CORPORATE CRIME REPORTER

Facing Down Bork, Hudson Institute’s Stelzer Says it Would Be Folly to Weaken Antitrust Laws
21 Corporate Crime Reporter 22, May 21, 2007

It would be folly to abandon or seriously weaken the nation’s antitrust laws.

You would expect such a sentiment from Public Citizen.

Or the American Antitrust Institute.

Or the antitrust plaintiffs’ bar.

How about if it came from Hudson Institute fellow and Rupert Murdoch’s man in Washington – Irwin Stelzer?

At the Hudson Institute today, Stelzer presented a paper titled “Coping with Market Power in the Modern Era” in which he defended the nation’s antitrust laws against a ramped up attack from his fellow pro-big business think tankers.

And he defended antitrust in the presence of Mr. Anti-Antitrust – Robert Bork.

Stelzer pulled together a panel to discuss his paper – including Bork, also a fellow at the Hudson Institute, Columbus School of Law Professor Heidi Schooner, and John Shenefield, a partner at Morgan Lewis in Washington, D.C.

In the century-long debate about whether the antitrust laws are about efficiency and efficiency alone – or about achieving broader social and political objectives – Stelzer came down strongly in the second camp.

“Man does not live by bread alone,” Stelzer wrote in the paper. “Our competitive economy is more than a machine to grind out more and more products at better and better prices, laudable as that objective is. . .the preservation of open markets creates upward social and economic mobility and diffuses economic and hence political power – keys not only to maintenance of competition. . .but to the maintenance of an economic system that is fair, and is seen to be fair.”

“There is more to what we are talking about than sheer efficiency,” Stelzer said. “There is a social value to constraining the power of large corporations. There is a value to having some constraint on management control. I worry whether capitalism can survive unless we regulate the unfairness. If people don’t trust markets, we will see a decline in support for the capitalist system.”

“In America we have avoided the class struggles that have taken place in Europe – not because the inequality is less here – in fact, it is much greater here – but because people felt there was potential upward mobility. If we close that off, if we allow dominant firms to preclude opportunities for entrepreneurs, we will get a situation that will be unwholesome, that will undermine support for free market capitalism.”

Stelzer admitted that his position defending the antitrust laws “is not the dominant position in free market conservative think tanks in Washington.”

“That’s the polite way of saying that nobody agrees with me in that group,” Stelzer said.

But Stelzer said Americans have always been “worried about the existence of this large artificial person – the corporation – that we have created at law.”

“But it is very hard to get angry with an artificial person,” Stelzer said. “You could get angry with a Rockefeller, but it is difficult to get angry with an artificial person.”

“The nervousness about corporations becomes traumatic when we are faced with monopoly power – which is why we have the antitrust laws,” Stelzer said.

Stelzer said that he decided to write the paper now because the criticisms of antitrust policy have been mounting.

“We find a call to loosen constraints on corporations on the theory that all market power is transient,” Stelzer said.

“Someone will come along with a better mousetrap and destroy it. And you don’t really need much antitrust enforcement.”

“The notion that all markets are contestable in the long run may be true,” he said. “But the long run can take a very long time. It is possible to accumulate quite large amounts of monopoly profits during the time period of the transition to a more competitive environment.”

“Second, it isn’t really true that all market power is transient,” Stelzer said. “Dominant firms have available to them a variety of tools that they can use to preserve their dominance. And these have nothing to do with efficiency, or building a better mousetrap, or having lower costs. If they have market dominance, they are not likely to stand around and wait for this transition to reduce their market power. They are likely to engage in tactics to preserve that market power.”

Stelzer defended the break up of the AT&T monopoly against critics who argue that what the courts tore asunder, the markets are now reconstituting through a series of mergers, and therefore the break-up was a waste of time and money.

“In the wake of the breakup of AT&T, there was a huge explosion in technology, a huge reduction in prices due to competition,” Stelzer said. “The notion that if you break up a large, seemingly efficient entity there is going to be all hell to pay is wrong.”

Stelzer also defended private antitrust enforcement.

“I’m most suspicious of anything that denies people access to the legal system,” Stelzer said. “In Britain, if you are libeled and you are rich, you probably can get redress. If you are libeled and not so rich, you can’t.”

“So, I’m rather a fan of private enforcement. I’m rather a fan of contingent fees, which allow people who cannot afford it to get counsel from legal entrepreneurs.”

Bork said a key question raised by Stelzer was whether judges and juries in deciding cases may consider anything other than the welfare of consumers as determined by economic analysis.

Bork said the answer should be no.

“If people want to talk about broader social and political goals on the fourth of July or some other celebratory occasion, that’s fine,” Bork said. “But if those goals are introduced into the decision of cases, the results are catastrophic for the rule of law.”

Bork said that Judge Learned Hand made “a dog’s breakfast of antitrust policy” in ruling in 1945 that Alcoa had an unlawful monopoly.

“The case probably should have been decided the other way on economic analysis grounds,” Bork said. “But Hand got around that difficultly by writing that great industrial consolidations are inherently undesirable regardless of their economic results.”

Bork said Hand’s ruling resulted in an “intellectual mishmash.”

“Hand asserts the right to trade off consumer welfare for an unarticulated and probably unarticulable social and political rule,” Bork said. “That is not law. It is a delegation to prosecutors, judges and juries to do whatever seems to them good.”

