When the state harms competition-the role for competition law

• Author: Eleanor M. Fox and Deborah Healey
• Position: Walter J. Derenberg Professor of Trade Regulation at New York University School of Law/Associate Professor on the Faculty of Law at the University of New South Wales, Australia
• Pages: 769-820

WHEN THE STATE HARMS COMPETITION—

THE ROLE FOR COMPETITION LAW

E

LEANOR

M. F

OX

D

EBORAH

H

EALEY

*

This article is about the actual and potential use of antitrust (or competition)

laws

1

to proscribe or override acts or measures of the state

2

that significantly

and unnecessarily harm market competition.

3

Anticompetitive impact that is a

by-product of otherwise legitimate state acts, such as rent control, are not our

focus or concern. At the other extreme, state laws organizing private cartels

and state-granted monopoly rights blocking entry to essentially competitive

markets are at the core of our concerns.

We begin by describing the evolution of competition law from a world of

distinct boundaries between the market and the state to a world that recog-

* Eleanor Fox is Walter J. Derenberg Professor of Trade Regulation at New York University

School of Law; Deborah Healey is Associate Professor on the Faculty of Law at the University

of New South Wales, Australia. The authors thank Eric Lawson, Bradley Pollina, Michael Liu,

Angela Kintominas, and Ishita Gupta for excellent research assistance. The authors are much

indebted to the officials and researchers in the responding jurisdictions for their patience in an-

swering yet one more questionnaire, to the UNCTAD Competition and Consumer Policies

Branch and its Research Partnership Platform, including Hassan Qaqaya and Graham Mott, for

facilitating the research; to our UNCTAD research team, including Michal Gal, Kusha Harak-

singh, Mor Bakhoum, Ebru G¨ok¸ce, and Ulla Schwager; and to the numerous individuals at

UNCTAD workshops who made contributions to our thinking, including Francisco Marcos and

Fr´ed´eric Jenny. The authors also thank Rafael Allendesalazar Corcho, Luisa de Caro, John Fer-

ejohn, Harry First, Helen Hershkoff, Michael E. Levine, Ekaterina Rousseva, Daniel Rubinfeld,

and Adam Samaha, who gave us most helpful information and comments, and our excellent

editor Valerie Suslow. Professor Fox thanks the Filomen D’Agostino and Max E. Greenberg

Foundation for generous research support.

1

“Antitrust law” and “competition law” are used interchangeably herein.

2

We use “state” to include bodies of federal, state, provincial, or local government unless the

context indicates otherwise.

3

By “unnecessary” we mean the following: not necessary or important to carry out the usual

sovereignty functions of the state. We are using the phrase “significantly and unnecessarily

harm” as a place-holder as we begin our analysis. We do not purport to define these words for

any state or its legislature, but we do believe that the state acts and measures that would be

proscribed by the principles we ultimately propose are unlikely to be justified as important to

carry out a public interest, generously defined, unless economic protectionism is regarded as a

public interest.

769

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NTITRUST

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OURNAL

[Vol. 79

nizes the harms from state and hybrid (mixed public and private) restraints

and subjects some of these acts and measures to antitrust challenge. We report

on results of a research project investigating the scope of this coverage, and

we assess what principles emerge that might usefully be adopted into nations’

laws and incorporated into suggested international practices.

I. THE BACKGROUND AND THE PROBLEM

Antitrust law was conceived in the United States as a discipline designed to

control anticompetitive acts of business firms.

4

The principal targets of the

law were aggressive industrialists who were building business empires at the

perceived expense of farmers, buyers, and other small players and were un-

dermining a vision of the social good.

The United States was not a statist economy; state and local ownership of

business was the exception, not the rule. The state and the market stayed

largely in separate spheres. Anticompetitive state abuses raised constitutional

or political questions; business abuses raised antitrust questions. If individual

states took measures that by some account excessively harmed the market,

this could be dealt with by the Commerce Clause of the Constitution,

5

which

prohibits undue burdens on interstate commerce, and by legislative preemp-

tion: Congress could, if it chose, pass laws to condemn anticompetitive state

restraints that affected interstate commerce.

6

Otherwise, any problem of state

action that unduly harmed competition was left to political processes.

7

If the

U.S. federal government itself took measures that restrained competition

within the United States, this would be a legislative and political matter, not

vulnerable to antitrust scrutiny.

