AEI-Brookings Joint Center Policy Matters 04-06



What's Yours is Mine. David S. Evans.  February 2004.

In a victory for telephone giant Verizon, the U.S. Supreme Court has issued what many consider the most important antitrust decision of the last 20 years. Two weeks ago, six justices signed the majority decision that affirmed -- more strongly than ever before -- that not only is there nothing wrong with having monopoly power and being able to charge high prices, but that this "is an important element of the free-market system" because "it induces innovation and economic growth."

In the next few weeks the European Court of Justice is going to be issuing a ruling on a similar "obligation to deal," involving a compulsory licensing of intellectual property. But will American and European competition law end in harmony on this property rights issue? It's not clear they will.

The U.S. Court's decision asked a central question: If rivals can show that they could compete more effectively if they could use the monopolist's assets, does the monopolist have to make those assets available? Never say never, but almost certainly not said the judges. The three other justices didn't disagree with that conclusion, but said they would have ruled in Verizon's favor for other legal reasons. The implications of this for firms in the U.S. are clear: Even if they get tagged with the monopolist label, American courts aren't going to make them give their competitors access to that essential distribution facility or that killer patent.

In arriving at its decision, the American court went over 100 years of cases that left the door open a crack for firms that wanted to have a go at the physical and intellectual property of their more successful competitors. Having narrowed their scope, the majority decision just about slammed the door shut.

Verizon, the incumbent telecom carrier, was supposed to provide access to its local exchange network under the 1996 Telecommunications Act. That includes some support systems that provided customer service. AT&T and some other companies that wanted to provide competing local service complained that they weren't getting what they were supposed to. The federal and state regulators who enforce the act agreed and fined Verizon. That was the end of it for AT&T.

But not for Verizon. Curtis Trinko, a lawyer who said he used AT&T local service, filed a class-action lawsuit, claiming that he and similar individuals had been harmed by Verizon's claimed foot-dragging. The lower court dismissed the case, but the appeals court said he could have his day in court, exposing Verizon and potentially other telephone companies to high class-action damages. The appeals court relied on essential facilities -- an antitrust doctrine, controversial on both sides of the Atlantic, that says that monopolies may have to make their key physical and intellectual property available to their competitors. Verizon -- with the support of the U.S. Department of Justice and the Federal Trade Commission -- asked the Supreme Court to reverse the appeals-court decision.

The six judges decided that compelling firms -- even monopolies -- to share their property risked reducing innovation and economic growth. A firm would have little incentive to invest if it had to share the results with its competitors, and the competitors would have little incentive if they could piggyback on their more successful rival. They also expressed doubt that courts could identify the exceptions when forced sharing might make sense. And they worried that courts would turn into "central planners" that would have to dictate price, quantity, and the other terms of deals between rivals. This position garnered the support of justices across a wide ideological spectrum, from Antonin Scalia to Ruth Bader Ginsburg.

Predicting how lower courts will apply Trinko is hazardous. But the result of another never-say-never decision provides some guidance. The Supreme Court raised similarly skeptical eyebrows to predatory pricing claims in the 1980s. Plaintiffs still bring these claims, but much less often than they used to, and they seldom succeed. If the Trinko decision is similarly applied, firms seeking access to another firm's property aren't likely to get a court to give it to them.

The European Court of Justice has set increasingly high hurdles to establishing an "obligation to deal" for dominant firms. Like the U.S. courts, it has recognized that making dominant firms share their property will reduce the incentives to create that property in the first place, and that compulsory licensing could weaken investment and innovation. A recent case involving a company that provides data on drug sales has generated much debate within the courts on when to grant exceptions to the rule that even a monopolist should have unassailable property rights.

The Court of First Instance has expressed skepticism as to the European
Commission's eagerness to find an obligation to deal. A version of this case is now before the ECJ. An advisory opinion has created significant uncertainty about the scope of competitors' ability to gain access to important facilities or intellectual property rights, but it remains to be seen whether Europe's highest court will opt for an interventionist approach common within the member states or the "almost never" standard adopted by the U.S. Supreme Court.

The result is important not just for businesses that have valuable physical or intellectual properties. Many commentators have recognized that having different competition rules across countries makes it harder for companies to run their increasingly global businesses. While many significant differences remain between American and European antitrust policy, the Supreme Court in Washington and the European Court in Luxembourg have held similar views on the sanctity of property rights. The best news for business and consumers would be if that continued.

Mr. Evans is an economist at NERA Economic Consulting.

This article appeared in The Wall Street Journal on February 2, 2004.