And Bork was predictably put off by Stelzer’s defense of private antitrust enforcement.

“Bill Baxter, who was head of the Antitrust Division under Ronald Reagan, favored abolishing private enforcement altogether on the grounds that such enforcement is unprincipled and leads to very bad law,” Bork said. “I agree with Baxter.”

Bork said that largely due to Baxter, the Federal Trade Commission and the Justice Department “have developed much more sophisticated economic approaches than once was the case.”

“Increasingly they bring only justified antitrust actions,” Bork said. “But private enforcement is in the hands of the plaintiffs’ bar that for the most part is interested only in the enormous contingent fees. They will take any case where there is a chance of winning – whether or not there is any sound economic rationale for it. They rely upon the lack of sophistication of juries.”

In addition, the automatic triple damage remedy “poses an enormous threat to companies that have done nothing wrong.”

“If you observe the jury arguments by plaintiffs' lawyers, you will not see sophisticated economic arguments,” Bork said.

“You will see populist class envy orations that would make the late unlamented Joseph McCarthy look like a scholar.”

Bork said that in reality, the plaintiffs’ antitrust bar simply follows the government and “after government brings a lawsuit and develops all of the evidence, the private plaintiff pops in, cites the government’s win, and picks up an enormous tab,” Bork said. “The richest lawyers I’ve known are plaintiff antitrust lawyers. I don’t know how I wound up on the defense side.”

“In short, the private antitrust suit is an abomination,” Bork said. “If abolishing such lawsuits altogether seems too strong a medicine, a much easier way would be to abolish triple damages and allow recovery only for damages actually suffered.”

Morgan Lewis partner Shenefield agreed with Stelzer that “private enforcement by and large is a good complement to government enforcement.”

But Shenefield said he strongly disagreed with the implications behind Stelzer’s statement that private enforcement is important because it is “free of direct political influence.”

“I have to challenge the premise that government prosecution decisions are influenced at all by political considerations,” Shenefield said. “Probably the very worst thing a company being investigated for violations of the antitrust laws could do is to seek to manipulate the levers of political influence. I would contend that in the last 30 years, there is no evidence of real political influence. And there is evidence to the contrary here. Four successive administrations declined to interfere with the AT&T case despite a vast political and public relations campaign. Bill Baxter, operating without an Attorney General to help him, because the Attorney General was recused, and facing powerful cabinet opposition, defended the AT&T settlement right up to the oval office and was able to produce the presidential sign-off he needed.”

“It is a fact that neither the White House nor Congressional offices would dare to communicate with the Antitrust Division on a specific case and that is the way it should be,” Shenefield said.

Shenefield drew a distinction between political influence of an improper kind and what he called “an entirely appropriate and constitutional decision of the President that has an effect on actions by the Antitrust Division.”

“It has been written that the President (Reagan) ordered the Antitrust Division to shut down a grand jury investigation involving UK entities that was highly irritating to Prime Minister Margaret Thatcher at exactly the time that the United States wished to enlist her strong support for enlarging the cruise and Pershing missile deployment that had initially been ordered in 1979,” Shenefield said. “But I trust that is not what you are talking about. You are talking about improper influence – worrying about congressional districts and all the rest.”

During the question and answer period, Stelzer raised a hypothetical.

A Senator from the state of Washington calls the White House and says – you can’t break up Microsoft, it’s a big campaign contributor. Is it inappropriate for the President to call the Attorney General? How does the Attorney General know whether the President has decided it is not in the national interest to break up Microsoft – or whether he just needs the Senator’s vote?

Shenefield said the question was – what is the reason for the President’s call?

“You are entitled to ask the President – why are you asking me to do this?” Shenefield said. “If the reasons are self-evidently phony, there is one result. If the reason is – there is a foreign policy consideration that the United States has, that Prime Minister Thatcher be happy with us, the result is completely different. It matters a lot.”

Shenefield agreed with Stelzer that competition policy should take into account factors other than economic efficiency or consumer welfare.

“It is crucial to the health of the system by which we organize our economic affairs that there be seen factors at work other than mere economic efficiency less the entire system lose its political support,” Shenefield said. “That is why such things as the diffusion of economic and political power and access to markets remain important to me – not as a substitute for consumer welfare judgments, but as a complement to them.”

“But believing is one thing, applying is another,” Shenefield said. “How do these non-economic factors affect the real world? Tie-breakers for a prosecutor or for a judge? How do lawyers counsel and how do business executives make decisions taking non-economic factors into account? The truth is that economic goals will always have primacy. And it may be that non-economic goals reflecting a sense of equity or fairness, although very noble, are condemned to make almost no practical difference in the real world.”

Shenefield said that the headline case of recent years – Verizon v. Trinko, “seems to me a very bad sign for the antitrust laws.”

“In Trinko, a heavy majority of the Supreme Court expresses deep skepticism as to antitrust enforcement in general,” Shenefield said. “The Supreme Court is fundamentally hostile to the spirit that animates antitrust. Indeed, Justice Scalia writes that monopoly is desirable in a free enterprise system because it is what gives entrepreneurs the incentives to compete hard.”

“For me, that is taking the core of a good argument and steering it straight over the cliff,” Shenefield said.

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