Cost-Benefit Analysis Without the Benefits or the Analysis: How Not to Draft Merger Guidelines

Previous iterations of the DOJ/FTC Merger Guidelines have articulated a clear, rigorous, and transparent methodology for balancing the procompetitive benefits of mergers against their anticompetitive costs. By describing agency practice, clear guidelines deter anticompetitive mergers while encouraging procompetitive ones, ensure consistent and reasonable enforcement, increase public understanding and confidence, and promote international cooperation.

But the 2023 Draft Merger Guidelines do not. They go to great lengths to articulate the potential anticompetitive costs of mergers but with no way to gauge “substantiality.” Most significantly, they ignore potential benefits of mergers, which eliminates the need for balancing. In other words, the Draft Guidelines provide very little guidance about current practice, which increases enforcement risk and thus deters mergers, which may be the point of the Draft Guidelines. In this Article, we offer specific recommendations that do a better job differentiating pro- from anticompetitive horizontal, vertical, and tech mergers.


The Invention of Antitrust

The long Progressive Era, from 1900 to 1930, was the Golden Age of antitrust theory, if not of enforcement. During that period courts and Progressive scholars developed nearly all of the tools that we use to this day to assess anticompetitive practices under the federal antitrust laws. In a very real sense, we can say that this group of people invented antitrust law.

The principal contributions the Progressives made to antitrust policy were (1) partial equilibrium analysis, which became the basis for concerns about economic concentration, the distinction between short- and long-run analysis, and later provided the foundation for the development of the antitrust “relevant market”; (2) the classification of costs into fixed and variable, with the emergent belief that industries with high fixed costs were more problematic; (3) the development of the concept of entry barriers, contrary to a long classical tradition of assuming that entry is easy and quick; (4) the distinction between horizontal and vertical relationships and the emergence of vertical integration as a competition problem; and (5) price discrimination as a practice that could sometimes have competitive consequences. Finally, at the end of this period came (6) theories of imperfect competition, including the rediscovery of oligopoly theory and the rise of product differentiation as relevant to antitrust policy making.

Subsequent to 1930, antitrust policy veered sharply to the left. Then, two decades later it turned just as sharply to the right. Eventually it moderated, reaching a point that is not all that far away from the Progressives’ original vision.


The long American Progressive Era to the New Deal, roughly 1900 into the early 1930s, was the formative age of antitrust policy. During this period a diverse group of policy makers developed nearly all of the analytic tools that antitrust law uses today to evaluate business practices or market structures thought to be anticompetitive. For all intents and purposes, they invented antitrust law. In fact, after decades of experimentation we are reclaiming much of it. The extraordinary Progressive influence on antitrust policy was at least partly a historical coincidence. The passage of the Sherman and Clayton Acts and the development of techniques for evaluating practices tracked extraordinary developments in technology as well as social and economic thought. Antitrust policy would have looked very different had it developed a half century earlier.

The Progressive Era antitrust movement was both political and economic. It reflected the emergence of new interest groups as well as new sources of economic concern and theoretical developments. The emergent interest groups were large multistate business, the trade association movement dominated by small business, consumers, and labor. The new sources of concern were industrialization, the rise of modern distribution, the labor movement, and the increasing importance of consumers as market participants. The new theoretical developments were the rise of marginalist economics and industrial organization theory, which provided competition analysts with a set of tools like none they had before.

The legislative debate leading up to the Sherman Act can hardly be characterized as a dispute about economic theory. That came later as litigants and courts looked for tools that would enable them to assess practices in a coherent way. Consistent with the economic-focused language of the Sherman Act itself, the tools that emerged were mainly economic, although they were applied by non-economist lawyers and judges. The record of their engagement with the law is impressive; judges routinely used them even if they were not aware of their economic origins or technical meaning. Nearly all of these developments placed antitrust theory on an expansion course that prevailed until the reaction against the New Deal found a voice in the neoliberalism of the 1940s, particularly as expressed by the Chicago School. Even so, the neoliberal revolution adopted most of these tools, although it modified some of them and rejected a few.

The Progressives are occasionally caricatured as people who really did not care about costs and productivity but were concerned exclusively about bigness as such. That could not be further from the truth. By and large the Progressives appreciated the fact that the trusts had lower costs than smaller firms and did not want to punish them for that. In fact, they were fairly obsessed with efficiency and cutting of costs. That obsession extended even to Louis Brandeis, a strong proponent of business efficiency even as he railed at large firms. He campaigned for “Taylorism,” or scientific management, as a way of limiting price increases. One antinomy in Brandeis’s work was his persistent failure to acknowledge the relationship between greater efficiency and larger size, even though contemporary economists clearly did.

The numerous and varied participants in the Chicago Conference on Trusts, discussed below, favored lower costs and were also concerned about higher prices. They worried that exclusionary practices might be a vehicle for achieving them and making market dominance permanent.


The Progressive Era was heavily preoccupied with the rise of larger firms, or the “trust” problem. The initial reaction was an eclectic range of views about what to do about them, or whether to do anything at all. The gigantic 1899 Chicago Conference on Trusts, hosted by the Civic Federation of Chicago, is an exceptional window into the contemporary mindset because it reflected this diversity of views. Its personnel and proceedings, which were published in 1900, represented every interest group that had a stake in policy about the trusts. Some participants were invited by the conference managers, while others were invited by the governors of individual states. The speakers included politicians, economists, lawyers, social scientists and statisticians, industrialists, labor union leaders, insurance company representatives, and even clergy.

This diverse group identified a number of phenomena that explained the rise of the trusts and that either justified or damned them. Some argued that the trusts were entirely the consequence of economies of scale or scope and as such were an engine of economic progress that should be left alone. Others argued that potential competition and new entry would always be present to discipline monopoly pricing, thus mitigating any concerns. Many others saw the trusts as harmful and blamed their rise on deficiencies in state corporate law. They debated about a national corporation act as a potential solution. Others both blamed and defended tariffs or unethical business actors.

Within this amalgamation of concerns the Sherman Act itself was hardly dominant. In fact, it played a surprisingly small part, and the speeches tended to emphasize its deficiencies more than its strengths. Henry Rand Hatfield’s well-known contemporary account of the Chicago Trust Conference is very likely responsible for the view that the economists who spoke were nearly all opposed to the Sherman Act. A fair reading of the proceedings suggests two quite different splits. First was the division of those who thought that the trusts were efficient and harmless from those who regarded them as threatening. Contrary to Hatfield’s view, a clear majority believed that the trusts presented a serious problem. Second was the question of the best legal tools for confronting them. Here, Hatfield’s point has more traction. As correctives, corporate law and tariff reform were at least as prominent as the Sherman Act, and many of the speakers professed strong disappointment in Sherman Act litigation to that time. Although the speakers were hardly unanimous, the strongest consensus around a single view was that the trusts should be controlled by changes in corporate law.

Prior to the Chicago Conference, the Civic Federation had sent a questionnaire to participants. The summaries contained in the Proceedings say nothing about the methodology, but there were 554 respondents to 69 questions. The respondents were described as “trusts, wholesale dealers, commercial travelers’ organizations, railroads, labor associations, contractors, manufacturers, economists, financiers, and public men.” A separate list, or circular, was sent to a smaller but overlapping group of lawyers, economists, and “public men.” The description of the survey also fails to indicate whether respondents were limited to one answer or could select multiple answers. Nor does it specify how recipients of the questionnaire were selected and what was their distribution over various interest groups. These omissions largely reflected the state of public opinion research at the time. In any event, nothing suggests that this was anything more than an informal questionnaire distributed broadly to invitees.

David Kinley, a professor from the University of Illinois, reported on the results. Three quarters of the participants overall believed that the trusts injured consumers. Two-thirds of the respondents regarded the trusts with “apprehension.” Most on the main        questionnaire believed that the trusts resulted in higher prices. However, 90% of the respondents on the second Circular, which was more focused on academics, lawyers, and government officials, believed that the effect of the trusts was to reduce costs. Two-thirds of the respondents on this second list also believed that consumers would benefit. Interestingly, roughly two-thirds of the respondents overall believed that labor organizations should be treated as all other trusts, while one-third took an unspecified “opposite view.” This suggests that the idea of a labor “exemption” from antitrust law did not have popular support in 1900. Tellingly, this occurred after the federal courts had begun using the Sherman Act as a powerful striking-breaking device. Evidently, most of the participants did not object.

The survey concluded with a very general question: “What shall be done with combinations?” The answers were all over the place, with pluralities going to unspecified “legislation” (61 respondents), “let alone” (60) and the third highest specific proposal going to “Tariff revision” (45). “Antitrust” did not appear on the list, except to the extent it may have been included in unspecified legislation. Twenty-six respondents preferred government ownership or control of natural monopolies, and even fewer (10) supported “Stricter Limitation on Corporate Powers.” No specific proposal other than “let alone” received 10% of the votes, and it received only 10.8%. The list of options did not include any that were obviously related to morals or ethics, although 123 responses were classified as “miscellaneous,” with no specification of their content.

At the time of the conference, the Sherman Act was nearly ten years old and had produced two important Supreme Court decisions condemning railroad cartels. Even here, the very small number of comments on the railroad cartel decisions were more negative than positive. One complaint was that the railroad cartel cases did not authorize the courts to set reasonable rates, but only to condemn bad agreements. Another was that the Trans-Missouri railroad cartel case, which had adopted a per se rule against price fixing, had largely “expunged” the rule of reason from the law.

By 1900 the Sherman Act had also been used aggressively several times against labor unions, a development that was both praised and condemned by participants. In nearly all of the labor cases the plaintiff had been the United States, thus inviting debate about what should be government policy toward labor union activities. P.E. Dowe, statistician of the Anti-Trust League, declared that while the cost of living within the last two years had increased some 12–16%, wages had risen by less than 3%. Nevertheless, as noted above, there was little support for labor antitrust immunity. Overall, while attitudes toward labor changed significantly between 1890 and 1914 when the Clayton Act was passed, most of this was not yet reflected in the conference proceedings.

Other conference participants criticized the Supreme Court’s very first Sherman Act decision, United States v. E.C. Knight Co., which had concluded that Congress lacked the constitutional authority to control intrastate manufacturing simply because the goods were destined for interstate shipment. That provoked the view that the country “must have a constitutional change if the general government is to deal with the trust problem.” Another speaker praised the railroad cartel decisions as well as E.C. Knight for developing the distinction between intrastate and interstate trusts. Many commentators expressed concerns about federalism, but most were of the nature that while the states had a primary role in combatting trusts they could not control interstate companies without federal assistance.

Several conference participants spoke about the role of costs. Many recognized that the trusts tended to reduce costs. Even the “Great Commoner” William Jennings Bryan acknowledged the cost reductions but protested that nothing ensured that these savings would be passed on in the form of lower prices. “A trust, a monopoly, can lessen the cost of distribution. But when it does so society has no assurance that it will get any of the benefits . . . .” Similarly, others indicated a concern for higher prices. For example, John M. Stahl of the Farmers’ National Congress acknowledged that the trusts had lowered costs but accused them of setting anticompetitively high prices. Some participants defined competition in terms of cost reduction.

       Critics later faulted the Chicago Conference for failure to make specific recommendations, and state governors called a second conference for that purpose which met in St. Louis later in 1899. It issued a number of recommendations, but its proceedings were apparently never published and it received little attention from the press. It was dominated by state attorneys general who focused largely on corporate law remedies. Its recommendations either duplicated those already contained in the Sherman Act or else called for corporate law modifications limiting the power of corporations to do business in more than a single state.

The path of antitrust development that took place in subsequent years leading up to the Clayton Act in 1914 was much more focused than the conference debates, mainly because many alternatives dropped away. The move for a national incorporation statute or expanded state corporate law remedies ran out of gas. Debates over the tariff remained, but no legislation ever linked them to trusts as such.

The role of labor became more controversial after 1900, with distinctive positions emerging by the 1912 presidential election. The 1912 Democratic Party platform called for protection of labor organizing so that “members should not be regarded as illegal combinations in restraint of trade.” The Republican platform was silent on that issue, although it did advocate for preservation of high tariffs as a means of protecting workers’ wages. High tariffs, it should be noted, protected producers directly, and labor only if producers passed on some of their gains in the form of higher wages. The Progressive Party, with Theodore Roosevelt as its head, called for an end to labor injunctions but did not mention a substantive antitrust immunity. The Democrat’s 1912 election victory very likely accounts for insertion of a labor immunity into the Clayton Act, now as section 6.

Debates over good morals in business behavior are of course never ending, but the concerns were never reflected in the text of an antitrust statute. Rather, when it passed the Clayton Act in 1914, the Progressive-dominated Congress doubled down on the use of exclusively economic language. The Act condemned conduct when it threatened to “substantially lessen competition” or “tend to create a monopoly.”

One thing that emerges powerfully in the proceedings of the conference is that, even though the participants represented a wide variety of political beliefs as well as professions, for a clear majority of them the dominant concern was with the power of the trusts to set high prices or drive rivals out of business. But there were some exceptions. Of the roughly seventy participants whose statements were published, a half dozen emphasized political or social concerns either in addition or as an alternative to the economic ones. The most prominent in Progressive circles was economist Henry Carter Adams, at this time a statistician for the Interstate Commerce Commission. Adams spoke at some length about rising concentration and economic power, as well as the deficiencies of state corporate law. However, he also complained about the “general social and political results of trust organizations” that must be considered. “For the preservation of democracy there must be maintained a fair degree of equality in the social standing of citizens,” he observed, and wondered whether the rise of the trusts was consistent with that. He concluded:

I would not claim, without discussion, that the trust organization of society destroys reasonable equality, closes the door of industrial opportunity, or tends to disarrange that fine balance essential to the successful workings of an automatic society; but I do assert that the questions here presented are debatable questions, and that the burden of proof lies with the advocates of this new form of business organization.

He also suggested that the trusts might have outsize political influence.

Dudley Wooten, then a member of the Texas legislature, agreed, arguing that the trusts were antidemocratic perversions brought about by selfishness. Aaron Jones, a leader of the national Grange, a populist political organization of farmers, observed that the sugar trust made political contributions to the Republican Party in Republican-controlled states and to the Democrats in Democrat-controlled states. John W. Hayes, General Secretary of the Knights of Labor, saw a political war between the power of the state and the power of the trusts, as did Edward W. Bemis from the Bureau of Economic Research. However, Bemis also praised chain stores for offering low prices and distinguished them from the trusts. While the trusts cut prices selectively in order to drive out rivals, the department store “furnishes alike to all the advantage of lower prices, which are rendered possible by the economies of a big business.” William Dudley Foulke, a prominent journalist and political activist for Progressive causes, argued that “the political and social effects of monopoly are far more menacing to society than its economic results.”

For more conservative political activist George Gunton, by contrast, politics were present but pulling the other way: politicians were being urged to abandon sound economic principles of “industrial freedom” in order to vote the “arbitrary paternalism” of harsh regulation of the trusts.

Following the Chicago Conference, Progressives began to focus more narrowly on the antitrust laws and the discipline of economics as the preferred tool for dealing with the trusts. While political and moral rhetoric about the trusts has always been present, there is little evidence that it provided substantial guides to policy making. The dominant tool became marginalist economics, then in its infancy, and the darling of the younger generation of political economists in the United States. Most of these were Progressives with a much stronger bias in favor of government intervention than their predecessors had supported.

The principal tools that emerged were (1) partial equilibrium analysis, which became the basis for concerns about economic concentration, the distinction between short- and long-run analysis, and later came to justify and provide support for the concept of antitrust’s “relevant market”; (2) classification of costs into fixed and variable, with the emergent belief that industries with high fixed costs were more problematic; (3) development of the concept of entry barriers, contrary to a long classical tradition of assuming that entry by new firms is easy and quick; (4) the distinction between horizontal and vertical relationships and the emergence of vertical integration as a competition problem; and (5) price discrimination as a practice that could have competitive consequences. Finally, toward the end of this period came (6) theories of imperfect competition, including the rediscovery of oligopoly theory and the rise of product differentiation as relevant to antitrust policy making.


The antitrust movement in the United States coincided with a far-reaching revolution in economics. The marginalist revolution has unfortunately been seriously undervalued in history writing about antitrust, mainly because so many historians did not understand it and failed to appreciate its implications. Nevertheless, the fact remains that one cannot understand the set of tools that Progressive antitrust policy makers deployed without understanding their underlying economics. By the 1930s nearly all economists were marginalists.

The classical political economists had seen value as inhering in goods or the labor that went into making them. They tended to assess costs and benefits by looking at averages, which were necessarily taken from the past. They also tended to believe that capital would flow naturally toward profit and that the only practical impediment was government licenses or other restrictions. In sharp contrast, marginalists saw value as willingness to pay or accept for the next, or “marginal,” unit of something. As a result, its perspective on value was forward looking. Further, market entry was a dynamic concept and its ease and likelihood varied greatly from one market to another.

Three features of marginalism account for both its influence and the resistance to it. One was that marginalist analysis enabled various values governing demand, supply, or economic movement to be “metered,” or quantified, in ways that classical political economy could not do. This feature also made marginalist economics much more technical, with increasing informational demands, but also promised to give Progressive Era economists capabilities far beyond those of their predecessors. Second, and relatedly, marginalism expanded the use of mathematics in economics, to a degree unknown by the classical political economists. This became a particularly attractive feature to younger economists and social scientists looking to add rigor and expertise to their disciplines. It also accounts for some of the resistance from older economists.A third feature was that marginalism undermined the classical view that markets are competitive unless the state creates monopoly. Under marginalism competitiveness was a matter of degree, and only a small percentage of markets satisfied the conditions for perfect competition. As a result, marginalism began to make a broad and unprecedented case for selective state intervention in the economy.

