Should California Adopt Revisions Proposed by Congress and the New York State Legislature to Address Single-firm Conduct?
| Publication year | 2023 |
| Author | By Susannah Torpey, Brandon Annette and Quinlan Cummings |
By Susannah Torpey, Brandon Annette and Quinlan Cummings1
California's primary antitrust statute, the Cartwright Act, prohibits any contract combination or conspiracy in restraint of trade or commerce, mirroring language codified in federal law.2However, the Cartwright Act is silent on single-firm monopolies, a direct departure from its federal law counterpart, the Sherman Act. Section 2 of the Sherman Act ("Section 2") addresses such monopolies by making it unlawful to "monopolize, or attempt to monopolize . . . any part of the trade or commerce among the several States, or with foreign nations."3 The Cartwright Act, by contrast, only outlaws "trusts," defined by the statute as concerted action by "two or more persons" to restrain trade.4Thus, the Cartwright Act does not reach unilateral conduct that restrains competition.5 As such, anticompetitive conduct that has been successfully prosecuted under Section 2, such as predatory pricing,6 patent misuse,7 anticompetitive product redesign,8 and refusals to deal,9 is not proscribed by the Cartwright Act.10
California is not alone in limiting antitrust proscription to concerted conduct. For example, New York's little Sherman Act, the Donnelly Act, currently does not reach unilateral conduct. However, the recent New York State Senate Bill S933A looks to Section 2 and European abuse-of-dominance standards for guidance on prohibiting predatory and exclusionary conduct by dominant single firms. Further, while federal law on its face bans exclusionary conduct by monopolists under Section 2, critics have argued that Section 2 of the Sherman Act itself has been under-enforced and is ineffective at holding monopolists accountable for anticompetitive conduct over the past two decades.11 In part to combat this issue, Senator Amy Klobuchar (D-MN) introduced the federal Competition and Antitrust Law Enforcement Reform Act of 2021 ("CALERA"), which endorses a European framework while focusing on increasing merger standards as a means of preventing the formation of monopolies indirectly.
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Having taken note of these developments, the California Law Revision Commission ("CLRC") is studying whether California law should be revised to prohibit exclusionary conduct to acquire or maintain a monopoly. The CLRC has requested commentary and opinions on the topic from members of the antitrust community. Accordingly, Sections I and II of this article detail New York's Senate Bill S933A, CALERA, European antitrust standards, and other developments in monopoly regulation to help the CLRC make informed decisions regarding potential revisions to California antitrust law addressing single-firm conduct. Section III addresses arguments the CLRC should consider in deciding how and whether to implement a prohibition on single-firm conduct in California.
The Donnelly Act, New York State's antitrust statute, does not prohibit unilateral anticompetitive conduct by monopolists; instead, like the Cartwright Act, it prohibits concerted anticompetitive behavior. In early 2021, the New York legislature proposed The Twenty-First Century Antitrust Act ("S933A") to address this issue.12 S933A would establish (1) a claim for monopolization and (2) a "European-inspired" claim for abuse of a dominant position.
