THE ESSENTIAL FACILITIES DOCTRINE IN THE DIGITAL ECONOMY: DISPELLING PERSISTENT MYTHS.

• Author: Guggenberger, Nikolas

Introduction I. The Case for the Essential Facilities Doctrine in the Digital Economy II. An Exception Turned Rule: The Single Monopoly Rent Theorem III. A Theory That Does Not Hold in the Long Run: Internalizing Complementary Efficiencies Theorem IV. Exaggerations, Asymmetries, and Disregard of the Alternatives: Administrability, Information Aggregation, and Error Costs V. Misunderstood: Entrenching Monopoly Power and the Political Economy of Remedies Conclusion Introduction

The "essential facilities" doctrine (1) is on the cusp of a reawakening in American antitrust law. (2) The doctrine grants competitors the right to access essential facilities of monopolists to the extent that these competitors depend on the facilities and cannot reasonably duplicate them. (3) This approach forced railroad companies and utility providers to share their infrastructure, for example. (4) After more than a generation of rejection and decline, (5) the doctrine is gaining steam again, and rightly so. (6) In fact, the concept might become the unexpected comeback kid of the inevitable reckoning with immense concentration in the economy generally (7) and gatekeeper power (8) in the digital economy specifically. (9) The recent Democratic House report detailing the findings of its "Investigation of Competition in Digital Markets" and the Republican counterpart "Third Way" report both endorse access rights to essential facilities. (10)

Even the traditionally antitrust-skeptic business community seems out of lockstep, with smaller enterprises and their interest groups favoring more vigorous enforcement against dominant digital platforms as a way to level the playing field. (11) Nascent bipartisan support for the essential facilities doctrine combined with an opening in the business community creates a cocktail that can induce change even in an otherwise gridlocked legislature. Indeed, Sen. Mark R. Warner (D-VA) sponsored the bipartisan Augmenting Compatibility and Competition by Enabling Service Switching Act of 2019 (ACCESS Act of 2019) together with Sens. Josh Hawley (R-MO) and Richard Blumenthal (D-CT) to "promote competition and reduce consumer switching costs" among others by creating access rights and enabling interoperability between services. (12) In the same vein, several bills have just been introduced as part of a bipartisan "Anti-Monopoly Agenda for A Stronger Online Economy: Opportunity, Innovation, Choice" in June 2021: (13) the American Innovation and Choice Online Act, sponsored by Rep. David Cicilline (D-RI) and co-sponsored by Rep. Lance Gooden (RTX), aimed at preventing discrimination and self-preferencing; and a new version of the Augmenting Compatibility and Competition by Enabling Service Switching Act of 2021 (ACCESS Act of 2021), sponsored by Rep. Mary Gay Scanlon (D-PA) and co-sponsored by Rep. Burgess Owens (R-UT), again focusing on access rights, interoperability, and data portability between services. (14)

These recent challenges to the conventional wisdom (15) are remarkable, given how American courts had all but abandoned the notion of antitrust-based access rights. In 1977, the DC Circuit in Hecht became the first court in the U.S. to rely on the essential facilities doctrine by name. (16) The DC Circuit found that "the District Court erred in failing to give [the plaintiff's] requested [jury] instruction concerning the 'essential facility' doctrine" when assessing whether an exclusive contract between the operator of a football stadium in DC and a team violated Sections 1 and 2 of the Sherman Act for preventing competing teams from entering the market. (17) The court clarified that a duty to deal arises when "duplication of the facility would be economically infeasible and if denial of its use inflicts a severe handicap on potential market entrants." (18) At the same time, resulting obligations find their limit where "sharing would be impractical or would inhibit the defendant's ability to serve its customers adequately." (19) The appeals court reversed the judgment and remanded the case for a new trial with proper jury instructions. (20)

The fact-specific and somewhat indirect articulation of the essential facility claim in Hecht was followed by MCI Communications, in which the Seventh Circuit famously established a generalized four-prong test for access requests: (1) control of the essential facility by a monopolist; (2) a competitor's inability practically or reasonably to duplicate the essential facility; (3) the denial of the use of the facility to a competitor; and (4) the feasibility of providing the facility. (21)