A.  Markets as Human Institutions: Coercion

The classical political economists saw the world of commercial relationships in binary terms. For private arrangements people were either free or bound. Aside from government constraint, the boundaries of obligation were defined by contract, property, and tort law. Value inhered in things or the labor used to produce them, and people either purchased or not. Setting aside public obligations, within that world people were free to make their own economic decisions unless a contract, property right, familial hierarchy, or sovereign command bound them. That bond was particularly strong because the common law principle of liberty of contract refused to set very many contracts aside. Further, the classical tradition regarded the market itself as a part of nature. Francis Wayland’s popular textbook on political economy defined the discipline in 1886 as “a branch of true science,” and by science “[he] mean[t] a Systematic arrangement of the laws which God has established.”

By contrast, one prominent feature of the late nineteenth century was its fascination with change—in everything from biological evolution to physics to mechanics. The historian Howard Mumford Jones described the period as the “Age of Energy.” It was only natural that economists would develop marginalism, with its forward-looking concept of value that focused on change and the next thing rather than on averages from the past. “Equilibrium” became the steady state to which all change aspired but seldom reached. Motion rather than stasis was the natural order of things.

Marginalism began with the premise that value is a measurable expression of human choice. Value depended on willingness to pay or willingness to forego. Further, marginalism distinguished among goods depending on costs, availability, and preference. One corollary was the increasing belief that markets were not all the same and did not all function equally well. This opened the way for more substantial if selective intervention to correct market deficiencies.

This change in the conception of markets from a pure product of nature to a created human institution was perhaps Progressive economics’ most important contribution. Markets became imagined as human creations and not merely a reflection of permanent natural laws. Their design was a product not only of preference but also of state policy, which could be for good or for ill. As the institutionalist progressive economist John R. Commons put it in his important book on law and capitalism, the evolution of economic phenomena was artificial, more like “that of a steam engine or a breed of cattle, rather than like that of a continent, monkey or tiger.”  Further, the “phenomena of political economy” are in fact “the present outcome of rights of property and powers of government which have been fashioned and refashioned in the past by courts, legislatures and executives through control of human behavior by means of working rules, directed towards purposes deemed useful or just by the law-givers and law interpreters.”

An outpouring of literature stretching from the 1890s through the early decades of the twentieth century developed aspects of this view that markets are “created” rather than simply present in the natural world. One manifestation was unprecedented economic concern with the distribution of wealth as a legitimate target of state policy because, after all, the state was responsible for it in the first place. Progressive economist Richard T. Ely argued in his two-volume book on the common law and the distribution of wealth that the legal system itself was strongly biased against the poor. The coercive rules of property and contract relinquished power to those who already had it. In a review, Cambridge economist Charles Percy Sanger concluded that “the most salient fact is the mass of evidence which shows how hostile the constitution of the United States, as interpreted by judges, is to the poor or the public.”

 A related consequence that had more salience for antitrust policy was the idea that markets themselves could be coercive instruments that limited human freedom. Columbia Professor Robert Hale, another Progressive who was one of the earliest economists to be hired onto a law school faculty, expressed this idea for an entire generation. In an article entitled “Coercion and Distribution in a Supposedly Non-Coercive State,” he observed that the economic systems that had been developed by classical economists gave lip service to freedom. In reality, however, their systems are “permeated with coercive restrictions of individual freedom, and with restrictions, moreover, out of conformity with any formula of ‘equal opportunity’ or of ‘preserving the equal rights of others.’ ”

Many of these newly discovered concerns about market coercion showed up in public law—things such as greater protection for labor from onerous wage agreements, prohibitions of child labor, women’s suffrage, the progressive income tax, and eventually the expansive safety net programs of the New Deal. But they also affected competition policy. For example, the law of vertical restraints became increasingly aggressive, particularly in its protection of small retailers. It abandoned very benign common law rules for virtual per se illegality for most distribution agreements that limited dealer behavior, as well as aggressive rules for vertical mergers. The classical conception that new entry would always be around to discipline monopoly unless the government prevented it gave way to one that saw markets themselves as forestalling new competition. The idea of competition itself came increasingly under attack, and not from socialists who did not believe in it. Rather it was from neoclassically-trained economists who realized that the viability of competitive markets depended on several assumptions that did not invariably obtain.

B.  Partial Equilibrium Analysis

Marginal utility theory permitted the creation of tools for determining the relationship between costs and either competitive or monopoly prices within a firm. By itself, however, it was not able to assess how competition works among multiple firms or what the conditions are for achieving it. That required additional theory about interactions among firms.

Partial equilibrium analysis permitted people to group firms producing similar products into “markets” on the assumption that the interactions of firms within the same market were much more important for evaluating competition than the interactions (or lack of them) among firms in different markets. Cambridge University Professor Alfred Marshall, the first great marginalist industrial economist, borrowed this approach from the science of fluid mechanics: for goods within the same market, prices and demand would flow toward equality, but not across the market’s boundaries.

In 1890 Marshall brought the ideas of marginal utility and equilibrium together in a way that made the analysis of market behavior both tractable and useful. First, he developed what came to be known as the Marshallian demand curve, illustrating the inverse relationship between price and output of a single commodity. The downward slope of the demand curve is driven entirely by the next, or “marginal,” buyer’s willingness to pay for one unit of that commodity. The model ignored choices people might make about different commodities, even though in a world of limited budgets such choices were relevant.

Marshall was not the first marginalist, but he did turn marginalism into a practical tool of competition analysis. He explained that he had come to attach great importance to the fact that our observations of nature, in the moral as in the physical world, relate not so much to aggregate quantities, as to increments of quantities, and that in particular the demand for a thing is a continuous function, of which the “marginal” increment is, in stable equilibrium, balanced against the corresponding increment of its cost of production.

For example, a firm would calculate a selling price by comparing the amount of additional cost that production and sale would encounter and the amount of additional revenue that it would produce.

Marginalism provided a partial theory of individual firm behavior, but not so obviously a theory of firm interaction and competition. In order to do that, Marshall needed a mechanism for identifying who in the economy competes with whom. This was in contrast to earlier contemporaries such as Leon Walras and Marshall’s own successor as professor of political economy at Cambridge, Arthur Cecil Pigou, who were more concerned with the economy as whole. Today this division roughly segregates macroeconomics and microeconomics.

Marshall’s concern was to make economic analysis more manageable by focusing on those firms that competed with one another in an obvious way. He realized that everything in an economy affects everything else, but the most important influences can be identified and tracked. In the influential eighth edition of Principles, published in 1920, Marshall observed that informational demands made it necessary for people, with their “limited powers” to “go step by step.” They would have to break up “a complex question, studying one bit at a time and at last combining [their] partial solutions into a more or less complete solution of the whole riddle.”

He described his solution, which came to be known as partial equilibrium analysis, this way:

The forces to be dealt with [in the economy are] so numerous, that it is best to take a few at a time; and to work out a number of partial solutions as auxiliaries to our main study. Thus we begin by isolating the primary relations of supply, demand and price in regard to a particular commodity. We reduce to inaction all other forces by the phrase “other things being equal”: we do not suppose that they are inert, but for the time we ignore their activity. This scientific device is a great deal older than science: it is the method by which, consciously or unconsciously, sensible men have dealt from time immemorial with every difficult problem of ordinary life.

This focus on individual industries quickly took over the entire field of business economics, or “industrial organization,” as a distinct area of economic inquiry. Industrial organization theory seeks to determine the conditions under which a particular industry attains equilibrium. Today, antitrust has become a substantially microeconomic discipline, certainly in litigation if not always in theory.

Marshall set industrial organization economics on the path of studying industries individually by identifying goods, which he termed “commodities,” that were sufficiently similar that they could be said to compete with each other. He borrowed from Augustin Cournot the definition that a “market” is the “whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality easily and quickly.”

This assumption had numerous implications that were relevant to antitrust. One was to invite questions about exactly how to identify who was in such a market and who was not. A second was to consider whether the identity of the firms in this grouping changed over time. The concept of “entry barriers” explained the likelihood that firms would cross this line, coming in when profits were high. A third was to make the analysis of relationships among competitors, or “horizontal” relationships very different from the analysis of vertical or other relationships. A fourth was a search for the conditions that either furthered or undermined competition once such a group of firms or their commodities had been defined.

Marshall clearly realized that in reality there is no such thing as a single market that is completely isolated from the rest of the economy. Partial equilibrium analysis, as it came to be called, was no more than a working assumption—although a very important one for making economic analysis manageable. The idea that groupings of similar (competing) commodities should be industrial economics’ principal subject of study had a profound influence on antitrust policy. One of the most important antitrust tools to come out of this focus was the idea of the “relevant market,” or the grouping of sales whose products and prices are strongly influenced by one another.

The late nineteenth century was the golden age of engineering and science, including social science and economics. Marshall borrowed his ideas about markets, movement and equilibrium straight from Newtonian physics: “When two tanks containing fluid are joined by a pipe, the fluid, even though it be rather viscous, which is near the pipe in the tank with the higher level, will flow into the other,” he wrote in 1890. Further, “if several tanks are connected by pipes, the fluid in all will tend to the same level . . . .”

While he appeared to be discussing fluid mechanics, Marshall was actually speaking of the principle of economic substitution at the margin, which he defined as the tendency for prices within a single market “to seek the same level everywhere,” just as the fluid in a tank. Further, “unless some of the markets are in an abnormal condition, the tendency soon becomes irresistible.” Within this model a “market” was a closed system in which fluids moved naturally toward equality. A different market would be a different enclosed system, and without any flow from one system to the other. Further, as soon as one relaxed the assumption that resources would move freely and quickly from any place of low utility to any place of higher utility, it became prudent to investigate where such movements could be expected to occur, when they would be less likely, and what were the obstacles that stood in the way.

Irving Fisher, who was to become one of America’s most important early marginalists, used his Ph.D. program at Yale in the 1890s to construct a “utility machine.” The machine illustrated with fluids controlled by pumps and valves how prices within the same market flowed to an equilibrium, but did not flow across market boundaries.

The utility machine was thought to be so innovative that it was scheduled for display at the 1893 Columbian Exhibition in Chicago but was destroyed in route. Other American economists also used illustrations derived from fluid mechanics to illustrate the equilibrium of prices in a market.

Figure 1. Irving Fisher’s Utility Machine (1893)

Sources: Timothy Taylor, Photos of Fisher’s Physical Macroeconomic Model, Conversable Economist (Oct. 25, 2016, 8:06 AM), [].

Marshall’s conclusion that the fluids in a tank would flow to a level equilibrium, even though they were “rather viscous,” presaged another development in marginalist economics: the idea of friction, or “costs of movement,” in the words of Marshall’s successor Pigou. This idea was later narrowed and refined to become “transaction costs.” The idea was simply that the costs of moving resources to an equilibrium varied from one market situation to another, and in some cases these costs prevented the movement altogether. As a result, one feature of some markets was “chronic disequilibria,” as Joseph Schumpeter later observed. Another result was increasing awareness that these costs could interfere with a market’s movement toward competition. These concerns were reflected in the increasing attention toward barriers to entry, in contrast to the historical classical assumption of free entry.

Marginalist industrial economics also broke the bond that had always existed between classical political economy and laissez faire policy—at least until significant neoliberal pushback occurred in the 1940s. The classicists had been strenuous opponents of government intervention in the economy, but the new Progressives were not. Indeed, Marshall himself moved significantly to the left as he grew older. As the technical study of market competition under marginalist principles developed, economists became increasingly concerned about defining the conditions for “perfect” competition. Accompanying this came the realization that the conditions are in fact quite strict. Nearly all markets deviated from them, although some more than others. One thing that marginalism provided was a set of tools for measuring these deviations, provided that the data were available. Antitrust policy in turn became a tool for examining certain industry structures and practices in order to determine whether they were anticompetitive and, if so, whether they could be corrected by the legal system.

C.  Industrial Concentration

The idea of a correlation between the number of firms in a market and its degree of competitiveness dates back to Cournot, a French mathematician who wrote in the mid-nineteenth century. In Cournot’s model, as the number of effective competitive players in a market becomes smaller, the margin between price and marginal cost increases until it reaches the monopoly level with a single firm. For more than a century, the relationship between industrial concentration and competitive performance has been an important component in competition policy, both at the legislative level and more specifically in merger policy. Nevertheless, its role has been controversial.

“Concentration” refers to the number of firms in a market and, under most measures, their size distribution. A market is said to be more concentrated as the number of firms goes down or as the size distribution is more lopsided. In order to have a measure of industrial concentration someone needs to have a concept of a market, or “industry,” and that is why partial equilibrium analysis was an essential premise.

Around the turn of the century, marginalist economists began to examine the relationship between market structure and industry performance. As early as 1888 Gunton used data from the U.S. Census of Manufactures to conclude that over the previous half century, industrial concentration in some markets had grown significantly. For example, the cotton industry census data from 1830 and 1880 showed that during that interval the amount of capital invested in the industry grew fivefold, the amount of production more than tenfold, but the number of firms had actually shrunk from 801 to 756. The data also showed that the amount of capital invested per worker had roughly doubled, indicating that the firms were becoming more capital intensive. Gunton also identified railroading, telegraphing, petroleum production, and sugar as showing greatly increased concentration.

Gunton’s conclusions were not addressed to competitiveness. He never discussed the relationship between the number of firms in a market and the threat of oligopoly or collusion. He observed that some had complained that the “concentration of capital tends to increase prices” but found no evidence of it. Rather, he found that most of the facts “point the other way.” Prices in most of the industries that had experienced higher concentration had actually gone down rather than up. He also rejected the argument that “although these trusts have constantly resulted in reducing prices,” still greater saving would result “should the government run the business.” He then concluded that the large firms were fundamentally a good thing.

Increasingly, however, economists and competition lawyers became less sanguine. Boston attorney Lionel Norman lamented that industrial concentration was increasing at an alarming rate. Cornell economist Jeremiah Jenks and Walter Clark, a professor of mathematics and economics, were also much more pessimistic, as were Progressive economists Ely and Edwin R.A. Seligman. Looking at the business landscape just after the turn of the century, Seligman concluded that the “study of modern business enterprise thus becomes virtually a study of concentration.” He also relied heavily on data from the U.S. Census of Manufactures, which showed rapidly increasing concentration around 1900 and a significantly greater number of “combinations,” or firms that had attained their large size by merger. All but one of the top twenty-five combinations had been formed between 1890 and 1904. On effects, he noted both the possibility of lower costs and higher profits. He also noted that higher profits did not necessarily mean higher prices, because higher output and lower prices could also be profitable. He seemed particularly troubled by the fact that the trusts earned higher margins, even if they sold at lower prices.

Progressive railroad economist and Harvard Professor William Z. Ripley also undertook a comprehensive examination of industrial concentration data derived from the Census of Manufactures. The two census figures he found to be most informative were those of the number of firms in each consecutive five-year census period and the value of their gross product. He concluded that in 142 of the 322 industries grouped in the census, the number of firms had declined, and there had been significant increases in per firm output. He was able to group industries by their tendency toward monopoly, simply by examining the trend toward increased concentration. “Concentration varies more or less directly with the degree of monopolization,” he concluded.

These writers generally assumed a correlation between the data contained in the Census reports and the “markets” that Marshall referred to for partial equilibrium analysis. In fact, the census data correlated very poorly. For example, one classification in the 1909 Census of Manufactures was “[f]urniture and refrigerators,” which included both metal and wood furniture of all kinds, as well as wooden iceboxes and metal refrigerators, which were first coming into commercial use. A metal refrigerator did not compete very much with an upholstered chair, which did not compete very much with a wooden bed. This very poor fit between industry census data and antitrust markets has served to weaken conclusions about industry competitiveness from census classifications—something that a few Progressive economists realized already at the turn of the century. This poor correlation has remained to this day as a problem with the measurement of industrial concentration through the use of census data. The classifications are better today than they were a century ago, but they still are not well designed to address this problem. Nevertheless, data of this type have been in continuous use to produce measures of industry competitiveness ever since the late nineteenth century.

The Chicago School largely rejected the significance of concentration data, opting for a position more like Gunton’s that the aggregation of large firms resulted mainly in greater efficiency and lower prices. Numerous other scholars from the mainstream and further left have disagreed. In the mid-1970s, the debate produced an influential conference collecting representatives from both sides. The resulting book hardly put the debate to rest, however, and census-driven concentration data continue to find a controversial but important place in debates about American competitiveness. For example, the Biden Administration’s 2021 executive order on American competitiveness lamented declining competition and relied on concentration data to make the point.

D.  Fixed Costs and Equilibrium

Both marginalism as a theory of value and Marshall’s theory of equilibrium made cost classification essential. In fact, for Marshall, the cost problem produced significant frustration. Competition drives prices to marginal cost which, by definition, are costs encountered for each incremental change in output. But if hard competition drives prices to marginal costs, then how could a firm pay off its other costs?

Marshall used the term “marginal cost” to describe the immediate additional cost that a firm faced when it increased output by a single unit. In a chapter on the “Equilibrium of Normal Demand and Supply,” he observed that under what he called “free competition” prices would be driven to a level very close to marginal cost, and this would become a stable equilibrium.

Marshall’s theory of marginal cost was an effort to determine how firms decide on prices. He observed that prices are related to costs but not all costs are the same. Some costs seem to be quite unrelated to a firm’s decision about what price to charge, at least over the short run. This included administrative costs as well as depreciation on plant and durable equipment. In calculating whether a particular price is immediately profitable, the firm largely ignores these costs. Marshall identified “total cost” as the sum of these supplemental costs plus marginal costs. In the short run each additional sale would add to a firm’s profit so long as it was at a price that exceeded the firm’s marginal costs.

Marshall never used the terms “fixed costs” or “variable costs.” He devoted an entire chapter to “cost of production,” which spoke of “prime costs,” “total costs,” and “marketing costs.” The words “prime” and “direct” were almost always used as references to what we would call variable costs. Within prime costs he included “the (money) cost of raw material used in making the commodity and the wages of that part of the labour spent on it which is paid by the day or the week.” He excluded salaries such as are paid to management because these did not vary with output over the short run.

