A new structured rule of reason approach for high-tech markets.

Author:Schrepel, Thibault
 
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"Easy cases ... produce bad law...." (1)

"Man is not capable of thought in any high degree, and even the most spiritual and highly cultivated of men habitually sees the world and himself through the lenses of delusive formulas and artless simplifications--and most of all himself." (2)

  1. INTRODUCTION

    Applying the per se illegality doctrine for years has proven to be a mistake. The challenge now is to avoid committing the same error by applying per se legality for practices related to the New Economy--notably predatory innovation. Also known as the "knowledge economy," or the "information economy," the New Economy refers to the progressive market created by contemporary channels of high-speed technologies and communications. (3) Avoiding applying per se legality in the New Economy context is especially important considering the cost of litigation, time, and the difficulty of applying the doctrine to antitrust law. This Article advocates for eliminating per se legality as it relates to innovation issues that stem from ideologies rather than particular facts. Generalizing the rule of reason will allow for faster antitrust law sophistication than other developments, such as Resale Price Maintenance (RPM). As high-tech markets evolve, antitrust law should be afforded the full opportunity to improve itself as quickly as possible. To achieve this, a newly structured rule of reason, tailored for innovation issues, would considerably improve antitrust law and economic analysis in the long run, while also avoiding false positives.

    We should immediately emphasize the absence of any automaticity between the rule of reason and the balancing test. To the best of my knowledge, the Supreme Court has indeed never linked the two. Additionally, a recent study analyzing over 300 court decisions proved that the balancing test had been applied in only five percent of these cases. (4) In short, this Article understands the rule of reason as being a negation of general per se rules, and that is about it. The question of which test to apply to each practice arises after the need to implement a rule of reason is agreed upon. It could be the balancing test--that I reject for reasons related to its administrability--or for instance, the profit sacrifice test, the equally efficient rival test, or the no-economic sense test. This is exactly what is underlined by Mark S. Popofsky, who states that "the unifying principle is that each Section 2 legal test reflects a specific expression of the same underlying 'rule of reason,'" (5) and that "Section 2's rule of reason, so understood, asks: For the type of conduct at issue, which legal test likely maximizes consumer welfare over the long run?" (6) I then emphasize that this Article does not intend to take a side on which test to apply to each practice that violates antitrust law. It is only focused on the need to recognize that general per se rules are to be avoided in the first place.

    Avoiding general per se rules does not mean, however, that a general rule of reason should be applied. Frank H. Easterbrook's findings demonstrate how filters can create an efficient error-cost framework. Nevertheless, Easterbrook's findings are not well suited for the practices related to the New Economy. This Article proposes implementing a newly structured rule of reason based on three filters that will suit contemporary antitrust law issues.

    For the first time in the age of big data, the procompetitive effects of many unilateral practices are discernible. We should not deprive ourselves the chance to enhance these procompetitive effects by applying a per se legality rule that questions their market consequences. Antitrust scholars should not give up and simply concede that such a structured rule of reason is too complicated to implement. This Article provides some initial guidance on how to precisely shape the structured rule to suit high-tech markets and encourage free-market efficiencies.

    According to John Sherman, the meaning of the Sherman Act "must be left for the courts to determine in each particular case." (7) Despite John Sherman's suggestion, courts have long applied per se rules in which the judge does not have the ability to enforce the law in each case. Courts continue to enforce per se treatments across many different practice areas. For instance, in regard to cartels, if an agreement between competitors affects price or output, the agreement is considered "naked" and per se rules apply. (8) In terms of monopolization, courts treat tying arrangements according to a similar per se rule. (9)

    For more than thirty years, a new doctrinal trend has been developing that advocates for per se legality, particularly for all high-tech-market-related practices. (10) Focusing on the New Economy, this Article demonstrates why both per se illegality and per se legality are not appropriate doctrines to apply in high-tech markets. Moreover, this Article explains how and under what circumstances monopolizations related to innovation should be judged under a more tailored and structured rule of reason.