On substance, MCI Communications featured a refusal to deal by the telecom incumbent AT&T, which "refused to interconnect MCI with the local distribution facilities." (22) In its reasoning, the court leans on existing case law and specifically references Hecht. (23) A later Seventh Circuit decision clarified that the fourth prong incorporates all legitimate business justifications for denial of access. (24)

Although not invoked explicitly by courts until the 1970s, the logic underlying the essential facilities doctrine dates back to 1912, when the Supreme Court defined access rights to critical infrastructure as an alternative to horizontal breakup of a bottleneck, in application of the Sherman Act. (25) In Terminal Railroad Association, the Court found that a conglomerate of railroad companies had monopolized all crossings over the Mississippi River by accumulating two bridges and a ferry company. (26) Rejecting the government's requested relief of divestiture, the Court ordered the Terminal Railroad Association to grant competitors access to its facilities on fair terms. (27) Over the following decades, courts applied the ideas expressed in Terminal Railroad Association to various types of industries and bottlenecks, from news organizations (28) to public utility companies, (29) ski resorts, (30) and many others. (31)

Beginning in the 1970s, however, the Chicago School of antitrust, a movement in legal academia dedicated to neo-classical economic reasoning, (32) had gained far-reaching recognition and influence. (33) Their arguments mainly reflected a popular preference for market mechanisms (34) unimpeded by government or judicial action. (35) The movement focused almost solely on maximizing rewards for dynamic innovation, without regard to protecting competition in adjacent or future markets that might see entry (36)--an antithesis to the essential facilities doctrine. (37) The slightly more moderate Harvard school of antitrust (38) offered its own scathing critique of the essential facilities doctrine, including on the legal and administrative dimension of the doctrine. (39) Together, the Chicago and Harvard Schools' stances against the essential facilities doctrine formed what William Kovacic called a "double helix." (40) Courts internalized the double helix's tenor and followed suit. (41) Over the course of the 1990s, appellate courts raised the bar for essential facilities claims. (42) In (2004), Justice Scalia, writing for the Supreme Court, finally declared of the essential facilities doctrine: "We have never recognized such a doctrine, and we find no need either to recognize it or to repudiate it here." (43) In so doing, the Court did not formally overrule its precedent, but practically barred essential facilities claims moving forward. (44)

The world is a different place today than it was in 2004. The financial crisis evaporated any illusions of ethical constraint of top management and demonstrated the need for substantive regulation, oversight, and enforcement. Meanwhile, academic and public discourse have widely recognized increasing levels of economic concentration as cause for concern. (45) This trend has proven especially pronounced in the digital economy. (46) Gatekeepers like Google, Amazon, Facebook, and Apple wield unprecedented power to exclude rivals from the marketplaces they control. (47) Consequently, academics have begun to question the mainstream antitrust consensus and are leading the charge for stricter antitrust enforcement. (48) Countless scandals and inadequate reactions have changed public perception and diminished the political capital of the tech giants. (49) Despite that new climate and the bipartisan political opening, reviving, renewing, and expanding the essential facilities doctrine remains an uphill battle. The federal judiciary has moved further to the right and Big Tech will fiercely fight any notion of comprehensive access rights or regulatory disruption of its monopolies.

In light of foreseeable debates about the merits of the essential facilities doctrine, I aim to dispel some of the myths that brought about the doctrine's decline and whose perpetuation still stand in the way of its revival. I focus on some of the most discussed economic and administrative criticisms that are likely to (re)emerge. First, I lay out the case for the essential facilities doctrine in the digital economy and demonstrate how it could be applied to incumbent platforms. Second, I address the misguided objection that a monopolist lacks the incentive to expand into adjacent markets--especially in digital markets. Third, I examine the allegation that a monopolist necessarily benefits from creating and maintaining a competitive secondary market. Fourth, I focus on concerns about the administrability and the consistency of the essential facilities doctrine in practice as well as potential error costs. And finally, I discuss the extent to which the essential facilities doctrine might entrench private economic and political power instead of mitigating it.

1. THE CASE FOR THE ESSENTIAL FACILITIES DOCTRINE IN THE DIGITAL ECONOMY

   Economic concentration has increased across industries in the U.S. over the past decades. (50) This development has become especially evident in the digital economy. (51) Just a few platforms dominate the landscape: in e-commerce...