Marshall observed that for goods that require a “very expensive plant” the “[s]upplementary” cost is a “large part of their [t]otal cost.” As a result, a “normal price” “may leave a large surplus above their [p]rime cost.” In today’s terminology, in order to be profitable a business with high fixed costs would have to charge a premium above its variable costs. He also observed what would become a significant problem for establishing equilibrium in markets with high fixed costs. “[I]n their anxiety to prevent their plant from being idle” producers may “glut the market.” If they “pursue this policy constantly and without moderation,” price may be so low “as to drive capital out of the trade, ruining many of those employed in it, themselves perhaps among the number.” When firms are under “keen competition” this urge becomes inevitable, and firms “whose business is of this kind . . . are under a great temptation” to sell “at much less than normal cost.”

Marshall’s problem was getting an equilibrium that would sustain a market that was both competitive and had high fixed costs—an increasingly prominent feature of industrial production. By his eighth edition in 1920, Marshall had come up with a largely unsatisfactory biological model to explain how firms with significant fixed costs might attain equilibrium. Firms were like trees in a forest, he explained. They have individual lifecycles, and thus come and go, and some never survive infancy. This organic metaphor never fit very well into the emergent neoclassical model of equilibrium that looked strictly at the mathematics of profit-maximization.

 During the formative years of antitrust policy in the United States, a “fixed cost controversy” drawn from Marshall’s model of competition dominated important debates about the appropriate roles of competition, antitrust policy, and regulation. In industries such as the railroads or heavy steel manufacturing, the argument went, “ruinous” competition would occur because firms would be forced to cut their prices toward marginal cost, leaving insufficient revenue to pay off their fixed costs. One equilibrium solution was the emergence of monopoly, perhaps by merger. Others were collusion or price regulation. These concerns were very likely a major contributing factor to the great merger wave that occurred around the turn of the twentieth century. Antitrust lawyers representing cartel defendants in markets with high fixed costs repeatedly asserted a “ruinous competition” defense to price fixing, but the federal courts consistently rejected it, as they do today.

On the other side, several of the more left-leaning Progressives denied that there was any such thing as chronic overproduction. By rejecting the defendants’ arguments, the Supreme Court was effectively taking their position. That was ironic, because the principal architect of the view was Justice Peckham, also the author of Lochner v. New York. He could hardly be classified as a left-leaning Progressive. Peckham’s opinion in the Joint Traffic case expressed strong doubts about the ruinous competition argument, concluding that the principal consequence of very low rates was increased demand, which would in turn produce a larger supply. One possibility, of course, was that Justice Peckham did not fully understand the implications of high fixed costs.

Justice Peckham’s clever response to the defense in the Addyston Pipe case was that, whether or not competition was ruinous, the defendants themselves could not be trusted to set a price no higher than necessary to prevent it. In fact, they had set prices so high as to deprive the public of the advantages of any competition at all. The Court cited cost evidence developed in the lower court that the reasonable cost of the defendants’ pipe, including a fair profit, did not exceed $15 per ton and could have been delivered profitably to Atlanta for $17 to $18 per ton. The bid price was actually $24.25 per ton. That statement at least suggested that one judicial response to a ruinous competition defense could be a judicial inquiry into costs, but the Court never went down that rabbit hole. It simply rejected the defense outright, as it has done ever since.

Theorizing about the behavior of firms with high fixed costs became a central focus of early antitrust literature, as well as the early American economic literature on the theory of industrial organization. It also proved to be a general attack on the model of perfect competition.

Prior to the development of imperfect and monopolistic competition models in the early 1930s the principal Progressive theorist of fixed costs was the institutionalist economist John Maurice Clark. Clark found the existence of significant fixed costs, which he termed “overhead” costs, to be a disruptor of the standard notion of the equilibrium of supply and demand under competition. The problem, as he noted, was that in the short run of immediate demand price and output are determined by demand and marginal cost, but in the presence of fixed costs this could be attained only over some longer run. High fixed costs continuously produced “irregularities” that threw the relationship between demand and supply out of balance, with some periods of excess capacity and others of excessive demand. Echoing Marshall, he observed that “where overhead costs are a substantial item, the perfect theoretical equilibrium is not found.”

The implications, as Clark worked them out, were chronic overproduction, because any price above short run marginal cost would serve to reduce the deficit in payment of fixed costs. Another result was that price discrimination became a profitable strategy to the extent that a firm was able to maintain higher prices on established demand while bidding a lower price for new sales. One characteristic of price discrimination as a solution to the problem of high fixed costs is that when it occurs it results in increased output. Clark concluded that there was nothing inherently anticompetitive or even suspicious about most instances of price discrimination. They were simply a mechanism that firms used to sell individual batches or product at a profit-maximizing (or loss-minimizing) price. That view has very largely persisted within antitrust policy.

The Marshall equilibrium problem ultimately went away when economic models began to incorporate product differentiation, particularly in the theory of monopolistic competition. The principal problem had been Marshall’s assumption that all sellers in competition sold identical “commodities.” As a result, firms competed only on price. When differences in the product or even the terms of sale were incorporated, it became possible to have equilibrium without relying on any non-economic theorizing about the nature of the firm. The significance of this debate, which occurred almost entirely during the Progressive and New Deal eras, is difficult to exaggerate. It gave us much of our theory about equilibrium in industrial markets, analysis of costs, and theories about the limits of competition and the appropriate scope of regulation. It also fueled the Harvard School view that markets differ from one another, and antitrust policy thus requires intense factual queries into particular industries and practices.

E.  Market Failure and Regulation

The fixed cost controversy strongly supported Progressives’ suspicions that markets were not as inherently benign as the classical political economists had believed. However, some worked better than others. Antitrust for its part is dedicated to the proposition that markets can be made to work tolerably well on their own with only selective intervention. In other cases, however, the roots of failure are so deep that ordinary market forces are ineffective.

Increased appreciation of market diversity led to a more general theory of market “failure,” championed by Pigou. Pigou developed the idea of a “divergence” between private and social costs, or “externalities” that private bargaining could not correct. For example, a negative externality might occur when a polluting refiner was not required to compensate downwind neighbors for its air pollution. By contrast, a positive externality occurred when the inventor of a new product could not effectively prohibit people from copying it. In the first case the result would be too much pollution; in the second case it would be too little invention.

 The idea, which became more technically expressed in the 1950s, was that in a few markets sustainable competition is impossible without state intervention. The goal of regulation became to emulate competitive outcomes in these markets. Adams had anticipated a version of that argument already in the 1880s, arguing that competition was not sustainable in industries with declining costs because the emergence of monopoly was inevitable.

The Progressive Era then saw an outpouring of literature on regulation as a corrective for market failure, much of it focused on transportation and public utilities. Among the most important contributions was Joseph Beale and Bruce Wyman’s 1906 book on railroad regulation. They made two important observations. The first was that monopoly provisions in corporate charters for railroads and bridges were common at least since the early nineteenth century. The argument that Justice Story articulated for them already in 1837 was that monopoly privileges were essential to attract investment into public utility markets, which were distinctive because of the amount of investment they acquired. However, Beale and Wyman observed a second rationale, which was “virtual monopoly”—namely, that the cost structure of these industries required a monopoly. Further, they argued, this was the “true ground” for regulation of monopolies. “[W]here competition prevails it regulates the conduct of business by its own processes, but monopoly requires the intervention of the law of the land . . . .”

This neoclassical theory of regulation has since formed the basis of core regulatory theory in the United States, as well as one of its most controversial features: cost-of-service rate making. The idea of market failure expanded significantly in the 1930s and after, bolstered in significant part by the Depression. Regulation moved far beyond the relatively narrow neoclassical conception of market failure even to the idea that markets themselves cannot be trusted to distribute goods or services in an efficient, egalitarian manner.

 Both Progressive and New Deal regulatory theory were aggressively assaulted in the 1960s and 1970s by Chicago School critics such as George J. Stigler. His critique completely ignored natural monopoly or other structural characteristics thought to justify regulation. Rather, he substituted a theory based entirely on political capture—namely, that regulation is nothing more than interest group purchase of regulatory favors from legislatures or government agencies. Stigler never even mentioned declining average costs or natural monopoly. In fact, the only costs he discussed were the cost of operating the political process, including the costs to lobbyists or political operatives of obtaining favorable legislation. He argued, for example, that the costs of successfully lobbying for an exclusionary occupational license are small when distributed over each member of society, but they can produce enormous gains to activists seeking such licensing protection. In sum, Stigler’s model completely divorced the theory of regulation from firm costs or market structure; it was purely political.

That Chicago School effort substantially failed. It never generated a theory with significant explanatory power outside the realm of badly designed regulation that could be explained only by political influence. For example, it could not explain why public utilities are subject to price regulation at the retail level while groceries in every state are sold competitively, except perhaps by offering that the utilities had better lobbyists. To be sure, the Chicago School did make some important contributions at the margins—mainly by hammering home the proposition that regulation can lead to harmful capture and there are good reasons to be on guard about overreach. In addition, regulatory fervor led to excessive controls that did more harm than good. For that, however, the usable critiques came from centrists such as then-Professor Stephen Breyer or Cornell economist and Chair of the Civil Aeronautics Board Alfred E. Khan.

F.  Price Discrimination

Price discrimination, which technically refers to selling to two or more customers at different ratios of price to cost, has always produced divisions in antitrust policy, most typically between economists and non-economists. Lawyers often view it with suspicion, something like race or gender discrimination. By contrast, economists have always tended to be more circumspect, and more inclined to divide it up into different varieties. Even a Progressive institutionalist economist such as John Maurice Clark discussed it in relatively benign terms. Minnesota economist and eventual Director of the United States Census Edward Dana Durand probably stated the consensus view among Progressive economists. In a critique of the Clayton Act, he observed that price discrimination “is an all but universal practice and is not necessarily injurious or calculated to bring about a monopoly.” However, he also observed that price discrimination could be a strategy of selective predatory pricing used to drive competitors out of the market.

Most of the economic foundations for our understanding of price discrimination developed during the Progressive Era as an outgrowth of marginal analysis. The principal originator of the modern theory was Pigou. Pigou divided price discrimination into three types, which he named first-, second-, and third-degree price discrimination. First-degree, or “perfect” price discrimination, is an analogue of perfect competition: it never exists in the real world but is an important tool for analysis. Under it, a seller sells every unit at that customer’s reservation price, or the highest price that customer is willing to pay. The result is that output is at the competitive level, but all of the industry profits go to producers rather than consumers.

Second-degree price discrimination occurs when the seller adopts a discriminatory pricing formula and the buyer “chooses” its price by selecting how to purchase. A quantity discount schedule is one prominent example. The purchaser can obtain a lower price by buying more. A discount for early booking is another.

In third-degree price discrimination the seller preselects categories of customers based on certain observed characteristics and charges them different prices—for example, one price for commercial users and another for residential users.

United States antitrust law has never developed general antitrust rules governing price discrimination. Section 2 of the Clayton Act, subsequently amended by the Robinson-Patman Act, addressed a practice that it called “price discrimination.” But the set of practices that statute reached often had little to do with economic price discrimination. Rather, the statute simply condemned price differences. The Progressives did often identify predatory price discrimination as one of the evils brought about by the trusts, particularly Standard Oil. The result was the original section 2 of the of the Clayton Act, which the Robinson-Patman Act later amended. The original statute was intended to reach a particular form of predatory pricing widely attributed to the Standard Oil Company as well as others. The House Judiciary Committee report on the provision indicated that its purpose was to target the practice of large corporations using local price cutting intended to destroy a competitor. In a 1923 decision, the Second Circuit described the condemned practice this way:

[P]rior to the enactment of the Clayton Act a practice had prevailed among large corporations of lowering the prices asked for their products in a particular locality in which their competitors were operating for the purpose of driving a rival out of business. Such lowering of prices was maintained within the particular locality while the normal or higher prices were maintained in the rest of the country; and this practice was continued until the smaller rival was driven out of business, whereupon the prices in that locality would be put back to the normal level maintained in the rest of the country. The Clayton Act was aimed at that evil.  

The statute did not explicitly require that the lower price be below cost, but that was largely the way it came to be interpreted. The Supreme Court initially construed the statute broadly without discussing any requirement of below-cost pricing. Further, the statute’s express limitation to “commodities” meant that it could not apply to things such as railroad rates, which were one of the biggest targets of price discrimination concern.

John Maurice Clark’s important 1923 book on fixed costs made a convincing argument that, setting aside differences in bargaining relationships or customer sophistication, price discrimination is largely a consequence of fixed costs. A firm with a heavy fixed cost investment needs to keep its output up, and any sale at a price greater than incremental costs will improve its bottom line. As a result, it tries to retain legacy customers at higher prices while bidding lower prices for new or spot market sales. When a firm has excess capacity, these pressures are great.

This explanation of price discrimination was already known in the railroad industry by Clark’s time. Forty years earlier Yale economist and eventual President Arthur Twining Hadley had made a similar observation in justifying railroads’ policies of charging different freight rates for different commodities depending on shippers’ willingness to pay. By doing this the railroads were able to maximize output. Given their high fixed costs, this meant that the average cost of transportation went down.

The Robinson-Patman Act was passed in 1936, subsequent to the period under discussion here. It was not a way of approaching the problem of fixed costs. The statute condemned many of the things that Clark’s analysis had explained as causing no competitive harm. In any event, the Robinson-Patman Act was a complete misfire. The concern motivating the statute was the emergence of large chain stores such as A&P, which had become the nation’s largest grocer. A&P drove many smaller grocers out of business, mainly because it was vertically integrated and also because it was able to purchase in large quantities, enabling it to undersell small grocery stores. The Robinson-Patman Act ignored vertical integration and scale economies and identified the problem entirely in terms of a firm’s insistence on charging some buyers lower prices than others.

The statute completely failed to limit vertical integration because of its requirement that both the higher priced and lower priced transactions be “sales.” The courts consistently held that a “sale” refers to a transfer of goods from one firm to a different firm. The vertical passage of a good from a firm to its wholly owned store or other subsidiary was not a “sale.” The Act did condemn a few large suppliers, such as Borden, for selling milk to large grocers at a lower price than to small grocers. Further, because the statute targeted “sales,” it did not effectively reach powerful buyers such as A&P itself. The statute did contain a buyers’ liability provision, almost as an afterthought, which was never very effective.

During the Progressive Era through the New Deal, the antitrust analysis of price discrimination was spotty and indeterminate. In fact, however, it remains indeterminate to this day. We have never developed good theory for generalizing about the competitive effects of price discrimination. The consensus of economists today is probably not much different from what it was in the 1920s and 1930s—namely, most instances are competitively harmless, particularly if the discrimination tends to increase output.

G.  Monopoly Power and Structure: Potential Competition, Barriers to Entry, and the Relevant Market

In 1890, when the Sherman Act was passed, legal doctrine did not have a coherent conception of market power as a measurable phenomenon. Economics was not much further along. Judicial decisions contained plenty of discussions of “monopoly,” virtually always in relation to patents or other grants of exclusive rights. In most cases “monopoly” was simply assumed from the existence of the exclusive grant itself. For example, many nineteenth-century decisions spoke of the “patent monopoly,” as if the relationship between the two terms was automatic. All of the references to patents in the Chicago Conference used the term this way. The law dealing with various aspects of monopoly came essentially from three sources: patent and copyright law, the common law of unfair competition and contracts in restraint of trade, and state corporation law. None contained a market power requirement, and power was generally either assumed or irrelevant.

Estimation of market power by reference to the share of a relevant market, as it is used today in antitrust cases, was a relatively late arrival. Today it has become so conventional that we regard it as routine, and in 2018 a divided Supreme Court mistakenly concluded as a matter of law that it is the only way to assess power in a vertical case. Since the existence and measurement of market power present questions of fact, the Court’s conclusion was not only technically incorrect, it was also a dictatorial intrusion of policy into fact finding. Econometric tools for assessing market power, such as the Lerner Index, were actually developed prior to judicial usage of the “relevant market” in antitrust analysis. Today econometric methods often produce better results than traditional measurement. Further, the use of econometric devices is fundamentally inconsistent with the model of perfect competition. The firms within a perfectly competitive market have no power to price above marginal cost unless they collude. Implicit in the Lerner Index, and later in the development of more sophisticated econometric tools for assessing the power of individual firms, is that the firms are not operating in perfectly competitive markets.

1.  Potential Competition and Barriers to Entry

The belief that trusts both promised lower costs and threatened higher prices at least partly explains the heavy focus in the early antitrust literature on “potential competition” as a disciplinary tool. In 1895, Gunton optimistically described potential competition as a force “that is ever waiting to step in where large profits warrant the risk.” Even a dominant trust would not charge monopoly prices if the looming threat of competition was sufficient to keep its prices down. Classical political economists had always assumed that any attempt to charge monopoly prices would invite new competitive entry that would force prices back to the competitive level. About the only things that would prevent this were government restrictions on entry, including patents.

In his 1884 critique of traditional political economy, Ely, who was to become one of the most prominent Progressive economists, caricatured the classical assumptions of easy market entry, which he described as “the absolute lack of friction in economic movements. Not only do capital and labor move with perfect ease from place to place and from employment to employment, but this . . . is accomplished without the slightest loss.” Under this image of the economy, Ely continued:

The silk manufacturer diverts his capital into another employment like the construction of locomotives with precisely the same facility with which he turns his family carriage horse from an avenue into a cross street, while the Manchester laborer on a moment’s warning finds a suitable purchaser for his immovable effects and without expense or loss of time transfers himself to London where employment is at once offered him at the rate of wages there current. Equality of profits and equality of wages flowed naturally from these assumptions. 

