'Worse Than the Tower of Babel'?: Remedying Antitrust's False Dichotomy Through De Novo Appellate Review
Thomas Jefferson School of Law
September 12, 2013
William & Mary Business Law Review, Vol. 5, No. 2, 2014
Thomas Jefferson School of Law Research Paper No. 2324224
Modern antitrust analysis rests on a strange perch. Its paradigmatic method – pretentiously entitled the Rule of Reason – appears (but only appears) to be a dichotomous analytic. At the first stage, a court supposedly defines the relevant market and determines, as a matter of fact, whether marketplace forces constrain the defendant from profitably raising price above the level that would prevail in a competitive market. Only when market forces are inadequate to protect consumers, i.e. the defendant has market power, does the court proceed to stage two where it assesses, as a matter of law, whether the defendant used its power improperly.
Nothing approaching this dichotomous analytic paradigm is true. The ostensibly separate inquiries into market power and competitive effects are really a unitary assessment of the industry’s best competitive makeup, that is the allocation of business realms into those requiring rivalry and those in which cooperation or foreclosure are permitted. For example, rivalry is usually required in the realm of short-run price competition. But in some cases, such as when a firm holds a valuable patent, courts permit foreclosure in that short-term realm in order to foster competition to innovate new products over the longer term.
Although the "competitive makeup" term of art is foreign to the antitrust vocabulary, it captures actual antitrust practice in the courts. Everybody knows that pure competition is a fiction; all industries involve an amalgam of competitive, cooperative, and foreclosed realms. And antitrust law requires competition only where it serves consumer interests.
Although many experts question whether federal judges can effectively assess business conduct as the competitive makeup approach requires, Austrian economics provides a theoretical justification for concluding that thoughtful judges can do a better job of resolving antitrust cases than would mindless, automaton courts applying necessarily over- and under-inclusive bright-line prophylactic rules. Most importantly, the Supreme Court has to date, including its most recent 2013 decision, demanded that federal judges engage theory and make thoughtful antitrust decisions.
Although much of this article is interpretive, attempting to explain what courts actually do when they say they are applying the antitrust dichotomy, it recognizes a significant problem that requires a remedy. Trial judges have the power to dictate the level of scrutiny that appellate courts will apply to their decisions. The false dichotomy can be manipulated so that most decisions can be framed as either issues of market definition, reviewed under the clearly erroneous standard, or competitive effect, reviewed de novo. Given the complexity and social import of many antitrust cases, a single federal judge should not have this power.
Appellate courts should thus abandon the clearly erroneous standard of review for market definition. The Supreme Court requires independent appellate scrutiny of fact-findings controlling important issues of public policy that are indistinguishable from the antitrust laws. It would thus be a small, but important, step to impose a de novo review standard for all antitrust issues.
Number of Pages in PDF File: 83
Keywords: antitrust, market, market definition, de novo, competitive makeup, market power, Austrian economics
JEL Classification: K21
Date posted: September 12, 2013 ; Last revised: December 29, 2013