspectives on economic law in international discussions, this view of competition law's goal has become a focus of the international debate on competition law s goals. This focus may, however, tend to obscure perspectives on competition law that should be considered by decision makers who operate in contexts very different f rom the United States. 1

2 In this brief essay, I look at one such perspective. The essay looks briefly at the goal of fairness, which has been a part of competition law in all systems in one form or another throughout competition law experience, and which has only recently been eclipsed in the U.S. Fairness objectives take a variety of forms, but at their core they are based on the idea that dominant firms or groups of firms should not be allowed to use their economic power to distort market processes in their favor and at the expense of consumers and competitors. It is closely tied to the perceived role and legitimacy of markets in society. I here examine fairness in the context of the development of competition law in the U.S. and in Europe. The essay has three main objectives. One is to attempt to clarify the issue of fairness in competition law. A second is to review the roles that fairness has played and continues to play in the US and Europe. A third is to speculate briefly about how this experience may be of value in developing competition law in Asia. I. FAIRNESS AS A COMPETITION LAW GOAL Fairness as a goal of competition law does not have a generally accepted and clearly defined meaning. The term has been used loosely in competition law itself, and its range of meaning in in other areas of law and in common language is even broader. Moreover, both technical legal language and common language usage vary across cultures and systems. It is important, therefore, to clarify what we mean by the term. Two basic forms of fairness concerns appear in competition law experience, and both relate to the use of power. 1 One is vertical -- i.e., it refers to the relationship between buyers and sellers. Where, for example, a firm uses its monopoloy position to raise prices to purchasers above competitive levels, this is often referred to as unfair to consumers, and it is often invoked to support restrictions on this use of power. The other is horizontal -- i.e., the use of power to harm competitors. Where an economically powerful firm or group of firms, for example, uses its power to block competitors from 1 The term economic power can be defined here as it is in neo-classical economics i.e., the capacity of a firm or group of firms to raise price above competitive levels. In economics this is usually referred to as market power or monopoly power. This definition may not be fully adequate, but it will suffice for our purposes here. 2

3 access to markets or to reduce their capacity to compete, this conduct may violate principles of fairness. In both cases, the economic power of the actors is used to disadvantage other market participants under circumstances in which that same power prevents those harmed from effectively responding to the actions. Consumers cannot reasonably move to other suppliers and competitors are not in a position to compete on the basis of their own performance. Treatment of these two basic concerns varies among competition law systems. They are conceptualized in very different ways; the available legal tools for enforcing claims based on fairness considerations vary significantly; and the status of such claims also varies. II. U.S. EXPERIENCE WITH FAIRNESS AS A COMPETITION LAW GOAL Fairness concerns were central to the creation of antitrust law in the United States. The Sherman Act, the foundational statute of US antitrust law, was enacted as a result of political pressure from those harmed by the conduct of powerful business organizations known as "trusts". These organizations became notorious for their unbridled use of economic power to exclude competitors from markets and to drive up the prices paid by those who purchased from them. The argument that this was fundamentally unfair was a major impetus for enactment of the statute. 2 Congress chose a convenient response. It merely took two legal concepts from the existing body of English and American Common Law cases and made them enforceable in the Federal courts. The statute provided that "restraints of trade" and "monopolization" were unlawful, and it authorized the Federal government and private parties to bring suit for conduct encompassed by those concepts. These concepts were politically attractive, because they were already part of the Common Law and did not appear to call for new measures of government "regulation. 2 For discussion, see, e.g. Robert Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 Hastings L.J. 67 (1982) and Rudolf J.R. Peritz, Competition Policy in America: (1996). For a narrower view of the statute s goals that reduces the issue to concepts of neo-classical economics, compare Robert H. Bork, The Antitrust Paradox (1978). 3