By contrast, the emerging discipline of industrial economics began to consider how long this might realistically take, what were the market factors that determined the speed and scope of new entry, and the power of incumbent firms to throw obstacles in the way. As Adams admonished in his book on trusts, “[t]he point at issue is whether the public is justified in placing sole reliance upon potential competition, active competition having disappeared.”

Privately created barriers emerged as a concern of antitrust law early in the Progressive Era. They were undoubtedly heightened by the Progressives’ increased sensitivity to the natural coercive power of markets. The Supreme Court recognized one such barrier already in 1904. In an early private action under the Sherman Act, the Supreme Court condemned a guild rule that limited membership and effectively prohibited market participation by tile layers who were not members of the defendant organization. Members of the association were prohibited from dealing with non-members. As Justice Peckham noted in his opinion for a unanimous Court, the association’s rules prohibited dealers from acquiring tile “upon any terms” from members of the guild, and all of the manufacturers in the area were members.

A few years later, in the American Tobacco case, the Court referred to a dominant firm’s vertical integration and market foreclosure as creating “perpetual barriers to the entry of others into the tobacco trade.” Some lower courts were less concerned. For example, in United States v. Quaker Oats Co., the court rejected the government’s claim of attempt to monopolize, noting that the product at issue, packaged rolled oats, was a commodity produced by many firms, and that the defendant had no reasonable means of excluding them.

Most of the participants in the multi-disciplinary proceedings of the Chicago Conference on Trusts saw potential competition as crucial to any assessment of the likelihood of monopoly. They disagreed about its effectiveness. The debates reveal that the classical assumption of free entry had become controversial. For example, Jenks was a skeptic. He acknowledged the existence of potential competition as a disciplinary force but doubted that the power of the large trusts to charge high prices would be effectively controlled.

Attorney A. Leo Weil was less concerned. He observed that the trusts generally reduced costs and prices, but if there were any tendency toward price increases, potential competition from new firms would tamp them down. Further, this new entry could be expected to occur “unless the laws of trade are to be reversed.” Statistician Joseph Nimmo observed that as a consequence of the revolution in railroad transportation, the range of potential competition was much wider than it had been previously. Economist James R. Weaver from De Pauw University was even less concerned. He suggested that potential competition “rarely fails” to aid the consumer. Accumulations of capital were easily assembled, and those who controlled it stood “ready to enter any specific field of production, whenever the profits of that industry offer sufficient inducement.” Further, it was well known that at the present time entrepreneurs were sitting on “a great mass of idle capital.” As a result, “to avoid this new competition, prices must be lowered or profits shared with the consumer.” Francis B. Thurber, the President of the United States Export Association, believed that the trusts merely moved competition to a higher and more beneficial level:

If a combination of capital in any line temporarily exacts a liberal profit, immediately capital flows into that channel, another combination is formed, and competition ensues on a scale and operates with an intensity far beyond anything that is possible on a smaller scale, resulting in breaking down of the combination and the decline of profits to a minimum.

John Bates Clark, the most prominent economist among the Conference participants, was much more skeptical. In theory, he observed “potential competition . . . is the power that holds trusts in check,” but “[a]t present it is not an adequate regulator.” The “potential competitor encounters unnecessary obstacles when he tries to become an active competitor.” He mentioned patents as one obstacle, but refused to endorse abolition of the patent system. He was also more cynical about the railroads, which he regarded as using manipulation of shipping rates as a device for deterring potential competition. Clark also blamed selective price discrimination—or the power of the trusts to exclude entrants by charging unreasonably low prices in that particular portion of the market where new entry was threatened. A particularly pernicious form of price discrimination was selective predatory pricing:

The ability to make discriminating prices puts a terrible power into the hands of a trust. If . . . it can sell goods at prices that are below the cost of making them, while it sustains itself by charging high prices in a score of other fields, it can crush me without itself sustaining any injury. If, on the other hand, it were obliged, in order to attack me, to lower the prices of all its goods, wherever they might be sold, it would be in danger of ruining itself in the pursuit of its hostile object. Its losses would be proportionate to the magnitude of its operations. 

This observation became the theory under which original section 2 of the Clayton Act was passed in 1914—namely to prevent firms from using selective, geographically limited discounts to drive rivals out of business. Finally, Clark opposed tariffs because their higher costs deterred the potential competitor “from becoming an actual one.”

Several years later Clark was even more pessimistic. At one time potential competition may have been more effective at keeping prices down, he acknowledged, but today that power had largely been eliminated by incumbent firms’ use of selective preferential rates, local discrimination, and exclusionary agreements. Clark then gave a strong endorsement to the Sherman Act, although he believed that more was necessary, including a federal law chartering corporations and an “industrial commission” designed to examine the competitiveness of individual large firms. Further, he would impose on them “a burden of proof,” first to show that they do not dominate the entire market and, secondly, to show “that the way is so open for the entrance of more that prices cannot become extortionate.”

Adams agreed in a 1903 essay on the trusts, as did Boston lawyer Robert L. Raymond. Raymond argued what came to be a common position held by Progressives—that potential competition was natural and ordinarily to be expected, but that dominant firms could devise practices that would prevent or limit its operation. He also observed that potential competition did not “instantaneously” become actual competition. Rather, “even with abundant capital one cannot erect a steel manufacturing plant or a sugar refinery until considerable time has elapsed.” This delay, he observed, gave dominant firms an opportunity to behave strategically. He also warned, however, that competition policy should not go further; it had to preserve the “true economic value” that they promised while also preserving the power of potential competition to limit their prices. Progressive economist Ely, who published his book on monopolies and trusts simultaneously with the Chicago Conference, doubted potential competition as a device for disciplining monopoly. He concluded that “[n]o evidence has been adduced of the sufficient action of potential competition in the case of monopoly.”

Clark returned to this problem in The Control of Trusts, a book he had had originally published in 1901. For subsequent editions he was joined by his son, John Maurice Clark. The revised edition was even more pessimistic than John Bates’ original, very likely reflecting John Maurice’s more institutionalist leanings. “When the first edition of this work was issued, so called potential competition had shown its power to control prices,” the Clarks lamented, but

[t]he potentiality of unfair attacks by the trust tended to destroy the potentiality of competition. Under these conditions it was and is clearly necessary to disarm the trusts—to deprive them of the special weapons with which they deal their unfair blows. It is necessary to repress the specific practices referred to and so to enable every competitor who, by reason of productive efficiency, has a right to stay in the field, to retain his place and render his service to the public. 

As a result, they concluded, while experience has shown that “potential competition is a real force, it has also shown that it is a force which can be easily obstructed.” A few years later, John Maurice Clark argued that potential competition was an unlikely discipline for monopoly in markets with “heavy permanent investment”—that is, with high fixed costs. In such cases, he noted, incumbent firms will be holding excess capacity and be able to expand their own output in response to new entry. Knowing this, potential competitors will not wish to make a significant investment in entry. Further, he observed, prospective entrants into such a market would realize that total output would be higher when their own production was added in, and thus prices lower. So what appeared to be profitable entry before might not be so later.

The Clarks’ work developed the basic model that emerged by mid-century for monopolization cases and that prevails today. That judge-made formulation required a showing of both monopoly power and anticompetitive practices. This model retained faith that in a market that is not restrained by either the government or private action, new entry could be expected to maintain competition. The problem for the antitrust laws was anticompetitive practices that forestalled competitive entry before it could occur or become effective. “A merely possible mill which as yet does not exist may forestall and prevent monopolistic acts,” the Clarks conceded, but only provided that the way is “quite open for it to appear.”

Writing in 1911 about the ongoing government cases against Standard Oil and American Tobacco, Raymond observed that the firms’ growth had depended on the suppression of potential competition. In American Tobacco, the district court condemned a trust agreement that involved a group of the same shareholders’ acquiring interests in multiple companies. The court acknowledged the defense that potential competition would discipline any monopoly because the combination itself did not involve any sort of market exclusion. But entry would take some time, the court observed, and the “objection is to present and not future conditions.” The court believed that argument to be worthy of “serious consideration.”

By contrast, in the 1918 United Shoe Machinery (“USM”) merger case the Supreme Court refused to condemn the union of several shoe machinery makers into what became the USM Company. The government’s argument was that the merged companies were potential competitors who could have turned into actual competitors but for the merger. The case thus invited a tradeoff question that remains to this day: some mergers increase productive efficiency by enabling a firm to do things at lower cost, but in the process may harm competition by preventing competition that might have developed had the merger not occurred.

The USM union was a merger of complements, and the district court had concluded that the individual companies were not in competition with one another at the time of the merger. Justice Holmes had actually elaborated on that conclusion several years earlier in a decision that approved the original merger. He also observed that the participating firms had not been competitors but rather were makers of complements. One firm produced lasting machines, another welt-sewing machines, and others outsole-stitching machines and heeling machines. It was not the purpose of the Sherman Act to “reduc[e] all manufacture to isolated units of the lowest degree.” In this case “the combination was simply an effort after greater efficiency.” He compared the merger to a situation in which a single firm was created to make “every part of a steam engine,” rather than using the antitrust laws to force “one to make the boilers and another to make the wheels.”

In the American Can case, which condemned the can-making trust but declined to break it up, the court also cited potential competition as the reason for being cautious about the remedy. The court observed that the American Can Company, given its large size and multiple plants, was highly efficient and made good cans. Further, the record revealed “that there are many ways in which a large and strong can maker can serve the trade, and a small one cannot.” In any event, the defendant’s power to restrain competition was limited by “a large volume of actual competition and to a still greater extent by the potential competition” from which it cannot escape. For example, when the defendant raised its price—perhaps prematurely believing that it had destroyed enough rivals—new competitors quickly re-emerged. It became “apparently profitable for outsiders to start making cans with any antiquated or crude machinery they could find in old lumber rooms.” At that point the defendant became so desperate that it actually started buying cans from its rivals, even though these were “very badly made.” Many of these were later destroyed.

The language of potential competition evolved into the modern doctrine of “barriers to entry,” a term that came into common use at mid-century. An entry barrier could be either natural or fabricated obstacles that made it more difficult for competition to enter the market. The Supreme Court first used the term in the American Tobacco case, when it referred to the defendant’s acquiring control of numerous “seemingly independent corporations, serving as perpetual barriers to the entry of others into the tobacco trade.” More specifically, the Court referred to the defendant’s acquisition of plants “not for the purpose of utilizing them, but in order to close them up and render them useless,” and also to noncompetition clauses placed on sellers that kept them from re-entering the market. A few years later a district court quoted this language in condemning Eastman Kodak of monopolization by acquiring around twenty companies and assembling all of the components of the photography industry. The phrase did not find much use in the economic literature until the 1940s, followed by significant expansion in the 1950s. It entered the mainstream antitrust literature after Joe S. Bain’s pioneering work on barriers to entry in the 1950s.

2.  From Potential Competition to the Relevant Market

As long as confidence was high that potential competition could be trusted to control prices, the precise definition of the market in which firms operated was relatively unimportant. Even monopolists could be kept in check if potential competition was robust. The assumption of robust potential competition explains both why early antitrust decisions involving dominant firms were not particularly fussy about market definition and also why they tended to emphasize detailed litanies of exclusionary practices. Monopolization was all about harmful conduct intended to exclude rivals.

 As confidence in the efficacy of potential competition waned, however, it became more important to know the number and robustness of a firm’s actual competitors. Any discipline of monopoly would come primarily from them. As John Maurice Clark observed in 1923, for most markets “it is inherently impossible to have industry effectively governed by potential competition alone.”

Concerns about potential competition are inherently dynamic. They ask about where a market is going, rather than how it may appear at this moment. In fact, accounting for movement and the ability to make useful predictions about it is one of the most challenging questions of antitrust policy. Classical economists assumed markets were competitive unless the government intervened because they focused so completely on the long run. The fact that monopoly might be dissipated by new market entry is certainly reassuring. Eventually such a market may reach an acceptably competitive equilibrium, but how long will that take, and who will be affected along the way? Focusing on macroeconomics in the 1920s, John Maynard Keynes ridiculed the optimistic faith of many economists that eventually the economy would move to a healthier equilibrium. In contrast stood the policy maker’s more immediate concerns about time. He famously concluded that the “long run is a misleading guide to current affairs. In the long run we are all dead.” Further, focusing on the long run makes economics worthless as a policy tool: “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”

The “relevant market” in antitrust analysis emerged as a device for trading off these static and dynamic concerns. First of all, it revealed who was competing with whom in the present instant. If the market was well defined and included consideration of entry barriers, it also estimated what was likely to change over time. The evolving concern was with how rivals and customers would respond to a future price increase above competitive levels.

The idea of a “relevant market” is entirely a creature of partial equilibrium analysis. While that proposition is uncontroversial, it was not commonly acknowledged in the antitrust literature until Oliver Williamson began talking about antitrust policy and welfare tradeoffs in those terms in the 1960s. As Marshall had observed, in selecting a market economists should group sales of close substitutes and then make a working assumption that those within the grouping affect one another’s behavior, but that firms outside of the group do not. Marshall also realized that this was a simplifying assumption and not a hard picture of a situation in which the elasticity of substitution between goods in the same market is infinitely high, while the substitution between goods inside and goods outside is zero. Today we commonly say that to the extent a market is “well defined” these two conditions come closer to applying.

Assessing antitrust practices by reference to the “market” in which they occur naturally produced several questions about delineation and measurement. The most obvious one was how to identify the particular grouping of firms to which the analysis should be applied. Marshall himself paid scant attention to the issue. He identified the grouping of sales in a particular market as a “commodity.” His favorite example was tea. In that case, sales of tea constituted the relevant market. He gave only a little thought to questions about whether tea competed with coffee or water, or even the extent to which a coffee producer might switch to tea in response to a higher price. He did conjecture at one point that a failure in the coffee harvest might lead to an increase in demand for tea. He made a similar conjecture about beef and mutton. He also noted that questions about “where the lines of division between different commodities can be drawn must be settled by the convenience of the particular question under discussion.” For some purposes, he acknowledged, we might even acknowledge Chinese and Indian teas as different.

Early Sherman Act cases took roughly the same approach, never putting a fine point on market definition. For example, neither the 1911 Standard Oil nor American Tobacco decisions discussed the boundaries of the “market” under consideration. In StandardOil, the Court referred repeatedly to “petroleum and its products,” without saying anything about what that might include. In American Tobacco, the Court did observe that the defendant produced a number of products, including “cheroots, smoking tobacco, fine cut tobacco, snuff and plug tobacco.” The Court did discuss some vertical practices that involved specific products. For example, the defendant also tried to control sales of licorice paste, an essential ingredient in plug tobacco, in order to exclude rivals. The Court never spoke of any of these products as relevant markets, or considered whether they were in the same or different markets.

The American Can decision a few years later described a large litany of bad practices but said virtually nothing about the scope of the market, other than to refer to it as “cans.” The court gave no thought to such questions as whether glass bottles, which were also widely used for preserving food, were in the same market. Such questions arose regularly after mid-century.

The International Shoe case, decided in 1930, included a brief discussion of the proper delineation of a product market. It also reflected the emergence of product differentiation as a factor in market analysis. The FTC challenged a merger of two manufacturers of dress shoes. McElwain made more expensive, attractive, and “modern” shoes entirely of leather. International made cheaper shoes that included some non-leather components. Without discussing the scope of the market, the Court did credit the defendants’ testimony that there was “no real competition” between the two firms.

Estimating market power today by reference to a share of a “relevant market” is not a pure exercise in static partial equilibrium analysis. In Marshall’s model, one examined equilibrium in the market under study on the assumption that the price and output of everything else remained constant. However, he also acknowledged that this assumption often fails to obtain in the real world:

[T]he demand schedule represents the changes in the price at which a commodity can be sold . . . other things being equal. But in fact other things seldom are equal over periods of time sufficiently long for the collection of full and trustworthy statistics . . . . This difficulty is aggravated by the fact that in economics the full effects of a cause seldom come out at once but often spread themselves out . . . .” 

A price increase naturally invites other sellers to move into the price increaser’s market territory and customers to defect away. These substitutions upset the equilibrium, and within Marshall’s model, continue to occur until the equilibrium is restored. To the extent the market is more rigorously defined and the market share of the price increaser is higher, the movements would take longer or be less likely to occur.

The 1940s and 1950s saw a significant expansion in antitrust usage of relevant markets to estimate market power. Judge Hand’s discussion in the Second Circuit’s 1945 decision in United States v. Aluminum Co. of America has become well known. The first Supreme Court decision to contain a significant discussion about the scope of a relevant market was United States v. Columbia Steel Co. in 1948. It concluded that the market that the government alleged was too narrow. First, the area of effective competition was larger than the government claimed. Second, the two firms actually made different although somewhat overlapping types of steel. On a 5–4 vote, it dismissed the complaint. Justice Douglas’s dissent (joined by Justices Black, Murphy, and Rutledge) contained almost no discussion of the relevant market except to dispute the fact that the acquired firm’s three percent share of the purchasing market under consideration was insubstantial.

The chronology of these concerns is revealing because of what it says about the declining faith in potential competition to solve monopoly problems. As noted previously, as of 1899 even monopoly was not a matter of concern for some participants in the Chicago Trust Conference because potential competition could be trusted to keep prices down. Subsequently, greater doubts about the disciplinary effects of new entry naturally led to increased concerns about just how competitive the market was when entry is disregarded. By the 1930s most antitrust cases involving large firms were harboring significant doubts about the ameliorating effects of potential competition. That explains the rising importance of market definition in antitrust cases.

