Antitrust by analogy: developing rules for loyalty rebates and bundled discounts

• Author: Sean P. Gates
• Position: Member of the California Bar
• Pages: 99-137

ANTITRUST BY ANALOGY: DEVELOPING RULES FOR

LOYALTY REBATES AND BUNDLED DISCOUNTS

S

EAN

P. G

ATES

*

Though analogy is often misleading, it is the least misleading thing we have.

—Samuel Butler

Economics has come to dominate antitrust jurisprudence. Preserving and

enhancing economic welfare (in one form or another) is now the conceded

goal of antitrust. Accordingly, economic analysis permeates antitrust scholar-

ship, drives agency decisions, and is the basis of modern judicial decisions.

The thought of developing an antitrust liability rule without a well-considered

underlying economic theory is anathema. The mention of such a possibility

brings pursed lips, condescending looks, and hushed ridicule. But what should

a court do when there is no consensus on the underlying economic theory?

That is the situation for the antitrust treatment of loyalty rebates and bundled

discounts.

The antitrust case law offers little guidance. Many of the critical debates in

antitrust law have centered on whether the prevailing framework of analysis

for particular competitive conduct should be changed in light of economic

analyses. In Continental T.V., Inc. v. GTE Sylvania Inc.,

1

for instance, the

Supreme Court was asked to revisit its prior holding that vertical nonprice

restraints were “so obviously destructive of competition” as to merit per se

condemnation.

2

This holding had become “the subject of continuing contro-

versy and confusion, both in the scholarly journals and in the federal courts.”

3

As the Court acknowledged, the “great weight of scholarly opinion [was] . . .

critical of the decision” and lower courts had sought to limit the holding.

4

Concluding that its prior holding rested on “formalistic line drawing” rather

than economic effects, the Court overruled its prior decision, rejected the use

* Member of the California Bar.

1

433 U.S. 36 (1977).

2

United States v. Arnold, Schwinn & Co., 388 U.S. 365, 379 (1967).

3

Continental T.V., 433 U.S. at 47.

4

Id. at 48 nn.13 & 14.

99

100

A

NTITRUST

L

AW

J

OURNAL

[Vol. 79

of per se analysis for vertical non-price restrictions, and held that the rule of

reason should apply instead.

5

Similarly, the Court has used developments in economic theory to reject

established antitrust precedents. For example, in State Oil Co. v. Khan,

6

the

Court overruled its nearly 30-year-old holding in Albrecht v. Herald Co.

7

that

vertical maximum price fixing is per se illegal. After chronicling the develop-

ment of the antitrust treatment of vertical restraints, the Court concluded “that

there is insufficient economic justification for per se invalidation of vertical

maximum price fixing.”

8

In Illinois Tool Works Inc. v. Independent Ink, Inc.,

9

the Court rejected the

decades-old rule in tying cases that “when a seller conditions its sale of a

patented product (the ‘tying’ product) on the purchase of a second product

(the ‘tied’ product),” the seller should be presumed to possess market power

in the market for the patented product.

10

Noting that the “vast majority of

academic literature recognizes that a patent does not necessarily confer market

power,”

11

the Court abrogated its prior cases by holding that “in all cases

involving a tying arrangement, the plaintiff must prove that the defendant has

market power in the tying product.”

12

Finally, in Leegin Creative Leather Products, Inc. v. PSKS, Inc.,

13

the Court

overruled the nearly century-old rule that minimum resale price maintenance

is per se unlawful. The Court found that the bases for the rule, first announced

in Dr. Miles Medical Co. v. John D. Park & Sons Co.

14

—the common-law

rule against restraints on alienation and treating vertical restraints as analo-

gous to horizontal restraints—had been rejected in the Court’s more recent

antitrust cases.

15

Noting that “respected authorities in the economics literature

suggest the per se rule is inappropriate, and there is now widespread agree-

5

Id. at 58–59.

6

522 U.S. 3 (1997).

7

390 U.S. 145 (1968).

8

State Oil, 522 U.S. at 18; see also 522 U.S. at 14–15 (citing Atlantic Richfield Co. v. USA

Petroleum Co., 495 U.S. 328, 343 n.13 (1990) (“The procompetitive potential of a vertical maxi-

mum price restraint is more evident now than it was when Albrecht was decided . . . . Many

commentators have identified procompetitive effects of vertical, maximum price fixing.” (cita-

tions omitted)); see also Khan v. State Oil Co., 93 F.3d 1358, 1363 (7th Cir. 1996) (following

Albrecht “despite all its infirmities, its increasingly wobbly, moth-eaten foundations”).