8

If the government took measures that re-

strained world trade, the measures could be prohibited by GATT/WTO

9

agreements, depending on trade bargains the United States made. As Ameri-

4

The first federal antitrust statute of the modern era was adopted in Canada in 1889, the year

before the U.S. Congress adopted the Sherman Antitrust Act, 15 U.S.C. §§ 1–7 (1890).

5

U.S. C

ONST

. art. I, § 8, cl. 3.

6

Hillsborough Cnty., Fla. v. Automated Med. Labs., Inc., 471 U.S. 707, 712–13 (1985).

7

See Daniel A. Crane, Judicial Review of Anticompetitive State Action: Two Models in Com-

parative Perspective, 1 O

XFORD

J. A

NTITRUST

E

NFORCEMENT

418, 420–22 (2013). Parker v.

Brown, 317 U.S. 341 (1943), laid the cornerstone for the U.S. state action doctrine: a private

party has a state-action defense only if the state has clearly and affirmatively expressed a state

policy to replace competition with regulation and the state supervises any private anticompetitive

conduct taken to carry out that policy. Cal. Retail Liquor Dealers Ass’n v. Midcal Aluminum

Inc., 445 U.S. 97, 105 (1980).

8

See U.S. Postal Serv. v. Flamingo Indus. (USA) Ltd., 540 U.S. 736, 746 (2004) (rejecting

application of the antitrust laws to the U.S. Post Office, which was an independent establishment

of the executive branch of the government and was regarded as no different from the United

States); note 36, infra.

9

General Agreement on Tariffs & Trade, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194;

Marrakech Agreement Establishing the World Trade Organization, Apr. 15, 1994, 1867 U.N.T.S.

154.

2014]

W

HEN THE

S

TATE

H

ARMS

C

OMPETITION

771

can antitrust matured, federal antitrust agencies and occasionally private par-

ties challenged seriously anticompetitive state and local government acts as

incompatible with the antitrust laws.

10

These challenges generally failed ex-

cept when a local body was a direct participant in the market.

11

Meanwhile, the world changed and perceptions changed. Antitrust princi-

ples spread around the world in a form more elastic than in the United States,

called “competition law and policy.” In some nations, competition law and

policy now takes a holistic approach to the anticompetitive impact of conduct

in the marketplace.

12

Five key historical and intellectual developments in par-

ticular helped redefine boundaries between the market and the state.

First, six European nations adopted the Treaty of Rome establishing the

European Economic Community in 1957 to create a single market as a pre-

scription for peace in Europe.

13

(Now 28 nations comprise the European

Union.) For basic effectiveness, the single market required prohibition of

trade and competition restraints by Member States and businesses in the inter-

nal European market.

14

In several of the member nation/states, the state owned

most of the nation’s major businesses and gave preferences to “its own” do-

mestic firms, in public procurement and otherwise.

The European Treaty of Rome explicitly brought within the purview of the

Treaty’s competition rules the conduct of firms owned by or granted exclusive

privileges by the state.

15

Many restraints were hybrid (state and private), and

accordingly the drafters wrote the antitrust rules and the free movement (com-

merce) rules so that trade and competition in the internal market were two

sides of the same coin. Knowing that a line must be drawn between inappro-

priate nationalistic state action, on the one hand, and appropriate state action

to protect public interests, on the other, the European Court developed a juris-

prudence delineating such a line.

16

The jurisprudence is constantly evolving.

Thus, from the start, the European Community (now the European Union)

integrated rules of trade, which traditionally had been confined to constraining

10

For an example of a private action, see Exxon Corporation v. Governor of Maryland, 437

U.S. 117 (1978). For FTC initiatives, see Sidney M. Milkis, The Federal Trade Commission and

Consumer Protection: Regulatory Change and Administrative Pragmatism, 72 A

NTITRUST

L.J.

911 (2005).

11

See City of Lafayette v. La. Power & Light Co., 435 U.S. 389 (1978).

12

See, e.g., C

OMM

.

OF

I

NQUIRY

(A

USTRALIA

), N

ATIONAL

C

OMPETITION

P

OLICY

(1993) [here-

inafter T

HE

H

ILMER

R

EPORT

], available at ncp.ncc.gov.au/docs/National%20Competition%20

Policy%20Review%20report,%20The%20Hilmer%20Report,%20August%201993.pdf.

13

See Treaty Establishing the European Economic Community, Mar. 25, 1957, 298 U.N.T.S.

11.

14

Id. art. 3.

15

Id. art. 92.

16

See infra Parts II.C, II.G.