A. MONOPOLIZATION UNDER S933A: THE TWENTY-FIRST CENTURY ANTITRUST ACT
Section 2(a) of S933A would create "an express monopolization violation using substantially the same language as Section 2 of the Sherman Act."13Section 2(a) of S933A is almost identical to Section 2 of the Sherman Act, providing "[i]t shall be unlawful for any person or persons to monopolize, or attempt to monopolize . . . , or combine or conspire with any person or persons to monopolize . . . any business, trade, or commerce . . . in this state."14
Section 2(a) of S933A was introduced to "fill a gap in the current law, which has been interpreted to prohibit only multiparty anticompetitive conduct."15However, there is controversy regarding whether New York should follow federal law and prohibit anticompetitive single-firm conduct.16 Critics of the bill contend that enforcement against single-firm conduct will be weak "[b]ecause the provision mimics federal law, . . . [and] courts construing the state counterpart will rely on existing federal case law authority," which has been ineffective in regulating single-firm conduct in this millennium.17
B. "ABUSE OF DOMINANCE" STANDARD
Whereas Section 2(a) of S933A intentionally mirrors federal law, Section 2(b) does not. In fact, Section 2(b) explores new territory for U.S. antitrust law altogether, by making it unlawful for "any person or persons with a dominant position in the conduct of business, trade, or commerce, in any labor market, or in the furnishing of any service in this state to abuse that dominant position."18 The Sherman Act has no similar provision on abuse of dominance; nor does any state law, for that matter.19 This abuse of dominance standard is "European-inspired"20 and is based on Article 102 of the Treaty of the Functioning European Union ("Article 102"), which states that "[a] ny abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited."21 Article 102 includes a broad prohibition against "exploitation" of market power, while Section 2 only reaches anticompetitive conduct that demonstrably harms the competitive process.22 Thus, it is "easier to challenge . . . certain unilateral conduct such as predatory pricing, tying, and monopoly leveraging" under the abuse-of-dominance standard in European courts than under the Sherman Act in American courts.23
Section 2(b), like its European Union counterpart, does not explicitly define "dominant position" or what constitutes "abuse."24 However, Section 2(b) makes clear that a relevant market need not be defined to prove abuse of dominance. It states that "[i]f direct evidence is sufficient to demonstrate that a person has a dominant position or has abused such a dominant position, no court shall require definition of a relevant market in order to . . . find that a claim has been stated."25 As examples of "direct evidence" of a dominant position, Section 2(b) includes "[t]he
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unilateral power to set prices, terms, conditions, or standards; [e]vidence that a person is not constrained by meaningful competitive pressures; and [] the use of non-compete clauses, no-poach agreements or the unilateral power to set wages."26This list draws clear inspiration from the Treaty of the Functioning European Union, which includes a similar non-exhaustive list of behaviors that might indicate "abuse of dominance."27
Article 102 also provides that "if a company has a market share of less than 40%, it is unlikely to be dominant."28 Section 2(b) similarly allows for a presumption of non-dominance for a person or firm with a low market share of 40% for sellers and 30% for buyers.29 This is in contrast to a showing of at least 50% market share to prove monopolistic conduct that has frequently been cited in cases involving the Sherman Act.30
Additionally, Section 2(b) gives significantly broader power to the New York Attorney General than does the current Donnelly Act. Under the proposed provision, the Attorney General would have rule-making power under the New York Administrative Procedure Act to issue rules to "carry out" Section 2(b).31 The Attorney General must also be notified at least 60 days in advance of any merger that would result in the buyer owning more than $8 million in assets or voting securities of the target;32 this is the first merger requirement of this nature under state antitrust law in the United States.33
Critics of Section 2(b) believe that its abuse-of-dominance standard may be too broad and undefined, and could deter procompetitive business conduct.34 Critics also contend that the low threshold of market shares needed to demonstrate a dominant position under Section 2(b), 30%-40%, may harm small and new-to-market innovators by criminalizing their growing businesses.35 They further argue that the relatively open definition of dominance could invite frivolous litigation against non-monopolistic conduct, which even if the courts dismissed, could bankrupt growing businesses.36
On the other side of the debate, supporters of Section 2(b) believe it is much-needed change to take on the emergence of "big tech"37 and balance-out weak federal laws that have limited litigation against large technology companies over the past three decades.38 Jay Himes, former Chief of the Antitrust Bureau of the Office of the Attorney General of the State of New York, testified before the New York State Senate that Section 2(b) is the most "important" portion of S933A because of how "out of touch Section 2 [of the Sherman Act] theory . . . is with the exercise of exclusionary and exploitive single-firm conduct in fact taking place in real world commerce today."39 Himes noted that the abuse-of-dominance standard is able to address single-firm conduct—including the conduct of big tech—that is "largely beyond the coverage of U.S. antitrust law [including] monopoly leveraging, predatory pricing, margin squeezes, foreclosure of competitors through product pricing strategies, and even excessive pricing."40
CALERA, introduced by Senator Amy Klobuchar in 2021, proposes sweeping reforms to federal antitrust law, aimed in part to combat and prevent the formation of monopolies through merger enforcement.41 These federal reforms may be necessary to revitalize Section 2 as an effective enforcement tool, which has been a clear focus of the United States Department of Justice ("DOJ") in recent years.42
Among the changes proposed by CALERA are lowering the threshold for...
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