4 The legislature did not, however, provide guidance about the aims of the statute, and prior use of the terms in the existing Common Law cases was also of little or no value in clarifying the meaning of restraint of trade and monopolization. The interpretation and application of these general provisions was left, therefore, to the courts, and for more than a century the federal judges have articulated the aims of the statute. This process has produced a diverse body of goal statements that has referred to economic and social as well as political values. 3 At various times, for example, concerns for fairness (particularly for small and medium-sized firms), equality of opportunity, and economic liberty have been deposited in this substrate. The articulated goals of the system have changed over time, but until recently they represented a relatively broad amalgam to which judges could refer in justifying their antitrust decisions. Fairness concerns were perhaps most directly pursued in the context of monopolization, but it was also part of the evaluative framework for merger law. For example, even as recently as the early 1970s, the US Supreme Court made important decisions on the basis of fairness toward small and medium-sized enterprises. Throughout most of this period a guiding notion has been to use antitrust laws to prevent powerful enterprises or groups of enterprises from using their power to compete in ways that distorted competition and thereby harmed other participants (either purchasers or competitors) in the economic process. In that sense, concepts of fairness have been central to the development of competition law in the United States. In recent years, however, the goals of US antitrust law have changed radically, as have the influences on the goal articulation process. In this process, fairness as an explicit goal has been largely swept away. 4 Beginning in the late 1970s, scholars 3 For classic discussions of these issues, see Eleanor Fox, The Modernization of Antitrust: A New Equilibrium, 66 Cornell L. Rev (1991) and Robert Pitofsky, The Political Content of Antitrust, 127 U. Pa. L. Rev (1979). 4 I emphasize that language is important here. The term fairness is no longer considered by most courts and scholars as an appropriate analytical concept in competition law. Substantively, however, important categories of conduct that are still considered to be anticompetitive can also be seen, and have been seen, as unfair. As we have noted, charging supra-competitive prices to consumers is anticompetitive under economic analysis, but it is also an element of fairness. 4

5 identified with the "law-and-economics"(l&e) movement superimposed a different conception of antitrust goals on the existing case-law background. 5 They scrutinized the case law of the immediately preceding period and attacked it for its lack of rigor in economic analysis. They argued that the goals of antitrust should be defined much more narrowly than they traditionally had been -- and that they should be determined solely by reference to economic theory. 6 Moreover, they argued that there was only one type of economic type of economic theory that was appropriate -- i.e., micro-economic price theory. Their reference point was the so-called Chicago-school of antitrust analysis. 7 Their ideas about goals quickly won acceptance during the 1980s. They were ideologically consistent with the laissez-faire ideology of Ronald Reagan, and, as a result, they became the basis for government enforcement policy. Moreover, they were congenial to many of the federal judges that President Reagan appointed. They now represent a kind of orthodoxy in American antitrust law. We can identify several factors that are related to the decline of fairness concerns in U.S. antitrust law. First, the statutory basis itself does not anchor fairness concerns. This leaves the content of the law and the articulation of goals to the judges. Second, and related, the language and analytical methods of law and economics that have become the orthodoxy of competition law do not easily accommodate fairness concerns. Third, in recent years there has been no perceived need for antitrust law to integrate markets or to enhance the social imbeddedness of markets and competition. Fourth, in the academic legal world, economic science has come to play a dominant role in antitrust analysis, and the language of economics does not generally accommodate fairness as an analytical concept. 8 Moreover, there has been a gradual increase in the centrality of procedural fairness and a concomitant relative decline in the importance of substantive fairness, and thus it has become less acceptable to talk about substantive fairness concerns. And, finally, US voters have seemed little interested in the issue. 5 See Richard A. Posner, Economic Analysis of Law (5 th Ed. 1998). 6 For the now-classic statement of this position, see Bork, supra note 2. 7 For discussion of this development from a comparative perspective, see David J. Gerber, Competition, in Oxford Handbook of Legal Studies (2004). 8 There are, however, important exceptions to this claim. See,e.g., William Baumol, Superfairness: Applications and Theory (1986). 5

6 III. EUROPEAN EXPERIENCE WITH FAIRNESS AS A COMPETITION LAW GOAL Fairness goals have also played important roles throughout the development of competition law in Europe, and, in contrast to the situation in the U.S., they continue to do so. In order to understand those roles, we need to review briefly the evolution of competition law in Europe. The story is less well-known than the US story and more complex. 9 A. National Experience The idea of using law to protect the competitive process was developed and almost enacted in Austria in the 1890s. There a bureaucratic elite conceived competition law as a means (1)to encourage economic growth and competitiveness (the economic goal) and (2)to increase the perception of economic fairness and thereby reduce antagonisms between workers and owners and among regional ethnic groups (the fairness or social integration goal). The basic idea was to assign to administrators the responsibility for protecting competition from distortion. This administrative control model has been at the core of European competition law experience ever since. It was originally associated with what has been called in Europe an "abuse" conception of competition law. In this conception, the law does not prohibit particular conduct, but gives administrators the discretion to prevent abuses of their economic power. Abuse as a concept is grounded in the idea of fairness. Several states enacted legislation based on this model during the 1920s, and by late in the decade there was widespread agreement about the need for competition law and about what its basic features should be. Ideas of fairness were an important part of the justifications for such laws, but the law s themselves were generally of limited importance. After the end of the Second World War, many European governments continued 9 I recount these experiences in detail in David J. Gerber, Law and Competition in Twentieth Century Europe: Protecting Prometheus (1998; pbk, 2001). I refer the reader to that work for further references and substantiation of the claims made here. 6