3.  The Rise of Structuralism and the Diminishing Importance of Conduct

As Chief Justice White observed in the 1911 Standard Oil decision, the monopolization offense required bad conduct and not mere monopoly status. Chief Justice White’s reasoning was that the practices condemned by section 1 of the statute actually forbade “all means of monopolizing trade, that is, unduly restraining it by means of every contract, combination, and so forth.” To this, section 2 of the Sherman Act sought,

if possible, to make the prohibitions of the act all the more complete and perfect by embracing all attempts to reach the end prohibited by the first section, that is, restraints of trade, by any attempt to monopolize, or monopolization thereof, even although the acts by which such results are attempted to be brought about or are brought about be not embraced within the general enumeration of the first section. 

The lower court had spoken much more clearly: section 2 should require a restraint of trade as embraced by section 1, but the difference was that “[o]ne person or corporation may offend against the second section by monopolizing, but the first section contemplates conduct of two or more.” That is in fact the distinction that modern courts have adopted.

What the statute did not do, Chief Justice White continued, was condemn “monopoly in the concrete,” or the mere status of being a monopolist.”

At that point, however, the Chief Justice cast his entire reasoning and perhaps even his mental acuity into doubt with his infamous argument that because “reason was resorted to” in deciding earlier cases the law reached only unreasonable actions. That dubious rationale presaged the more formal recognition of a rule of reason seven years later.

All of this was in pursuit of a larger point, as the Chief Justice elaborated, which was to shunt aside the argument that a court could not constitutionally divest an innocent firm of its property without compensation simply because it was a monopolist. Property owners had no right to engage in restraints on trade. Rather, the statute was directed to “particular acts,” even though these were inferred only “generically” from the statutory language. That is, requiring wrongful acts—even though the statute did not explicitly list them—was essential to the statute’s constitutionality. At that point the opinion turned to a detailed summary of Standard Oil’s conduct.

The Clayton Act developed this theme further by its enumeration of specific acts that threatened to create monopoly—namely selective and discriminatory predatory pricing, tying and exclusive dealing contracts, and anticompetitive mergers. Nothing in the Clayton Act even hints of possible condemnation of monopoly without fault; indeed, its added specificity points in the other direction.

It is thus not surprising that Progressive Era monopolization cases often read like tort cases—with an extensive discussion of conduct, accompanied by relatively thin treatment of market structure and power. This period preceded the structuralist revolution that would occur in the late 1930s and 1940s. Indeed, some commentators from the period wrote of the monopolization offense as if it did not contain a market power requirement at all, but only guilty conduct. After World War II antitrust policy as led by industrial economists completely flipped that script.

Already in the 1930s some industrial economists began to study the monopoly problem by looking at the types of structures most likely to produce it. In 1937 Harvard industrial economist Edward S. Mason observed that in “recent years economic thinking on the subject of monopoly has taken a radically different trend.” It began with the observation that “monopoly elements” of conduct were apparent in the “practices of almost every firm.” As a result, policy makers were increasingly required to make “distinctions between market situations all of which have monopoly elements.” For that, conduct alone provided little basis for differentiation. The important differences were not the conduct but rather the markets in which the conduct occurred. He noted an emerging distinction between “restriction of trade” and “control of the market.” If economics was to make a contribution to the problem of monopoly, Mason observed, it must move beyond practices and descriptive accounts of anticompetitive behavior and look for structural features that made markets more or less conducive to monopolization.

The development of imperfect competition theories in the early 1930s forced a shift in focus toward the particular market structures that made noncompetitive outcomes more likely. Some of the foundational work was done earlier. For example, in the 1920s economist John Maurice Clark looked at the manifold sources of economies of large plant size. The economies, which resulted from technology and engineering, were inherent in certain industries. In addition, the presence of high fixed (“overhead”) costs provided an explanation for price discrimination, showing it to be typically but not invariably procompetitive. Clark also discussed “economies of combination,” showing how the effect of high fixed costs and large plant size made markets more conducive to both horizontal and vertical control arrangements. In such industries “large-scale production, combination, and monopoly or restricted competition are all more or less bound together, and all occur in the same class of industries.” Everything in Clark’s book pointed in the direction of assessing competition problems by assessing the particular structural characteristics of each firm, emphasizing the extent and nature of fixed costs.

Clark’s book was too technical to have widespread public appeal, but it did both reflect and lead an important set of developments in the field of industrial economics. Antitrust policy became more interested in the types of market structures that made noncompetitive outcomes more likely. Enforcement policy followed these developments, culminating in massive monopolization cases brought against capital intensive firms in the 1930s and after, including Alcoa and USM. Both decisions emphasized market structure and market definition and de-emphasized conduct. Indeed, both toyed with but did not ultimately embrace the idea of monopoly “without fault”—or that certain dominant firms should be broken up simply because they are too big. In Alcoa, Judge Learned Hand discussed the possibilities of a presumption that a firm that had acquired a ninety percent market share was behaving unlawfully. It could defeat that presumption, however, by showing that monopoly had been “thrust upon it,” or that it was merely the “passive beneficiary” of monopoly. A few years later in the USM case, Judge Wyzanski characterized Alcoa as suggesting that a firm with an overwhelming market share monopolizes whenever it “does business.” That was as close as American antitrust law ever came to a rule of no fault monopolization.

With those decisions the courts entered the era of antitrust structuralism, which in its strongest form made evidence of bad conduct almost but not quite irrelevant. That largely ended the Progressive Era’s tort theory of monopolization.


A.  “Competition,” Horizontal and Vertical

Progressives were the first to examine vertical practices and vertical integration systematically as competition problems. While some law of vertical contracting practices existed prior to that, almost none of it was concerned with competition. The Progressive accomplishment was noteworthy, because vertical business practices have historically been the most poorly understood in antitrust and have provoked the most controversy. Articulate writers have argued that they should be governed by both the extreme rules of per se illegality and per se legality. The Progressives in fact opted for a highly defensible middle ground that has proven to be very durable.

Progressive Era contributions to the law of vertical integration and restraints were formative but also modest. Mainly, they focused on the relationship between vertical integration or vertical contracting and realistic threats of monopoly. Subsequently the antitrust law of vertical business relationships veered to the left and became very aggressive, condemning many practices where harm to competition was never seriously threatened. Later it changed course again, veering very far to the right and developing rules of virtual nonliability in Chicago School academic writing. The case law never went quite that far. Since 2000 or so it has been moderating once again. The rule of reason that is currently the law for nearly all vertical practices is in between, although somewhat closer to a rule of nonliability. This is at least partly because the courts have made it so difficult for plaintiffs to win rule of reason antitrust cases.

The thoroughly conventional distinction that antitrust and economics makes today between “horizontal” and “vertical” practices is actually a fairly recent development. Today most of our antitrust rules of illegality are driven by it: horizontal restraints are more suspicious than vertical ones. Unlike horizontal agreements, vertical agreements do not increase the effective market share of the participants. The means by which horizontal price fixing agreements reduce market output are more obvious and better understood than for vertical price agreements. Vertical arrangements have a greater potential to produce cost savings.

Classical political economists and most lawyers prior to the 1910s or so did not see these distinctions. They tended to see competition as “rivalry,” and the vertical rivalry that might occur between a buyer and a seller, or employer and employee, counted as “competition” just as much as the rivalry between two competitors. For example, in the 1888 edition of his popular text on political economy, MIT economist Francis Walker defined competition as “the operation of individual self-interest among buyers and sellers.”

Marshall did only a little better in Principles of Economics. On horizontal competition, he focused almost entirely on the theory of monopoly, or single firms that accounted for all sales in a market. In a footnote he spoke briefly about “partial monopoly,” which he described as a firm whose wares were better known than those of other firms. Marshall’s chapter on “The Theory of Monopolies” largely assumed exclusivity and focused on how the monopolist determines its output and price when there is no threat of entry. He did mention that a vulnerable monopolist, such as a railroad threatened by new competition, would very likely charge a lower price in order to protect its trade. Never once in the 750 pages of the first edition did Marshall mention cartels or price fixing. While he drew his theory of marginalism from Cournot, he never discussed Cournot’s very influential theory of oligopoly. He did mention the rise of the American trusts in his Eighth Edition in 1920, seeing them largely as an alternative to German cartels and ultimately describing them as “treacherous.” He also saw the evil of the trusts as “narrowing . . . the field of industry which is open to the vigorous initiative of smaller businesses.” None of these discussions mentioned vertical integration or restraints.

Marshall’s relatively infrequent expressions about “competition” seem almost amateurish today—for example: “The strict meaning of competition seems to be the racing of one person against another . . . .” He complained that the term “competition” has “gathered about it evil savour, and has come to imply a certain selfishness and indifference to the well being of others,” and that “unrestrained competition” produced suffering. He spoke of competition as “glorified individualism.” He also lamented that machine production had led to undesirable competition that, “like a huge untrained monster,” led to weakness and disease. He blamed this on excessive British protection for liberty of contract. Marshall made the same complaint about labor, where he saw unfettered competition as driving wages to subsistence levels.

Marshall also had little to say about vertical integration and vertical relationships, and nothing about their impact on competition. His few mentions focused on labor. For example, he distinguished horizontal movement of workers from one firm to another from vertical movement, or promotion within a firm. Speaking again of labor, he also discussed the “vertical” competition that existed between skilled and unskilled workers who performed the same task. He concluded that for workers competition was both vertical and horizontal. First, they competed vertically for advancement within the firm. Second, they competed horizontally by movement from one employer to another. In Chapter 8, entitled “Industrial Organization,” he used the term “integration” a single time, using a biological metaphor. He defined it as “a growing intimacy and firmness of the connections between the separate parts of the industrial organism.” Late in his life, in his much less prominent and overly long book on Industry and Trade(1919), Marshall began exploring some of the differences between horizontal and vertical expansion.

Prior to 1910 or so, courts also viewed “competition” in terms that did not distinguish the horizontal from the vertical. Often the reference was to the “competition” that exists between the two parties to a bargain, with the seller wishing to receive as much as possible while the buyer wished to pay as little as possible. For example, John D. Park & Sons Co. v. Hartman, one of the earliest Sherman Act challenges to resale price maintenance, spoke of the practice as “protecting the seller of property against the competition of the buyer.” The Supreme Court of Oklahoma treated resale price maintenance agreements as a form of noncompetition covenant, used to protect “the seller of the property against the competition of the buyer.” Today, of course, we would characterize the relationship between a buyer and a seller as vertical, at least in most cases.

Even Justice Holmes, whose grasp of economics was better than that of most contemporary judges, spoke of competition interchangeably as horizontal or vertical. While a Justice on the Supreme Judicial Court of Massachusetts, he had defined competition in a tort case as “not limited to struggles between persons of the same class” but rather as applying “to all conflicts of temporal interests.” He continued, offering a purely vertical illustration:

One of the eternal conflicts out of which life is made up is that between the effort of every man to get the most he can for his services, and that of society, disguised under the name of capital, to get his services for the least possible return.

In keeping with more modern views, in 1908 the Supreme Court of Illinois rejected that characterization, describing it as “fanciful and far-fetched.” It then concluded that an employer and its unionized employees could not be said to be in “competition” with one another, even though their interests clearly diverged.

Holmes also dissented from the U.S. Supreme Court’s decision condemning resale price maintenance. The Court had reasoned that resale price maintenance was a restraint on alienation that served to eliminate competition among dealers in the sale of Dr. Miles’s brand of medicines. Holmes responded that the competition of “conflicting desires” should be sufficient to do that for most goods that were not essential, and Dr. Miles medicines were not. If a good was not essential (Holmes’s example was “short rations in a shipwreck”), the price would be set by the “competition” between the seller’s wish to charge more and the buyer’s wish to pay less. In the Northern Securities merger case he dissented from the majority’s condemnation of a merger to monopoly under section 1 of the Sherman Act. The “act says nothing about competition,” he observed. He then described the litany of common law situations characterized as contracts in restraint of trade and concluded that the facts of the present case did not fit into any of them. The idea that elimination of competition between firms that had previously been rivals might result in higher prices did not obviously trouble him.

With one implicit exception, the Sherman Act itself never distinguishes vertical from horizontal practices. The exception is the reference to “contracts . . . in restraint of trade” in section 1 of the Act. As Justice Holmes pointed out in his Northern Securities dissent, at common law that phrase referred to “contracts with a stranger to the contractor’s business, . . . which wholly or partially restrict the freedom of the contractor in carrying on that business as otherwise he would.” Justice Holmes gave as an example the British decision in Mitchel v. Reynolds. The lessor of a building to be used by the plaintiff as a bakery promised not to open a competing bakery in the vicinity. Noncompetition agreements such as these are vertical because they are formally between the seller (lessor) and buyer (lessee) of property or in other situations between an employer and an employee. Nevertheless, the agreement also has a horizontal effect to the extent that its purpose is to limit the competitive choices of the promisor. In Mitchel, the lessor had promised the lessee that he would not enter into business in competition with the lessee.

Even the Clayton Act, passed in 1914, ignored vertical competition issues with one limited exception. That was section 3, which prohibited the sale of commodities on the “condition or understanding” that the buyer not deal in a competitor’s goods. This of course became the basis for the modern law of tying and exclusive dealing. Even here, however, while the law condemned a vertical agreement, the impact was horizontal. The concern was agreements that limited competition from rivals. Further, its historical focus was on patent license agreements in which it was thought that patentees used ties to extend their patent beyond its lawful scope. The Clayton Act did not seek to expand the law of purely vertical restraints that limited only the sales of a manufacturer’s own product.

Section 2 of the original Clayton Act prohibited price discrimination directed at rivals, a form of predatory pricing. That was a purely horizontal practice. The provision was amended in 1936 as the Robinson-Patman Act so as to reach so-called “secondary line” price discrimination, or the charging of two different prices to two different customers, favoring the customer who paid the lower price. These 1936 amendments effectively turned it into a predominantly vertical statute. Ever since, the Act has distinguished “primary line” (horizontal) and “secondary line” (vertical) violations. However, the first was entirely a creature of the original 1914 Act, while the second was developed by the 1936 amendments.

 Likewise, the original Clayton Act provision condemning mergers reached only those that limited competition “between” the merging firms—that is, mergers of competitors. It was amended and extended to vertical mergers in 1950, as it appears today. 

In sum, while the Clayton Act greatly expanded upon the Sherman Act and the Supreme Court largely interpreted it that way, it was concerned almost exclusively with horizontal practices. It became “vertical” only through amendments passed in the mid-1930s and after. Outside the law of resale price maintenance, which did not have a well-developed economic rationale other than the concern for restraints on alienation, competitive concerns about vertical integration had not yet emerged. While the Sherman Act’s concern with contracts in restraint of trade and the Clayton Act’s concern with tying were both vertical, today we would characterize both as “interbrand” restraints. That is, they were vertical contracts aimed at limiting horizontal competition.

At the same time, however, section 3 of the Clayton Act and the 1917 Motion Picture Patents case became important vehicles for developing a theory of anticompetitive vertical practices that expanded greatly in the 1930s. Notably, however, the practice in that case was substantially horizontal, directed at insulating the patentee’s films from the films offered by rivals.

B.  Progressive Economics and Vertical Integration

One important chapter in Adam Smith’s Wealth of Nations was entitled “That the Division of Labour is Limited by the Extent of the Market.” Smith’s point was that larger markets permit greater specialization because businesses are able to depend more on exchange rather than internal supply. In isolated villages in Scotland, “every farmer must be butcher, baker and brewer, for his own family,” and in such towns it is hard even to find a professional carpenter or mason. From Smith’s insight that larger markets lead firms to rely more on others for certain inputs, Stigler fashioned a theory that small markets provide an impetus for internal vertical integration. As markets grow larger firms have more opportunities to buy rather than make. But to turn that argument into one that saw Adam Smith as developing a general economic theory of vertical integration was a stretch. 

During antitrust’s early years the idea of competitively harmful vertical practices was almost entirely absent in economics as well as law. Very little of that occurred prior to the twentieth century. In the 700 pages of proceedings of the Chicago Conference on Trusts neither lawyers nor economists ever once discussed vertical integration or vertical practices as a competition problem. A few years later federal courts first began addressing resale price maintenance under the Sherman Act.

Exploration of vertical business relationships and competition policy began to enter economics literature in the early twentieth century, although somewhat haphazardly. Notwithstanding the heightened Progressive concern about the trusts, they did not see vertical integration or vertical control as a threat. The early discussions spoke of it in very benign terms. In 1901 William F. Willoughby, a political scientist and lawyer who taught at both Harvard and Princeton, concluded that the competitive effects of vertical integration were overwhelmingly positive. Speaking of Andrew Carnegie’s steel company, he concluded that the “policy of the company” in integrating vertically was “not in attempting to lessen outside competition, but in seeking to bring about a more perfect organization and integration of its own properties.” Overall, he believed, the principal reason that firms integrated vertically was to ensure themselves of adequate and timely supply in the event of shortages.

 Progressive economist and President of the University of Wisconsin Charles Van Hise’s 1912 book on the Trust Problem spoke a single time of “vertical combination.” He was referring to vertical integration in the steel industry, but drew no conclusions about vertical integration generally. John Bates and John Maurice Clark’s important 1914 book on The Control of Trusts never discussed vertical practices or vertical integration at all. That omission is significant because at the time the father, John Bates, was one of the most prominent economists in the country and a leading marginalist. More generally, their book was a fierce indictment of the trusts.

In his 1919 book on Industry and Trade, written near the end of his life, Marshall did speak several times about the “vertical expansion” of firms into markets for supply or distribution. He noted, for example, that firms sometimes integrated vertically in order to avoid the effects of upstream cartels. His only sustained discussion of vertical integration was in relation to firms that did so in order to assure sources of supply or distribution, and he spoke of it entirely in benign terms. A few other economists did talk about vertical integration, mainly to emphasize the efficiencies that vertical control made possible.

John Maurice Clark’s 1923 book on fixed (“overhead”) costs did contain a more detailed discussion of vertical integration. He spoke briefly of “vertical combination” in the steel industry and more generally in a chapter entitled “Economies of Combination.” He described it as “the combination under one management of successive stages in a chain of productive operations.”