    Courts must consider antitrust law standards and limitations in their judicial analyses. For instance, antitrust law constantly shifts as new technologies emerge, most notably with the sophistication of related analyses. These advances and changes are reshuffling the cards for judicial consideration. It is now necessary for courts to eliminate automaticity--and therefore, per se standards--from all their antitrust law analyses related to high-tech markets. (11)

    In general, those supporting per se illegality often argue that this standard allows courts to issue rulings over a shorter time period, thereby saving parties money. (12) On the other hand, per se illegality creates false positives and does not enable courts to apply progressive antitrust law, which is most important for innovation-related issues. Applying per se legal doctrines to innovation-related issues can lead to drastically differing results. For instance, a practice formerly deemed anticompetitive could not be procompetitive under a strict per se doctrine analysis. This radical change from anticompetitive to procompetitive has to be avoided for innovation-related issues, primarily because some of these markets are a "winner-take-all" feature. (13) Even though market shares are moving more quickly in high-tech markets than others, the judicial system must ensure that it is not creating winners by ruling unfairly. (14)

    Furthermore, as Frank H. Easterbrook explained, a practice mistakenly condemned by a court is likely to be condemned in future cases, thus remaining illegal. (15) The market, however, shows signs that it rather than the judiciary will eventually take charge of the illegal practices, similar to how a new rival takes down high prices. (16) In other words, "the economic system corrects monopoly more readily than it corrects judicial errors." (17) Therefore, per se illegality cannot be justified because, on balance, it creates more risk than benefits. Moreover, per se illegality has never proved to be efficient in regards to saving time and money. Those supporting per se legality essentially argue for the same benefits, adding that it makes provisions to avoid false positives. (18) But what are the costs of such a policy? Can high-tech markets afford to legalize anticompetitive practices in the long run?

    Finally, proponents of both per se illegality and legality also contend that the rule of reason standard, besides being costly and imprecise, often leads to a de facto per se legality. Advocates of per se illegality assert that it must evolve because the court has a more important role to play, while those who support per se legality argue that the regulator should ratify a de facto situation to enhance the level of legal certainty, and, therefore, spur innovation.

    As Justice Holmes explained, "the life of the law has not been logic, it has been experience." (19) Both the Sherman Act and the Treaty on the Functioning of the European Union (TFEU) are indeed experimental, and more litigation is necessary in order to shine a light on the rules they contain. To refine the rules, more judicial experience is necessary. (20) Without it, antitrust law is inefficient and, as a result, ineffective as governing law in the New Economy.

    This Article does not recommend the elimination of all safe harbors for high-tech related practices. (21) Rather, this Article argues for removing per se legality whenever the effects of a practice implemented in these markets vary in each particular case. In other words, this Article urges courts not to apply per se legality for all practices related to innovation--notably predatory innovation--when arguments support the cost of litigation, the gain of time, or the difficulty in applying antitrust law.

    The law should uphold the elimination of per se legality for innovation-related issues that are not based on particular facts, but occur because of ideological reasons. The application of a new, structured rule of reason, tailored for innovation issues, should be applied whenever it is likely to create efficiencies. Such a standard allows for improvement in antitrust law in the long run, while creating the benefit of per se treatment in the immediate future.

    This Article discusses why the definition of the applicable standard is vital to antitrust law and businesses. (22) Next, this Article emphasizes that per se legality is not an effective antitrust law standard for high-tech practices. (23) Lastly, this Article proposes a more desirable alternative to a new structured rule of reason. (24)

  2. THE DEFINITION OF THE APPLICABLE STANDARD AND WHY IT IS CRUCIAL

    1. The Applicable Standard: Antitrust Law Cornerstone

      Each standard carries different objectives for antitrust law. (25) The applicable standard in antitrust applies to all aspects of antitrust law and litigation as it encompasses the overarching goals of...

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