7 this development, authorizing administrators to apply relatively vague competition law statutes. In the decades immediately after that war, social integration was a prominent concern, and competition laws were designed not only to foster economic growth, but also to demonstrate to the skeptical social classes that supported greater equality and democracy that large businesses would not allowed to utilize their power to the detriment of either consumers or competitors. Fairness was often a major objective in these laws, because they represented a means of securing political support for market ideas and of enhancing social integration. These systems have gradually grown in importance, as administrators have been given increasingly powerful tools to combat competitive restraints. They have also become increasingly juridical in character. Although administrative decision making has remained central, it has been subjected to more extensive review by courts. Moreover, the substantive law has gradually moved away from the abuse conception in most areas with the result that it increasingly features prohibitions on specific conduct rather than broad discretion to administrators. In this development, fairness concerns are often localized in the concept of abuse of a market-dominating position. In competition law systems, administrators frequently use this principle to combat the imposition by dominant firms of higher prices or other forms of unfairness on consumers. Yet there tends to be relatively little case law development of the concept itself. To a large extent, European national courts and administrators have relied on EU and German developments in thinking about the juridical content and status of the abuse concept. 10 Germany has played a special role in the development of competition law in Europe, and this role is particularly important for understanding the evolution of fairness concerns. Germany has heavily influenced not only other national systems, but also the development of competition law in the EU. The foundation for this role was laid in the 1930s and 1940s by a group of lawyers and economists in Germany who secretly developed ideas of how Germany 10 See Gerber, Law and Competition, supra note 9, at

8 should be reconstituted after the war. 11 Their school of thought is often called ordoliberalism or the Freiburg School. The scholars of this group sought to use law to protect market processes from distortion either by the public power of the state or by the private economic power of large firms. They conceived the idea of an economic constitution which would function much as a political constitution. It would require that administrators act to protect the economy from distortions and unfairness, but it would prevent administrators from intervening in the economy on a discretionary basis. It would also require that dominant firms not abuse their economic power to harm consumers, for example by raising prices about competitive levels or excluding or impeding competitors and potential competitors from the market. These ordoliberal ideas had much influence on the development of the German Law against Restraints of Competition (GWB), which was enacted in 1957 as the first "modern" competition law in Europe. Although modified several times since then, its basic principles remain in effect. Competition law in Germany is conceived as an essentially "juridical" system. The administrators of the Federal Cartel Office (FCO) conceive their task as primarily one of applying a statute according to juridical principles rather than pursuing short-term policy objectives, and its decisions are subject to substantive review by the regular courts. This has led to large body of court decisions and of sophisticated competition law scholarship. The FCO, the courts and legal scholarship have developed the concept of abuse of a dominant position and paid extensive attention to associated fairness concerns in several areas of competition law. In particular, they have developed the law relating to single-firm conduct. They have applied the concept not only to horizontal unfairness, but also to vertical unfairness. The legislature has also played a role in this expansion. It has, for example, authorized private suits for certain types of abuse and included concepts of fairness in merger law. Competition law acquired great importance in Germany because it was associated 11 See David J. Gerber, Constitutionalizing the Economy: German Neo-Liberalism, Competition Law and the 'New' Europe, 42 Am. J. Comp. L. 42 (1994). 8

9 with the establishment of an effective and socially responsible market economy. As a key feature of the social market economy, it played a key role in some of postwar Europe s most impressive economic and political successes. The concept of fairness was at the core of its success, because it imbedded competition in society and associated it with notions of social solidarity and economic progress. B. European Union Competition Law With the establishment of the European Economic Community in 1957, competition law began to move toward a central role in European integration and in European economic and political development generally. In the context of the EU, competition law was charged with two objectives: 1) the integrative role of eliminating obstacles to trade across national borders and 2) the economic goal of creating the conditions for a successful and European market and the prosperity it could bring. 12 The two objectives are inseparable: only if there is economic integration, can the integrated market function in a way that will yield the economic prosperity that is desired. Fairness issues are thus central to both of these objectives. Perceived fairness is central to the entire project of European integration. An even and thus "fair" playing field for all market participants has been seen as an essential condition for integration of the European market. The central assumption was that only where the market is perceived to be fair would national decision makers be willing to surrender some of their control over markets and thus allow economic integration. This is a somewhat different form of fairness than one encounters in the context of a national legal system, but its integrative function is the same. Here the concept of fairness is used to integrate independent polities, whereas in the domestic context it serves to maintain or enhance solidarity among social groups and divergent economic and political interests within an existing polity. The concept of fairness is used explicitly in EU competition law in several contexts. 13 For example, it is central to the evaluation of whether an agreement that 12 Gerber, Law and Competition, supra note 9, at For discussion, see gen. Giuliano Amato, Antitrust and the Bounds of Power (1997). 9