Clark cast the vertical integration problem as one of managing information and fixed costs: “The employer’s knowledge of his own needs and of the conditions of his own business is an expensive industrial asset . . . .” Further,

[A]nother gain from integration arises, in the shape of great reliability in the supplying of materials. The two concerns adapt their processes to each other, and the supply of materials, both in quality and regularity, can be more carefully suited to the needs of the user than they would be if the two were independent concerns . . . .

As a result, “[a]nother thing that is saved is all the work of negotiation, bargaining, higgling, stimulating demand (on the part of the seller) . . . and much of the other work of buying and selling, which could be reduced to a matter of routine.” He described this as “an overhead outlay which is capable of being enormously reduced by vertical combination.” Clearly Coase was not the first to observe that internal integration is a way of avoiding the costs of using the market. Clark’s own contribution was mainly to observe that high fixed costs and product differentiation exacerbated problems of market coordination of upstream and downstream levels.

During the Depression the economic treatment of vertical practices did an about face, becoming much more critical, minimizing the role of cost savings or even finding them harmful, and focusing on problems of monopoly. One of the most pessimistic was economist Arthur R. Burns’s 1936 book The Decline of Competition, which was heavily influenced by the theory of monopolistic competition. He presented vertical integration as inherently monopolistic and as strong evidence that competition was in decline.

C.  Progressives and the Emerging Law of Vertical Integration

In distinguishing vertical from horizontal practices, the difficult part was to determine how a firm’s control of a vertically related market affected competition. As previously noted, economists of the day were keenly aware that vertical integration could reduce costs. So were many courts. Already in 1866, a British decision observed that one effect of a railroad’s acquisition of a colliery was to reduce the cost of coal necessary for its operations.

The courts were also aware of foreclosure threats but did not generally find them decisive. In 1886, the Supreme Court held that a railroad that had integrated into express freight delivery services had no obligation to provide equivalent services for an independent delivery company. Justices Miller and Field dissented. Given that the delivery service was a complement to the railroad, they observed, the effect of the refusal would be to exclude competing express companies from the markets served by that railroad. There was no relevant antitrust law or even an Interstate Commerce Act, which was passed a year later. Rather, they would have found a duty under the common law of common carriers. A few years later the first Justice Harlan wrote the opinion for a unanimous Court declaring that an exclusive dealing contract between a railroad and a provider of sleeping cars was not contrary to public policy or common law. The action did not rely on any federal statute.

Speaking of noncompetition covenants, which are a form of vertical exclusive contracting, Judge Taft’s 1898 antitrust opinion in United States v. Addyston Pipe & Steel Co. noted that they could sometimes be harmful. They might injure the parties by depriving them of opportunities; or they might deprive the public of services that would be valuable and thus discourage enterprise. In addition, he gave two reasons more directly related to competition policy: they might “prevent competition and enhance prices,” and they “expose the public to all the evils of monopoly.” For its part, the common law approved the great majority of vertical agreements with the exception of some noncompete agreements. In any event, Judge Taft’s statements in Addyston Pipe were dicta, because the case involved only naked horizontal price fixing.

That analysis still left many questions open. For example, how does one account for the fact that vertical arrangements may simultaneously reduce costs and exclude rivals? One of these things seems beneficial and the other harmful. Further, how much weight should be given to the common law’s traditional strong protection for liberty of contract and the freedom to trade? Those concerns loomed large in cases involving resale price maintenance and other vertical restraints, where the freedom to trade came to be the freedom to be free from restrictions on distribution. As the Supreme Court reiterated in a 1919 decision declining to find an agreement to engage in resale price maintenance, the purpose of the Sherman Act is to “preserve the right of freedom to trade.”

Historically the common law did recognize limitations on business firms’ vertical integration by contract, but the concerns did not relate to competition policy. First was the common law policy against restraints on alienation, which courts had used regularly to decline enforcement of certain types of contracts. Later on, antitrust decisions cited this policy as a rationale for using the Sherman Act to condemn vertical contractual limitations on resale, including resale price maintenance. The Supreme Court cited concerns about restraints on alienation in an antitrust case as recently as 1967, when it declared territorial restraints on dealers to be per se antitrust violations.

Second, many exclusive dealing and similar contracts were incomplete because they did not specify price or quantity. The common law itself exhibited a strong preference for “one off” contracts that contemplated sales with precise terms covering all important elements. Here, the most frequently challenged practice was requirements contracts, which later came to be called exclusive dealing. Under them, a purchaser promised to purchase its needs for a product from the seller but did not state the quantity. Through the early twentieth century such contracts were routinely struck down, not because of concerns for competition, but because the contracts lacked specificity. As the New York Court of Appeals declared in 1921, while a contract did not necessarily need to specify a precise amount, the quantity must be able to be “determined by an approximately accurate forecast.” This rule threatened the early development of business franchising, because franchise agreements were by nature open ended as to price, quantities and even other terms of dealing. Within a few years such open-ended contracts were to become a routine and essential part of franchised dealership networks. This occurred largely as a result of contract law’s developing doctrine of the good faith purchaser.

In his influential 1920 treatise on contracts, Harvard’s Samuel Williston approved of the common law’s restrictive interpretation. He also suggested a workaround, however, that revealed that competition policy was not the driving concern. As a general rule, he concluded, a promise to sell a purchaser’s needs without precise specification of the number is “not sufficient consideration” to make an enforceable contract. He then added however, that the contract could be made enforceable if the buyer promised to purchase all of its needs from the seller. Thus “the promise of a seller not to manufacture except for the buyer, or the promises of a buyer not to buy except from a particular seller” was adequately supported. Williston’s statements, amply supported by case law, reflected that the common law around 1920 ran in just the opposite direction as the subsequently emerging antitrust rule: contracts of this kind were enforceable at common law only if they were exclusive. By contrast, under antitrust law exclusive contracts were looked at with ever increasing suspicion.

Another concern that the case law reflected and that did breach the boundary into antitrust policy was when contractual restraints were included in patent or copyright licenses. Initially the courts refused to enforce many such agreements under patent law, using a variety of doctrines intended to limit the power of patentees to impose restrictions on patented articles once they had been sold. For example, in its influential decision in Wilson v. Simpson, forty years prior to the Sherman Act, the Supreme Court held that a patentee could not require purchasers of its wood planing machine to purchase its own unpatented disposable blades. In Adams v. Burke, the Supreme Court refused to enforce a condition imposed by the manufacturer/patentee of coffin lids limiting the geographic area where the lids could be used for a burial. That restriction, the Court held, was not “within the monopoly of the patent.” In Bobbs-Merrill Co. v. Straus, it refused to enforce a resale price maintenance agreement contained in a book copyright license, three years before the Supreme Court applied the antitrust laws in the Dr. Miles decision. The decision did not cite the antitrust laws. Long prior to the passage of the antitrust laws, the Supreme Court was routinely denying enforcement to vertical restrictions contained in patent or copyright licenses. Much of this doctrine eventually found its way into antitrust law.

These decisions did not consider anything about competition in distribution, but only whether the restrictive license provision fell outside the scope of the intellectual property grant. Eventually, however, the patent decisions did generate some pushback on competition grounds. One example was Judge (later Justice) Horace Lurton’s 1896 opinion in Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co.The seller of a patented button-fastening machine prohibited purchasers of the machine from using it with any except its own unpatented fasteners, one of which connected each button to a garment. In modern terms we would characterize this arrangement as a variable proportion tying arrangement. In addition to a dispute over the reasonable scope of the patent license in which the restriction was placed, the purchaser made an argument “based upon principles of public policy in respect of monopolies and contracts in restraint of trade.” The gist was that “public policy forbids a patentee from so contracting with reference to his monopoly as to create another monopoly in an unpatented article.” Judge Lurton responded by noting that the tying clause served the useful purpose of measuring usage of the machine in order to determine the royalty.

In 1912 a divided Supreme Court relied heavily on the Button-Fastener case to hold in Henry v. A.B. Dick Co. that the maker of a patented office copying machine could tie its own unpatented paper, stencils, and ink to the machine. By this time Judge Lurton had been elevated to the Supreme Court and wrote the opinion. The Sherman Act had now been passed, but the Court rejected the contention that it prohibited this kind of agreement. Rather, the Court noted the general rule of “absolute freedom in the use or sale of rights under the patent laws.”

The Henry decision proved to be too much. Congress responded two years later with section 3 of the Clayton Act, which prohibited ties of goods “whether patented or unpatented,” provided that harm to competition was shown. That is, competition law rather than the appropriate scope of the patent became the driver. With that statement, the law of tying migrated from patent law into antitrust law. Section 3 became the first antitrust statute specifically targeting a vertical restraint. The statute actually went further, prohibiting not only absolute ties but also discounts or rebates conditioned on tying. However, it did not condemn all ties or even all patent ties, but only those that threatened to “substantially lessen competition or tend to create a monopoly.” Indeed, it is hardly clear that the Clayton Act would have condemned the button and office copier ties that had provoked Congress to act. Both were of common commodities and very likely caused no harm to competition.

 In 1917 the Supreme Court overruled Henry in condemning a tying arrangement involving the Edison motion picture projector. It was sold subject to a patent license agreement that prohibited users from showing any films other than the seller’s own. By the time of the litigation, separate patents on the film had expired. The Court read the license restriction as effectively attempting to continue the film patent’s exclusivity by tying the film to the patented projector. While the decision generally relied on patent law, the Court quoted the new Clayton Act provision as confirming its conclusion. Unlike Henry, the Motion Picture Patents case did involve a serious threat of monopoly in the infant motion picture industry. After 1930 the tying decisions were not so circumspect and began condemning competitively harmless ties.

Decisions such as Motion Picture Patents never spoke of vertical practices, but the decision did indicate judicial recognition of downstream control of films as a monopoly problem, at least in the area of patents. The concern in this case was that a patented film projector and control of film could become the lever for control of the motion picture industry. In the 1930s this concern about vertical practices as a tool of monopoly became prominent in the literature of industrial economics. In the motion picture industry itself, it eventually led to a near obsession with vertical integration reflected in the 1948 Paramount decree.

Resale price maintenance—a so-called intrabrand restraint because it does not limit competition with rival products—received the harshest treatment of all. Today we are inclined to think that tying arrangements present greater potential for competitive harm than do resale price maintenance agreements. In 1907 Judge Lurton, still on the Sixth Circuit, held that an agreement between a proprietary medicine manufacturer and its various distributors and resellers stipulating their resale price was not enforceable because it was a contract in restraint of trade. There were no antitrust issues. The difference between this case and his own previous decision in the Button-Fastener case was that the medicines in question may have been protected by a trade secret, but they were not patented. Four years later the Supreme Court agreed in Dr. Miles Medical Co. v. John D. Park & Sons Co. It referenced the Sherman Act only to conclude that earlier decisions refusing to apply it had all involved patented products.

Federal antitrust case law did not refer to a practice as “vertical” until the 1930s. In 1934 a district court opinion in the SugarInstitute case spoke about the possibility that “vertical organization of distribution agencies” might result in “a lower price to the ultimate consumers.” 

More explicit judicial recognition of a distinction between horizontal and vertical practices emerged a little later, and from an unlikely source. After the Dr. Miles decision holding resale price maintenance unlawful, small business interest groups began a “fair trade” movement to permit individual states to opt out of federal law and permit resale price maintenance within their borders. After some state attempts to do so contrary to federal law, Congress yielded to an intensive campaign of small business groups led by the National Association of Retail Druggists, which had drafted a “model act” for Congress to adopt. Congress responded with the Miller-Tydings Act in 1937. President Roosevelt opposed the bill and threatened to veto it, but he caved to political pressure at the last moment.

Miller-Tydings authorized states to approve resale price maintenance within their borders, but it invited considerable dispute about its scope. While it never used the terms “vertical” or “horizontal,” it did contain a proviso that it did not immunize agreements among manufacturers, producers, and wholesalers. The scope of this immunity had to be determined judicially. Because the proviso was triggered by state legislation, it was interpreted mainly by state courts, which very largely concluded that the statute exempted “vertical” agreements but not “horizontal” ones. For example, the North Carolina Supreme Court explained in 1939:

The agreements authorized by the law are vertical, between manufacturers or producers of the particular branded commodity and those handling the product in a straight line down to and including the retailer; not horizontal, as between producers and wholesalers or persons and concerns in competition with each other . . . .

The Supreme Court eventually confirmed this view as a matter of federal antitrust law in Schwegmann Bros. v. Calvert Distillers Corp., concluding that the statute did “not authorize horizontal contracts, that is to say, contracts or agreements between manufacturers, between producers.”

By the early 1930s the law of vertical practices had developed to a place not all that different from where it is today, save for the treatment of resale price maintenance. Tying arrangements were addressable under antitrust, but liability was very largely limited to firms that had dominant market shares or where foreclosure percentages were high. In addition to Motion Picture Patents, the IBM tying case of 1936 found a tie of IBM’s computation machine and its data cards to be unlawful on a market share that exceeded eighty percent. By contrast, General Motor’s (“GM”) tie of car repairs to its original equipment parts was approved when the court concluded that the tie was essential for quality control and that there was plenty of competition in any event. Other decisions also approved ties when the markets in question were competitive.

The same thing was true of exclusive dealing, which condemned the practice when it realistically threatened to perpetuate market dominance. In a decision applying the Clayton Act to exclusive dealing, the Court noted that the supplier controlled roughly forty percent of the dress pattern outlets in the country and that the exclusive agreement in question threatened to create several local monopolies. There was no antitrust law of vertical territorial restraints until the Supreme Court addressed the issue in the 1960s in White Motor Co. v. United States. Justice Douglas held for the Court that it was too early to say. Resale price maintenance, which remained unlawful per se, was the outlier.

The law of vertical mergers and ownership vertical integration cut a similar path. The courts condemned it when it appeared to create or preserve monopoly, but generally required evidence of market dominance or foreclosure. For example, judicial condemnation of vertical integration in the American Tobacco, Corn Products, Kodak, and Keystone Watch decisions were all predicated on at least an assumption of dominant market shares. On the other hand, the court refused to condemn United States Steel’s integration into distribution facilities, finding that the integration improved efficiency and reduced costs and uncertainty. In affirming, the Supreme Court cited evidence that it was cheaper for the defendant to combine several operations in a single facility and that this combination would enable it to compete more effectively in the world market.

 In its unanimous antitrust decision in Eastern States Retail Lumber Dealers Ass’n v. United States, the Court even intervened to protect ownership vertical integration in the lumber industry. The defendants were classic examples of Progressive Era small businesses who relied on the mantle of “fair trade” to protect themselves from larger vertically integrated firms. In this case they organized a boycott, which the Court condemned, agreeing among themselves that they would not purchase lumber at wholesale from anyone who had vertically integrated into retailing. The decision never used the words “vertical” or “integration.” Rather the boycott was cast in terms of wholesalers who sold directly to customers rather than exclusively to the defendant retailers.

D.  Growing Fears of Vertical Control After World War II

The law of vertical relationships began to go off the rails in the 1940s, and for a confluence of reasons. One of course was the Great Depression and the dramatic rise of small business as an interest group following World War I. Another was President Franklin D. Roosevelt’s appointment of Thurman Arnold to be head of the Department of Justice Antitrust Division, turning it into a potent antitrust and anti-patent tool. The development of influential models of imperfect competition also had considerable influence.

In its International Salt tying decision in 1947, the Supreme Court applied both the Sherman and Clayton Acts to condemn a non-foreclosing tie involving a common staple—salt—that was not realistically capable of being monopolized. The case effectively migrated patent act tying policy into antitrust law by holding that the defendant’s patents on its salt injecting machine created a presumption of market power sufficient to condemn that tie. It also watered down the Clayton Act requirement that an unlawful tie must “substantially lessen competition” by holding that proof of competitive harm did not require foreclosure—something that would have been impossible to show, given that the tied product was ordinary salt. Rather it was enough to show that the tying contracts covered a significant amount of salt. In this case that was approximately $500,000 per year.

From that point tying law was used aggressively to condemn competitively harmless practices that the Court did not understand. Nor did it need to, because the per se rule for tying that the Court adopted created a strong presumption of illegality without competitive analysis. The Court relied on Justice Frankfurter’s dicta in the 1949 Standard Stations exclusive dealing case that “[t]ying agreements serve hardly any purpose beyond the suppression of competition.” That dicta served to make the Court more hostile toward tying arrangements than it was toward exclusive dealing.

In its 1949 Standard Stations decision, the Supreme Court expanded the rules against exclusive dealing to prohibit Standard Oil of California from engaging in “single-branding,” or insisting that its franchised gasoline stations pump only its own gasoline. Standard Oil’s contracts covered 6.7% of the gasoline sold in California. The Court’s condemnation of the practice was too much for Justice Douglas, otherwise an aggressive antitrust enforcer, who predicted in his dissent that requiring franchised gasoline stations to sell multiple brands of gasoline would force the refiners to build their own stations, thus eliminating the smaller dealers altogether.

One effect of these decisions was a long-standing hostility toward tying arrangements, although it never extended quite as far to exclusive dealing. That distinction does not make a great deal of sense. While a tie requires a dealer to carry a specific second product as a condition of obtaining the first, exclusive dealing excludes a particular product from the dealer’s entire business. For example, under tying a dealer that sells GM cars might be required to repair them using GM parts. By contrast, under exclusive dealing the dealer would be prohibited from selling non-GM cars altogether. While outcomes vary with facts, often the amount of market exclusion produced by exclusive dealing exceeds the amount produced by tying. In any event, the per se rule for tying was not a creature of the Progressive Era, but rather of the late 1940s.