9

547 U.S 28 (2006).

10

Id. at 31.

11

Id. at 44.

12

Id. at 46.

13

551 U.S. 877 (2007).

14

220 U.S. 373 (1911).

15

Leegin, 551 U.S. at 887–88.

2013]

A

NTITRUST BY

A

NALOGY

101

ment that resale price maintenance can have procompetitive effects,”

16

the

Court overruled Dr. Miles and held that “[v]ertical price restraints are to be

judged according to the rule of reason.”

17

But what if there is no established framework of analysis, no long line of

cases, no “great weight of scholarly opinion” presenting a consensus view?

What if there is no standard underlying economic analysis of the particular

conduct?

That is precisely the situation with the antitrust treatment of rebates (loyalty

and bundled).

18

The scholarship is divided.

19

The economics is murky.

20

The

courts are just starting to address such conduct. The critical question then is

what tool can the courts use to develop antitrust liability rules for rebates?

16

Id. at 900.

17

Id. at 907.

18

Recognizing the differences, I use the term “rebates” to refer to both loyalty rebates (rebates

given when the customer meets certain purchasing thresholds, typically a percentage of its re-

quirements) and bundled discounts (discounts or rebates given when the customer purchases two

products together or more typically meets certain purchasing thresholds based on its require-

ments for a bundle of products, e.g., 90% of the customer’s requirements for a certain class of

pharmaceuticals).

19

Compare Thomas A. Lambert, Appropriate Liability Rules for Tying and Bundled Dis-

counting, 72 O

HIO

S

T

. L.J. 909, 980–81 (2011) (arguing for cost-based test similar to predatory

pricing), and Herbert Hovenkamp & Erik Hovenkamp, Complex Bundled Discounts and Anti-

trust Policy, 57 B

UFF

. L. R

EV

. 1227, 1234–37 (2009) (advocating version of cost-based test),

with Kevin W. Caves & Hal J. Singer, Bundles in the Pharmaceutical Industry: A Case Study of

Pediatric Vaccines 48 (Aug. 11, 2011), available at http://ssrn.com/abstract=1908306 (arguing

that “[r]ecent scholarship demonstrates that cost-based tests . . . may fail to properly classify a

given bundled pricing scheme as anticompetitive”), Einer Elhauge, Tying, Bundled Discounts,

and the Death of the Single Monopoly Profit Theory, 123 H

ARV

. L. R

EV

. 397, 461–69 (2009)

(arguing against use of price-cost tests for bundled discounts) [hereinafter Elhauge, Bundled

Discounts], Einer Elhauge, How Loyalty Discounts Can Perversely Discourage Discounting, 5 J.

C

OMPETITION

L. & E

CON

. 189, 216–17 (2009) (arguing against price-cost tests for loyalty dis-

counts) [hereinafter Elhauge, Loyalty Discounts], and Timothy J. Brennan, Bundled Rebates as

Exclusion Rather than Predation, 4 J. C

OMPETITION

L. & E

CON

. 335, 337–38 (2008) (arguing

that cost-based test is flawed).

20

See, e.g., Brief for the United States as Amicus Curiae at 12 n.9, 3M Co. v. LePage’s Inc.,

No. 02-1865 (U.S. May 28, 2004), available at http://www.justice.gov/atr/cases/f203900/

203900.pdf (“the theoretical and empirical analysis of [bundled rebates] as a potentially exclu-

sionary mechanism is relatively recent and sparse”); Nicholas Economides, Loyalty/Requirement

Rebates and the Antitrust Modernization Commission: What Is the Appropriate Liability Stan-

dard?, 54 A

NTITRUST

B

ULL

. 259, 259 (2009) (noting a “number of alternative economic stan-

dards have been proposed for establishing antitrust liability” in rebate cases); Einer Elhauge &

Abraham L. Wickelgren, Anti-competitive Market Division Through Loyalty Discounts Without

Buyer Commitment, Harvard John M. Olin Discussion Paper No. 723 (Aug. 2012) (noting divi-

sion among scholarship); Bruce H. Kobayashi, Does Economics Provide a Reliable Guide to

Regulating Commodity Bundling by Firms? A Survey of the Economic Literature, 1 J. C

OMPETI-

TION

L. & E

CON

. 707 (2005) (concluding that the economic literature does not support whether

the exclusionary effects of bundled discounts outweigh procompetitive benefits); Timothy J.

Muris & Vernon L. Smith, Antitrust and Bundled Discounts: An Experimental Analysis, 75 A

NTI-

TRUST

L.J. 399, 400 (2008) (noting lack of consensus regarding antitrust standard for bundled

discounts).