10 restrains competition may nevertheless be permitted. Article 81 of the Rome Treaty prohibits agreements that have as their object or effect the prevention, restriction or distortion of competition..., but it permits exemptions where several conditions are met. One such condition is that an agreement will not be prohibited where it improves the production or distribution of goods or promotes technical or economic progress, provided that it allows consumers a fair share of the resulting benefit (emphasis added). This provision often plays a key role in the competition law assessment of otherwise competition-restricting agreements. 14 The fairness objective is also anchored in the concept of abuse of dominant position of article 82 of the EU treaty. According to this provision, any abuse by one or more undertakings of a dominant position...shall be prohibited as incompatible with the common market. It then lists as its first specific example of such abuse directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions...(emphasis added) The concept of fairness has been developed by the courts, the European Commission and extensive European scholarship. It has been aggressively used, for example, in assuring that suppliers do not "exploit" their power vis-a-vis their distributors as, for example, through loyalty rebates. 15 It has also been used to constrain firms in the use of their power vis-a-vis consumers. Finally, fairness has also often been an important criterion in evaluating mergers under European competition law. IV. RELEVANCE FOR COMPETITION LAW IN ASIA This brief and superficial review of the role of fairness concerns in European and US competition law experience suggests factors that may be relevant to the development of competition law in Asia. First, it reveals that fairness issues have been central to competition law experience in both the US and Europe. Only recently has the US has moved away from this goal only, and it is consequently too early to assess the permanence and/or consequences of this move. Moreover, the fact that US antitrust law has moved in this direction does not necessarily provide a strong basis for 14 See D.G. Goyder, EC Competition Law (3d ed., 1998). 15 See, e.g., Goyder, Id. at

11 making similar moves in Asian competition law systems. This is not the place to examine fully the reasons for these moves, but they are primarily related to specific features of the US economic, political and legal situation that bear little or no similarity to the situations of countries in Asia. I note some examples: competition has long represented a central value in US society; the US market is very large and highly developed; the US political system is highly stable; and, perhaps most important, the U.S. procedural mechanism contains many features not found in Asian countries. 16 Second, our review has demonstrated that the role of fairness in competition law is closely related to the social and political roles of both law and economic competition. It reflects not only fundamental characteristics of a society and the issues it faces, but also perceptions of the relationships between law, social relationships and the economy. The role and influence of fairness issues in competition law tends to correlate positively with the polity s interest in broad societal acceptance of the role of economic competition and with its concern for social and political integration. Finally, the development and success of competition law has correlated with its perceived status, roles and function in society, and one of the key factors in this regard has been the role played by fairness considerations in applying competition law. Fairness objectives are easily comprehensible by non-specialists, and they tend to generate political support for competition law regimes. In situations where competition law has required political support, the perception that it protects against economic unfairness in competition has been emphasized as a source of such support. In particular in the developmental phase of competition law, for example, fairness concerns have tended be more influential than in situations where competition law is well established. Competition law in Asia is a relatively new phenomenon. Its future 16 For discussion of some of the features that distinguish the context of competition law in the US from competition law contexts in other states, see David J. Gerber, United States of America, in Limits and Control of Competition with a View to International Harmonization (Juergen Basedow, ed., 2002). 11

12 development is likely to depend in large measure on its capacity to relate market competition to Asian societies in ways that generate political support. In this context, the issue of fairness will necessarily play a central role, as groups within society increasingly seek to participate in market operations in which they must compete against larger business firms, some or many of which may be located outside the borders of the state. Using competition law to make the market fairer has been used to increase both the social acceptance of markets and their functional effectiveness in both the United States and Europe, and, as a result, it has played an integrative role that has tended to solidify confidence in market operations. Conditions and traditions in Asia will influence the form that competition laws take there and the roles that competition laws perform there, but the competition law experience of the United States and Europe in this area is likely to provide useful points of reference for Asian decision makers as they create their own versions of competition law. 12