The courts also became more aggressive about vertical integration by merger and even by new entry. In fact, vertical integration almost became a suspect category. After the merger law was amended in 1950 so as to reach vertical as well as horizontal mergers, the Court applied it liberally to situations where foreclosures were not in the 40% and above range that Progressive courts had condemned, but as low as 3% or 4% on the Supreme Court, or barely over 1% in the lower courts. Internal vertical expansion earned similar treatment. For example, some decisions condemned automobile makers’ distribution of cars through wholly owned dealerships rather than contracting with independents. While the Mt. Lebanon Motors decision observed that the law of exclusive dealing required market power, the requirement was met when the court defined the market as “Dodge automobiles [sold] at the retail level in Allegheny County,” thus guaranteeing that Chrysler’s market share would be 100%.

Numerous decisions in the 1960s and 1970s prohibited nondominant firms from doing any more than switching to self-distribution rather than relying on independent dealers. None of these decisions has survived today.


In 1933, two disruptive books appeared that presented the theories of imperfect and monopolistic competition. One was written by Cambridge University’s Joan Robinson, and the other by Edward Chamberlin from Harvard. Both books reflected the Progressives’ increased skepticism about the benign qualities of markets. In the process they also paved the way for significantly more aggressive enforcement.

The theories of imperfect and monopolistic competition immediately became influential in academic circles. They gradually evolved into a single set of theories that today go by the name of imperfect competition. Whether incidentally or as a result, antitrust policy began to veer left, often past all reasonable boundaries, condemning efficient practices where the creation of monopoly was virtually impossible.

This increased level of antitrust enforcement subsequently provoked a fierce neoliberal reaction, mainly from the Chicago School. It was prominently represented in the writing of George J. Stigler and, a little later, Robert Bork. The Chicago School fought an ultimately losing battle to present imperfect competition models as untestable or incoherent. An empirical renaissance in economics, mainly in the 1970s and after, refuted that critique. Today imperfect competition models clearly dominate the microeconomic literature as well as antitrust law, and their empirical robustness is well established.

The most general result has been a shift back toward the center. Today antitrust policy sits between the aggressiveness of the Roosevelt Court on one side, which often condemned competitively harmless practices, and the decaying remnants of the Chicago School on the other. Against this the Progressive response—aggressive in its own time but quite moderate today—has proven to be surprisingly durable.

96 S. Cal. L. Rev. 129


James G. Dinan University Professor, University of Pennsylvania Carey Law School and the Wharton School. Thanks to Erik Hovenkamp and Matthew Panhans for valuable comments.

Democracy Dies in Silicon Valley: Platform Antitrust and the Journalism Industry

Newspapers are classic examples of platforms. They are intermediaries between, and typically require participation from, two distinct groups: on the one hand, there are patrons eager to read the latest scoop; on the other hand, there are advertisers offering their goods and services on the outer edges of the paper in hopes of soliciting sales. More than mere examples of platform economics, however, newspapers and the media industry play an irreplaceable role in the functioning of our democracy by keeping us informed. From behemoths such as the Jeff Bezos–owned Washington Post to outlets like the Hungry Horse News in the small town of Columbia Falls, Montana, the press lets us know what is happening on both the national and local levels. However, the age of the Internet and the corresponding emergence of new two-sided platforms is decimating the media industry.[1] In a world where more users get their news on social media platforms like Facebook than in print,[2] the survival of quality journalism depends in large part on whether the media industry can tap into the flow of digital advertising revenue, the majority of which goes to just two corporations founded around the start of the new millennium.

Facebook and Google, formed respectively in 2004 and 1998, are new types of platforms aiming to accomplish what newspapers have done for centuries: attract a large consumer base and solicit revenue from advertisers. However, unlike the fungible papers newsies once distributed hot off the presses, Facebook and Google connect advertisers and consumers in a more sophisticated, yet opaque manner. Facebook and Google are free to consumers insofar as users do not pay with money to surf the web or connect virtually with their friends. Instead, the companies collect information about users based on their online activity, and complex algorithms connect those users with targeted advertisements.[3] This new method of connecting Internet users and advertisers has been wildly successful, creating a tech duopoly profiting from nearly sixty percent of all digital advertising spending in the United States.[4]

          [1].      Throughout this Note, I refer to the journalism industry also as the “media” industry and the “news media” industry. Although there are undoubtedly nuanced differences between journalism and news media, for the purposes of this Note, I draw no distinction between them.

          [2].      Elisa Shearer, Social Media Outpaces Print Newspapers in the U.S. as a News Source, Pew Rsch. Ctr. (Dec. 10, 2018), [].

          [3].      Although I may not be interested in an upcoming Black Friday deal for chainsaws posted in a physical publication of the Hungry Horse News, Facebook and Google are—based on my history and activity on the platforms—aware of my affinity for things like antitrust law and coffee, and so their algorithms are likely to present advertisements to me for items such as books written by Herbert Hovenkamp and expensive burr coffee grinders.

          [4].      Felix Richter, Amazon Challenges Ad Duopoly, Statista (Feb. 21, 2019), https:// [].

* Executive Senior Editor, Southern California Law Review, Volume 95; J.D. Candidate, 2022 University of Southern California, Gould School of Law. I would like to thank Professor Erik Hovenkamp for serving as my advisor. All mistakes are my own.

Due Process in Antitrust Enforcement: Normative and Comparative Perspectives

Article | Anti-trust Law
Due Process in Antitrust Enforcement: Normative and Comparative Perspectives 
by Christopher S. Yoo*, Thomas Fetzer†, Shan Jiang‡, and Yong Huang§

94 S. Cal. L. Rev. 843 (2021)

Keywords: Anti-trust Law, Due Process, Competition Law

A global consensus has emerged recognizing the central role that competition law plays in promoting a nation’s prosperity. As the briefing notes on trade and competition policy for the 2003 Cancún World Trade

Organization (“WTO”) Ministerial acknowledged, there is a “growing realization that mutually supportive trade and competition policies can contribute to sound economic development, and that effective competition policies help to ensure that the benefits of liberalization and market-based reforms flow through to all citizens.”1 Although competition law was eventually deleted from the agenda of the Doha Round of General Agreement on Tariffs and Trade (“GATT”) negotiations, having an effective competition law regime has become a de facto prerequisite for joining the WTO.2 The number of competition law enforcement agencies has continued to grow, with the membership of the global group of competition law authorities known as the International Competition Network (“ICN”) now including more than 130 countries.3

Adherence to basic principles of due process has long been recognized as an essential aspect of proper competition law enforcement. The rule of law is generally understood to include several critical procedural components, such as “due process, judicial review (by an independent judiciary), equal application of the law, and transparency” in decision- making processes.4 The WTO recognized that clarifying “core principles including transparency, non-discrimination and procedural fairness” represented one of the key mandates for its Working Group on the Interaction between Trade and Competition Policy.5

China has also increasingly embraced the importance of due process in the wake of its accession to the WTO.6 For example, in 2018, the Chinese Securities Regulatory Commission has also instituted a system of independent administrative adjudicators to bring Chinese practice in line with international norms.7

Recent judicial decisions have further underscored the importance of fair procedures and adequate judicial review. The Chinese Hainan District Court, for instance, recently reversed an Anti-Monopoly Law (“AML”) decision by the local Development and Reform Commission (“DRC”). Although the Hainan High Court later reversed the district court’s decision,8 it further resulted in a retrial by the Supreme People’s Court. It was an important sign that decisions by enforcement agencies cannot avoid judicial review. Likewise, on September 6, 2017, the European Court of Justice (“ECJ”) sent a competition law case against Intel Corp. back to the General Court with instructions to examine all the arguments put forward by Intel.9 Additionally, the ECJ agreed with the ombudsman’s conclusion that enforcement authorities must maintain full records of both formal and informal meetings with competitors and held that the European Commission had erred in merely providing a nonconfidential summary of an interview to Intel, although the court concluded error did not influence the decision.10 This rare rebuke pushed the Commission to adhere more carefully to the procedural rules protecting due process. Both judicial decisions underscore the importance of reasoned decisionmaking, internal controls, and transparency associated with fair enforcement procedures.

The past year has borne witness to an upsurge of interest in due process in the competition law community. For example, at its most recent annual meeting, the ICN adopted its Recommended Practices on Investigative Process, which represents the most authoritative type of document the ICN typically adopts,11 and sixty-two agencies became inaugural signatories of the ICN’s new Framework for Competition Agency Procedures (“CAP”).12

In addition, the Organization for Economic Co-operation and Development (“OECD”) extended its prior work on procedural fairness and transparency13 by conducting additional roundtables on the topic.14 It also began consideration of a Draft Recommendation of the Council on Transparency and Procedural Fairness in Competition Law, which lays out principles that could serve as benchmark for due process in antitrust enforcement.15 As a follow up to its best practices issued in 2015,16 the American Bar Association (“ABA”) Antitrust Section’s International Task Force conducted an assessment of the extent to which different agencies were complying with them.17 The Association of Southeast Asian Nations (“ASEAN”)18 and the International Chamber of Commerce (“ICC”)19 have offered similar guidance.

While the existing guidelines and best practices are helpful, they are pitched at a high level of generality and stop short of detailed application to national law. This Article strives to fill that void by engaging in a detailed comparison of procedures employed by competition law officials in China, the European Union (“EU”), and the United States and making nine recommendations that would improve due process.

It is now a fitting moment to assess the state of enforcement processes. China’s AML celebrated its tenth anniversary of implementation in 2018, and China is currently considering possible revisions. The National People’s Congress Standing Committee recently revised China’s Administrative Litigation Law to make it more conducive to economic growth.20 At the same time, President Xi Jinping led a major anti-corruption campaign designed to stop government decisions that are motivated by personal or parochial interests and other abuses of power.21 All are part of broader efforts to balance the government-market relationship and make enterprises operating in China more market responsive and efficient.


*. John H. Chestnut Professor of Law, Communication, and Computer & Information Science and Founding Director of the Center for Technology, Innovation and Competition (CTIC), University of Pennsylvania.

†. Chair of Public Law, Regulation Law, and Tax Law, School of Law and Economics, University of Mannheim, and Academic Director of the Mannheim Centre for Competition and Innovation (MaCCI). ‡. Associate Professor and Researcher of the Competition Law Center, University of

International Business and Economics (UIBE) School of Law.
§. Professor of Law and Director of the Competition Law Center, UIBE School of Law. The authors would like to thank Professor Lixia (Nell) Zhou of UIBE, Professors Guobin Cui and Yuan Hao of the Tsinghua University School of Law, Professor Shen Kui of Peking University Law School, Roger Alford, Maria Coppola, Kris Dekeyser, Ian Forrester, Douglas Ginsburg, Andrew Heimert, Elizabeth Kraus, John Temple Lang, Valeria Losco, Philip Lowe, Paul O’Brien, Giovanni Pitruzzella, Ronald Stern, Randolph Tritell, Marc van der Woude, and the participants in the conferences conducted at the Penn Wharton China Center, Seoul National University’s Center for Competition Law, Chung Yuan Christian University, University of Southern California Gould School of Law’s Center for Transnational Law and Business, and Luxembourg for the comments on earlier drafts of this paper. Thanks to Louis Capozzi, Allie Gottlieb, Jennifer Mao-Jones, and Hendrik Wendland for their expert research assistance.

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What’s in a Claim? Challenging Criminal Prosecutions Under the FTAIA’s Domestic Effects Exception – Note by Jay Kemper Simmons

From Volume 92, Number 1 (November 2018)

What’s in a Claim? Challenging Criminal Prosecutions Under the FTAIA’s Domestic Effects Exception

Jay Kemper Simmons[*]



I. Legal Background

A. Historical Foundations of Extraterritoriality
in U.S. Competition Law

1. Extraterritorial Criminal Liability Under the
Sherman Act: Exploring the Shift from
Territoriality to Effects

2. Principles of International Comity and Fairness

B. The FTAIA’s Domestic Effects Exception

C. Hui Hsiung, Motorola Mobility, and Beyond

II. The FTAIA Does Not Authorize Extraterritorial Criminal Prosecutions

A. Textualism Foundationally Supports a Narrow Construction of the Domestic Effects Exception’s
“Claim” Language

B. Narrow Interpretation of the FTAIA Comports with International Comity Principles and Applicable
Canons of Construction

C. Distinct Remedies Reflect Distinct Treatment
of Civil and Criminal Actions Under the FTAIA

III. Implications for an Interconnected Global Political Economy




O be some other name!

What’s in a name? That which we call a rose

By any other word would smell as sweet . . . .

                            William Shakespeare, Romeo and Juliet act 2, sc. 2

Americans recently awoke to a startling revelation: “Our country is getting ripped off.”[1] Indeed, the purportedly deleterious effects of international trade on the United States domestic economy have claimed top billing in President Donald Trump’s nascent “America First” agenda.[2] As the White House publicly excoriates international free trade for the first time in recent memory, global trade deals and domestic tariffs are cast in stark relief.[3] China and Mexico, along these lines, are cast as chief culprits in a system of international exchange allegedly designed to subjugate American workers to nefarious foreign interests.[4] Overall, recent politics underscore the practical importance of, and interdependence between, competition and cooperation in international economic regulation.[5]

In the arena of hard-nosed international competition, it’s all fun and games––until somebody starts a trade war.[6] But beyond the scope of trade deals and tariffs, sovereign states’ domestic antitrust laws are also critical regulatory levers. Americans at the Antitrust Division of the Department of Justice and the Federal Trade Commission have the power to influence incentives in markets across the globe. For example, although domestic by nature, U.S. antitrust laws do not exclusively apply to conduct in domestic markets—the Sherman Act may extend far beyond American shores to activities conceived and executed abroad.[7]

Although it is understood that extraterritorial antitrust liability may exist with respect to certain foreign conduct, courts, businesses, and practitioners have struggled to concretely define the contours of this liability in practice.[8] Judicial construction of the Sherman Act’s “charter of freedom”[9] currently permits civil actions and criminal prosecutions against foreign anticompetitive conduct based solely on American domestic law. In the United States, liability may attach to foreign conduct even if the allegedly anticompetitive acts occur entirely beyond the territory over which the United States exerts sovereign control.[10]

Moreover, given its impact on the interests of market participants and sovereign states, extraterritorial application of the Sherman Act remains highly controversial in academic and professional legal circles.[11] In part due to the emergence of modern global supply chains, which often span several sovereign jurisdictions,[12] debate about extraterritoriality in U.S. competition policy has reached a fever pitch.[13]

Enter the Foreign Trade Antitrust Improvements Act of 1982 (“FTAIA” or “the Act”).[14] In 1982, Congress passed the FTAIA, putatively in order to clarify the limits of the Sherman Act in reaching certain foreign and export activities.[15] In early 2015, however, the United States Court of Appeals for the Ninth Circuit upheld the convictions of a Taiwanese electronics-manufacturing firm, AU Optronics, and its executives for criminal price fixing, in part based on the FTAIA’s so-called “domestic effects” exception.[16] In a decision assessing several independent challenges to the defendants’ extraterritorial criminal convictions, the panel ruled that an “effects” theory was independently sufficient to support criminal price-fixing charges under the FTAIA, absent an allegation that any acts in furtherance of the conspiracy occurred in the United States:

The defendants . . . urge that . . . the nexus to United States commerce was insufficient under the Sherman Act as amended by the Foreign Trade Antitrust Improvements Act of 1982 . . . . The defendants’ efforts to place their conduct beyond the reach of United States law and to escape culpability under the rubric of extraterritoriality are unavailing. . . . The verdict may . . . be sustained under the FTAIA’s domestic effects provision because the conduct had a “direct, substantial, and reasonably foreseeable effect on United States commerce.”[17]

From one perspective, the defendants’ foreign collusive activities were fairly traceable to U.S. markets, and thus fully within the purview of American antitrust laws, based on its direct connection to some qualifying “effect” on nonimport domestic commerce.[18] This rationale rendered the defendants in United States v. Hui Hsiung subject to the weight of criminal antitrust penalties under the Sherman Act, although the entirety of the defendants’ underlying conduct occurred overseas. The court suggested that this criminal punishment was only fair, as the defendants’ wholly foreign anticompetitive activities entailed some “direct, substantial, and reasonably foreseeable effect on United States commerce,”[19] which was legally cognizable through overcharges paid by Americans for electronic goods that had incorporated the defendants’ price-fixed LCD-panel component parts.[20]

Regrettably, however, the final panel decision affirmed the defendants’ criminal convictions without substantively evaluating a critical merits inquiry[21]: whether the FTAIA’s “domestic effects” exception even authorizes the underlying extraterritorial criminal prosecution as a “claimunder the Sherman Act.[22] This Note posits, contrary to the Ninth Circuit’s amended decision in Hui Hsiung, that the FTAIA’s domestic effects exception does not authorize American regulators to prosecute wholly foreign conduct under the Sherman Act. In the three years since Hui Hsuing, both the Supreme Court and Congress have failed to meaningfully address how to properly read the FTAIA.[23]

This Note builds on published legal decisions, practitioner resources, and academic commentaries to paint a fuller picture of the FTAIA’s domestic effects exception and, in particular, its proper scope in the context of extraterritorial criminal prosecutions.[24] Part I explores the historical development of extraterritorial antitrust jurisprudence in the United States, the FTAIA’s substantive requirements, and recent cases evaluating extraterritorial enforcement under the Act. Part II evaluates the prevailing approach under Hui Hsiung and makes the case that the FTAIA does not independently authorize extraterritorial criminal antitrust prosecutions. Part III discusses criminal liability implications under Hui Hsiung and related antitrust jurisprudence for international businesses and their agents. In sum, through discussion of the FTAIA’s history, text, and teleological aspects, this Note aims to clarify the proper scope of extraterritorial criminal antitrust actions under the Sherman Act, as amended by the Foreign Trade Antitrust Improvements Act of 1982.[25]

I.  Legal Background

A.  Historical Foundations of Extraterritoriality in U.S. Competition Law

Before diving into the current state of criminal prosecutions under the FTAIA’s domestic effects exception, it is first critical to trace the development of American criminal antitrust prosecutions beyond the territorial borders of the United States. Prior to passage of the FTAIA (and arguably even after its codification),[26] courts—rather than legislators—primarily defined the extraterritorial contours of the Sherman Act. The following sections trace a series of seminal decisions regarding the proper scope of the Sherman Act in international commerce prior to and following the passage of the FTAIA. This historical foundation informs a narrow interpretation of the FTAIA’s domestic effects exception in criminal prosecutions.[27]

1.  Extraterritorial Criminal Liability Under the Sherman Act: Exploring the Shift from Territoriality to Effects[28]

The Sherman Act prohibits monopolization and unlawful restraints on “commerce . . . with foreign nations.”[29] Thus, the statute unambiguously applies to conduct with foreign actors and opens the possibility of government prosecutions for “bad apples” in the high-stakes game of global competition. Historically, however, federal courts hesitated to apply the Sherman Act’s provisions—along with related laws, such as the Clayton Act and the Federal Trade Commission Act—to conduct that occurred beyond the territorial boundaries of the United States.

