A proposed antitrust approach to high technology competition.

• Author: Piraino, Thomas A., Jr.

INTRODUCTION

This Article discusses the most critical antitrust issue of the new century: how to regulate competition in Internet, medical, media, telecommunications, computer hardware and software, and other high technology markets. The form of such regulation will have implications beyond the high technology sector. During the 1990s, high technology innovations became the greatest drivers of U.S. economic growth. Traditional industrial firms began to use high technology to enhance their productivity. (1) New Internet software allowed firms to adapt their purchasing and production schedules to meet changing demand, thus smoothing out the peaks and valleys of the economic cycle. Linchpins of the "old economy," such as Ford and General Motors, began to collaborate in business-to-business (B2B) e-commerce ventures that allowed them to sell products and purchase supplies online. (2) A 1999 survey found that American executives believed that they had exploited "only half of the potential of high-tech." (3) Thus, continued productivity gains across the breadth of the U.S. economy could be at risk if antitrust policy does not create an environment conducive to high technology investments.

There is currently considerable debate about whether aggressive antitrust enforcement helps or hinders the development of high technology. That debate will be joined sharply in two cases whose outcome could determine the future control of the Internet: AOL Time Warner's pending monopolization suit against Microsoft (4) (AOL) and the final remedial phase of the most recent of three cases brought by the government against Microsoft (5) (Microsoft III). A recent Wall Street Journal editorial posed the high technology dilemma as follows:

It's increasingly clear that products whose primary value lies in intellectual property--products such as software, pharmaceuticals, movies, records and many of the other things that drive today's economy-are fundamentally different from staples of the industrial economy such as autos and steel, or service-economy products such as banking and insurance. And those fundamental differences are wreaking havoc with traditional notions of economics that underlie antitrust laws.... (6) Some observers argue that the antitrust laws were designed to regulate competition in traditional industrial markets, where the effects of technological changes are relatively measured and predictable. When regulators understand the economic effects of particular conduct, they can condemn or approve it with relative confidence. (7) The courts and antitrust enforcement agencies, however, comprehend little about the ultimate economic effects of high technology. (8) They may therefore unintentionally preclude the development of promising new products by overregulating high technology industries. (9) Firms may be less willing to invest in high technology if they fear that they will be penalized for their success. (10) As Judge Frank Easterbrook has stated, "People are quick to condemn what they do not understand. Hasty or uninformed judgments may condemn novel practices just because of their novelty." (11) Former Federal Communications Commission Chairman William Kennard has explained how regulatory restraint freed firms to make the investments necessary for the development of the Internet: "The best decision government ever made with the Internet was the decision the FCC made 15 years ago not to impose regulation on it.... It was intentional restraint born of humility." (12) In its 1998 Microsoft II decision, the District of Columbia Circuit Court declined to find Microsoft liable for tying its Internet browser to its "Windows" operating system, pointing out that since courts have limited competence in evaluating high technology product designs, they should be "wary of second-guessing the claimed benefits of a particular design decision." (13)

Some commentators have argued that antitrust enforcement is less necessary in high technology industries then in more traditional markets. They emphasize that the pace of technological change is so swift, and so transforming, that no firm can hold monopoly power in a high technology market for a meaningful period. (14) The "paradigm shifts" that occur in such markets "enable new entrants to upset the existing order" more quickly and more effectively than could any court or administrative agency. (15) Since high technology industries are self-correcting for market power, there is no need to risk the potential adverse effects of antitrust enforcement.

Many commentators and government enforcers insist, however, that antitrust can help ensure the efficiency of high technology industries. Robert Pitofsky, a former Chairman of the Federal Trade Commission, argues that the relevant issues in high technology industries are no different than those which antitrust has traditionally addressed: that is, the adverse effects of cartels and the abuse of monopoly power. (16) An October 2000 study conducted by the staff of the Federal Trade Commission (FTC Staff Report) concluded that B2Bs "are amenable to traditional antitrust analysis." (17) Richard Blumenthal, Connecticut's Attorney General, recently claimed that the District of Columbia Circuit Court's decision in Microsoft III constituted "a sweeping and historic victory, not only for this case but also for the application of antitrust laws in the technology sector and the New Economy." (18) Even advocates of less aggressive enforcement policies have concluded that antitrust has a role to play in high technology markets. Judge Richard A. Posner, a respected antitrust scholar and jurist of the more conservative "Chicago School," (19) has opined that "antitrust doctrine is supple enough, and its commitment to economic rationality strong enough, to take in stride the competitive issues presented by the new economy." (20)

Unfortunately, the courts have established confusing and inconsistent standards for the regulation of high technology competition. (21) The courts' analytical failure could have profound implications for the American economy in the twenty-first century as firms are deterred from investing in high technology. (22) It is critical that the courts adopt a new approach that gives clearer guidance on the types of high technology competition that will be permitted or precluded. As a recent editorial in the Wall Street Journal pointed out, "In a world where intellectual property serves as the source of greatest value, antitrust policy ... may turn out to be more important than ever before. That means the government and the courts face a greater challenge to get it right." (23)

The greatest threat to competition in high technology markets stems from exclusionary conduct undertaken by joint ventures and by individual firms with monopoly power. Since its enactment in 1898, the Sherman Act has set forth the standards for judging such conduct. Section 1 of the Act deals with relationships among competitors, prohibiting "[e]very contract, combination ... or conspiracy, in restraint of trade...." (24) Section 2 makes it illegal for any firm to "monopolize, or attempt to monopolize" interstate commerce. (25) Although originally designed for traditional industries such as steel, railroads, and oil, these standards are just as applicable to today's computer hardware and software, telecommunications, and e-commerce firms. In fact, two antitrust doctrines developed in the late nineteenth and early twentieth century are particularly appropriate for twenty-first century high technology firms. Both of these doctrines recognized that the objective of antitrust is not to dictate the outcome of the competitive struggle, but simply to ensure that the competitive process is conducted fairly. Thus, antitrust regulation should be concerned more with the conduct of firms than with the structure of markets. The "essential facilities doctrine," established in 1912, did not outlaw monopolies, but merely precluded them from arbitrarily denying competitors access to their resources. (26) Similarly, the "ancillary restraints doctrine," which dates back to 1898, did not forbid firms from collaborating in joint ventures, but simply forbade them from conspiring to limit competition in areas outside the legitimate scope of their venture. (27)

Such precedent provides a basis for regulating today's high technology industries. The courts should recognize that it is inevitable, and even beneficial, for individual firms and joint ventures to obtain market power in high technology markets. The problem with high technology monopolies and joint ventures stems not from their existence but from their conduct. Instead of precluding such monopolies and joint ventures, the courts should ensure that they do not engage in conduct that unduly perpetuates or extends their market power.

Such a conduct-based approach to high technology competition plays to the federal judiciary's strengths. Judges and juries are adept at determining the purpose and motivation for defendants' conduct. They are "well suited to the task of holding individual firms accountable for their conduct." (28) It is a task they face every day in resolving legal disputes. Courts, however, have little competence to determine the structure of markets or the precise economic effects of agreements among competitors. Fortunately, a defendant's purpose for engaging in certain behavior usually can be counted upon to reveal its likely impact on competition. (29) By concentrating on such a purpose, the federal courts can distinguish more effectively between the competitive abuses that should be deterred and the innovative conduct that should be encouraged in high technology markets.

Part I of this Article describes the tendency of high technology markets to confer a durable form of monopoly power on the first firm to successfully commercialize a new product. Part II explains how collaborations among competitors have the...