Traditional notions of sovereignty largely informed the dominant, territorial conception of American courts’ narrow jurisdiction over foreign anticompetitive conduct. The territorial location of the underlying conduct, rather than the site of its fairly traceable effects, served as the relevant standard for determining jurisdiction over foreign anticompetitive conduct. Justice Holmes’ decision in American Banana Co. v. United Fruit Co., for example, reflects the historic presumption against extraterritorial application of the Sherman Act:

Words having universal scope, such as every contract in restraint of trade, every person who shall monopolize, etc., will be taken, as a matter of course, to mean only everyone subject to such legislation, not all that the legislator subsequently may be able to catch. In the case of the present statute, the improbability of the United States attempting to make acts done in Panama or Costa Rica criminal is obvious, yet the law begins by making criminal the acts for which it gives a right to sue. We think it entirely plain that what the defendant did in Panama or Costa Rica is not within the scope of the statute so far as the present suit is concerned.[30]

Although this prima facie territorial presumption applied seemingly to “all legislation” passed by Congress under Justice Holmes’ view, the jurisprudential tide steadily shifted to embrace the imposition of antitrust liability for conduct conceived or executed beyond U.S. borders.[31] Over time, the Supreme Court came to stray from a strict territoriality standard and adopted a much broader standard that granted courts antitrust jurisdiction over activities with certain “effects on competition in the United States.”[32]

Judge Learned Hand’s approach in United States v. Aluminum Co. of America (“Alcoa”) definitively established that foreign anticompetitive acts involving import commerce could be criminally prosecuted in American courts.[33] A unanimous panel of the United States Court of Appeals for the Second Circuit found a Canadian corporation to be in violation of Sherman Act section based on its agreement with European aluminum producers not to compete in the American market for virgin ingot.[34] The decision marked a notable shift in extraterritorial interpretation of the Sherman Act; Hand’s majority opinion not only served as the final decision in lieu of Supreme Court review,[35] but also significantly expanded the global reach of American antitrust laws to include activities with effects on import commerce.[36]

Rather than territoriality, the touchstone of extraterritorial antitrust liability shifted decidedly toward the tangible effects of foreign anticompetitive conduct on domestic markets. With respect to such effects, Judge Hand candidly noted, “[a]lmost any limitation of the supply of goods in Europe, . . . or in South America, may have repercussions in the United States if there is trade between the two.”[37] Shifting to an effects standard required reasonable limits; otherwise, American courts would adjudicate seemingly every global competition dispute.[38] Although the court in Alcoa embraced an effects test for extraterritorial Sherman Act violations, it also warned, “[w]e should not impute to Congress an intent to punish all whom its courts can catch, for conduct which has no consequences within the United States.”[39] Despite concerning only conduct directly involving import commerce, Alcoa’s non-territorial, effects-centered rationale has been generally incorporated into criminal antitrust precedents after passage of the FTAIA.[40]

Thus, courts historically hesitated to apply domestic law to activity beyond U.S. territorial borders, which traditionally delineated the outer bounds of American sovereignty. After Alcoa, however, courts’ antitrust jurisdiction would expand considerably to encompass criminal penalties for anticompetitive conduct involving direct import trade and commerce.[41]

2.  Principles of International Comity and Fairness

Another judicial innovation concerns the doctrine of international comity.[42] Despite finding sufficient anticompetitive effects targeting domestic commerce to support domestic jurisdiction, courts may nevertheless decline to apply U.S. law to foreign conduct under the judicial constructs of “international comity and fairness.”[43] To determine the propriety of invoking comity to bar an antitrust action, courts widely consider several factors, including: (1) the parties’ nationality, allegiance, or principal locations; (2) the relative importance of domestic and foreign conduct in the allegations; (3) the relative effects on all countries involved; (4) the clarity of foreseeability of a purpose to affect or harm domestic commerce; (5) foreign law or policy and degree of conflict with American policy or law; and (6) compliance issues.[44]

For example, in Timberlane Lumber Co. v. Bank of America, international comity factors suggested that the court “should refuse to exercise jurisdiction,” in part because “[t]he potential for conflict with Honduran economic policy and commercial law [was] great,” and “[t]he effect on the foreign commerce of the United States [was] minimal.”[45] The “jurisdictional rule of reason” embodied in the Timberlane opinion attempted to balance domestic concerns with the interests of foreign states in adjudicating legal disputes. Thus, in American antitrust law, the comity doctrine adds greater nuance to courts’ treatment of the domestic effects that stem from foreign anticompetitive conduct.[46]

The comity doctrine reinforces a norm of reasonableness when applying domestic laws to foreign actors—agents who, in many cases, may not be fair targets for enforcement actions under the Sherman Act. In that vein, the third Restatement on Foreign Relations Law of the United States characterizes comity as a “principle of reasonableness” that applies to a court’s authority to adjudicate disputes and enforce remedies.[47] The comity doctrine has historically empowered federal courts with a measure of discretionary authority over how far domestic authorities can reach abroad to target foreign defendants, as well as how far private plaintiffs can project domestic claims across national borders. These considerations remain critical even after passage of the FTAIA.[48] Without considering fairness and foreign sovereignty in applying domestic laws, U.S. courts would risk dangerously overreaching into the affairs of international partners, as well as upsetting the constitutionally ingrained separation of powers between judicial, legislative, and executive branches of government.[49]

The Timberlane test has been widely embraced by courts in extraterritorial antitrust actions.[50] The Ninth Circuit’s analysis built a compelling case for declining to extend domestic antitrust laws to a foreign transaction in which an American corporation, Bank of America, allegedly manipulated the Honduran national government to prevent its competitor, Timberlane, from exporting lumber into the United States.[51] Beyond the facts of Timberlane, however, Hartford Fire Insurance Co. v. California suggests an alternative approach.[52]

In Hartford Fire, the Supreme Court—without deciding whether federal courts may ever decline to exercise subject matter jurisdiction over Sherman Act claims concerning foreign conduct—determined that principles of international comity are not relevant in the absence of a “true conflict” between domestic and foreign law.[53] The petitioners in Hartford Fire claimed error based on the district court’s failure to decline to exercise antitrust jurisdiction under the principle of international comity.[54] As the petitioners did not allege that British law mandated that they act in violation of the Sherman Act, however, the Court found no direct conflict of law and therefore quickly concluded that there was “no need . . . to address other considerations that might inform a decision to refrain from the exercise of jurisdiction on grounds of international comity.”[55]

The Court further ruled that the plaintiffs’ civil antitrust action could proceed, despite concerns regarding the application of domestic laws to the defendants’ foreign acts, so long as such foreign acts “[were] meant to produce and did in fact produce some substantial effect in the United States.”[56] It remains unclear to what degree the rule in Hartford Fire governs comity decisions in extraterritorial criminal prosecutions under the Sherman Act. In the absence of clear guidance on this aspect of international comity in federal courts, principles of comity and fairness continue to play integral roles in extraterritorial antitrust analysis under either the Hartford Fire or Timberlane standards.

B.  The FTAIA’s Domestic Effects Exception

Although it remains unclear whether the FTAIA “amend[ed] existing law or merely codifie[d] it,”[57] courts have construed the statute to comport with the Sherman Act’s historical scope. The statute operates along with case law concerning how far plaintiffs may extend federal courts’ extraterritorial antitrust jurisdiction.[58] Prior to assessing the efficacy of the prevailing construction of the FTAIA’s “claim” language, however, it is helpful to discuss the language of the domestic effects exception, the intended purposes of the provision, and the early cases that largely ignored the statute in extraterritorial antitrust analysis.

The FTAIA facially excludes most foreign conduct from the scope of the Sherman Act. Two narrow exceptions bring wholly foreign activity back within the scope of domestic antitrust law.[59] Under the FTAIA’s “domestic effects” exception, the Sherman Act “shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations,” unless: (1) “such conduct has a direct, substantial, and reasonably foreseeable effect” on domestic trade or commerce, and that effect (2) “gives rise to a claim” under the Sherman Act.[60] Courts have clarified that conduct involving direct “import trade or import commerce” unambiguously falls within the scope of the Sherman Act under the FTAIA.[61]

In practice, the FTAIA applies when anticompetitive conduct is foreign in nature.[62] Courts have consistently noted since its passage, however, that lawmakers passed the Act primarily to “facilitat[e] the export of domestic goods by exempting export transactions that did not injure the United States economy from the Sherman Act and thereby reliev[e] exporters from a competitive disadvantage in foreign trade.”[63] Ironically, then, the FTAIA aimed to clarify when foreign anticompetitive conduct gives rise to domestic antitrust liability primarily in order to clarify that American firms can behave anticompetitively—so long as they only target foreign markets.[64] The notion that the FTAIA enables criminal prosecutions to remedy competitive harms in U.S. markets is notably absent in congressional findings related to the Act’s purpose, although the legislative history does broadly mention “Department of Justice enforcement.”[65]

The Act was further designed to provide appropriate “legislative clarification” of the antitrust laws, which presented “an unnecessarily complicating factor in a fluid environment” of international exchange, and allegedly caused many “possible transaction[s] [to] die on the drawing board.”[66] Despite endorsing the “situs of effects standard authoritatively articulated in Alcoa, the legislative history uncovers debate concerning the “precise legal standard to be employed” for assessing the requisite “effects” on domestic or import trade or commerce.[67] Lawmakers generally acknowledged, “it has been relatively clear that it is the situs of the effects as opposed to the conduct, that determines whether United States antitrust law applies.”[68] In line with judicial precedents, Congress intended to “enact[] . . . a single, objective test—the ‘direct, substantial, and reasonably foreseeable effect’ test” to clarify precisely which effects trigger extraterritorial antitrust liability for “businessmen, attorneys and judges as well as foreign trading partners.”[69]

The legislative history suggests primary consideration of domestic commercial interests in export markets—interests that were increasingly complicated by the extraterritorial application of the Sherman Act.[70] Yet the statute has by no means proven simple and straightforward for antitrust practitioners. In that vein, prevailing academic commentary strongly suggests that the Act, falling just short of an outright failure worthy of repeal,[71] has demanded more from the federal courts—tribunals that must now apply the complicated statute in tandem with an expansive terrain of Sherman Act precedents.[72]

The Supreme Court first tackled the FTAIA in Hartford Fire. The majority declined to apply the statute in an analysis of civil claims under the Sherman Act.[73] The Court declined to rest its section 1 ruling on the FTAIA’s effects language, and instead relied entirely on Sherman Act precedents.[74] Nevertheless, the effects-centered rationale imbued in the FTAIA’s legislative history and prior precedents carried into decisions rendered after passage of the Act, as in United States v. Nippon Paper Industries and F. Hoffman-La Roche, Limited v. Empagran S.A. Although Hartford Fire only addressed the limited role of the FTAIA in civil antitrust proceedings, these later decisions grappled with the thornier issue of how to interpret the FTAIA and Sherman Act in the context of criminal prosecutions.

The district court in Nippon Paper (Nippon I) reviewed the defendants’ motions to dismiss a criminal antitrust indictment.[75] The indictment targeted a Japanese fax paper manufacturer for participating in meetings, agreements, and monitoring activities that took place entirely in Japan.[76] Notably, the court “disagree[d] with [the U.S. government’s] suggested equating of the Sherman Act’s civil and criminal application” with respect to wholly foreign conduct.[77] Given a “strong presumption against extraterritorial application of federal statutes” in criminal matters, the district court reasoned that “the line of cases permitting extraterritorial reach in civil actions is not controlling” in determining whether the Sherman Act’s criminal provisions can reach wholly foreign conduct.[78]

Citing prior judicial treatment of the language of the Sherman Act, academic commentary on its extraterritorial reach, policies underlying antitrust and criminal law, and relevant legislative history, the court concluded that the “criminal provisions of the Sherman Act do not apply to conspiratorial conduct in which none of the overt acts . . . take place in the United States.”[79] Thus, on first impression, the court in Nippon I differentiated between the requirements of an extraterritorial civil claim and an extraterritorial criminal prosecution under the FTAIA.

The district court’s holding remained intact for 165 days. The United States Court of Appeals for the First Circuit swiftly reversed the judgment, holding in Nippon II that, under Hartford Fire, the defendants could be criminally liable for agreeing to employ retail price maintenance strategies with various firms that distributed paper in the United States (notwithstanding the FTAIA’s terms).[80] The court sidestepped Hartford Fire’s civil posture by emphasizing that “in both criminal and civil cases, the claim that Section One applies extraterritorially is based on the same language in the same section of the same statute.”[81]

Despite pausing to note the “inelegantly phrased” FTAIA, the panel’s decision nevertheless declined to “place any weight on it,” following Hartford Fire.[82] The majority also reasoned that, without meaningful distinction in the Sherman Act’s treatment of civil and criminal liability, “it would be disingenuous . . . to pretend that the words had lost their clarity simply because this is a criminal proceeding.”[83] The decision explained how

Hartford Fire definitively establishe[d] that Section One of the Sherman Act applies to wholly foreign conduct which has an intended and substantial effect in the United States. We are bound to accept that holding. Under settled principles of statutory construction, we also are bound to apply it by interpreting Section One the same way in a criminal case. The combined force of these commitments requires that we accept the government’s . . . argument, reverse the order of the district court, reinstate the indictment, and remand for further proceedings.[84]

In addition, despite ultimately arriving at the same conclusion regarding the applicability of the Sherman Act’s criminal provisions to wholly foreign conduct, the detailed concurrence in Nippon II provided greater historical context for courts’ broad “interpretive responsibility” in adjudicating Sherman Act claims:

The task of construing [the Sherman Act in a criminal context] is not the usual one of determining congressional intent by parsing the language or legislative history of the statute. The broad, general language of the federal antitrust laws and their unilluminating legislative history place a special interpretive responsibility upon the judiciary. The Supreme Court has called the Sherman Act a charter of freedom for the courts, with a generality and adaptability comparable to that found . . . in constitutional provisions.[85]

Thus, by the turn of the century, the FTAIA’s substantive provisions were manifested as mere legislative gloss on prevailing judicial principles. Both the district court and the appellate court in Nippon Paper declined to find the FTAIA dispositive of extraterritorial criminal antitrust prosecutions, instead falling back to traditional conceptions of liability under the Sherman Act.

Nevertheless, the notable contrast in the district court’s and the appellate courts treatments of the Sherman Act’s extraterritorial criminal provisions underscores a key development in extraterritorial antitrust jurisprudence. Although Nippon II stands for the proposition that wholly foreign conduct may give rise to criminal liability under the Sherman Act based on the plain language of the statute and its “common sense” application,[86] reasonable minds differ with respect to the proper extraterritorial limits on the antitrust jurisdiction of federal courts. For example, the district court’s reasoning in Nippon I stands against the dominant, casual assumption that indictments are interchangeable with civil “claims” when anticompetitive conduct occurs beyond U.S. borders, based on reasonable application of similar tools of statutory interpretation as the court in Nippon II. The fact that the appellate panel declined to endorse the district court’s handiwork, and instead crafted its own interpretive edifice with its preferred tools, is by no means dispositive of the merits of the district court’s reasoning.[87]

In 2004, the Supreme Court finally weighed in on the FTAIA’s domestic effects exception in F. Hoffman-La Roch, Ltd. v. Empagran. Two decades after the passage of the Act, the Court reasoned that its “claim” language refers directly to the “plaintiff’s claim, or the claim at issue.”[88] In Empagran, the Court held that foreign purchasers of vitamins could not recover under the FTAIA based merely on allegations that their own foreign harms from international price-fixing activity coincided with some domestic injury.[89] Thus, foreign purchaser plaintiffs in a civil antitrust action must now prove that the alleged anticompetitive effect on domestic trade or commerce itself gives rise directly and proximately to their own foreign injuries.[90] Foreign plaintiffs cannot “piggyback” on an indirect domestic effect to get into American courts on antitrust claims under the FTAIA. Following Empagran, the requisite domestic effect must proximately cause an antitrust plaintiff’s claimed injuries[91]—and it is the plaintiff’s burden of proof and persuasion to demonstrate proximate causation with respect to a domestic effect and his or her “claim.”

C.  Hui Hsiung, Motorola Mobility, and Beyond

Recent circuit court judgments in United States v. Hui Hsiung[92] and Motorola Mobility, LLC v. AU Optronics Corp.[93] endorse criminal prosecution of foreign anticompetitive conduct based on the FTAIA’s domestic effects prong. Further, in denying certiorari for these conspiracy cases,[94] the Supreme Court let the final circuit decisions lie undisturbed, even in light of potential analytical deficiencies.[95] Careful consideration of both decisions sets the stage for analysis of the FTAIA’s “claim” language.[96]

Hui Hsiung and Motorola Mobility stem from the same conspiracy to fix prices for liquid crystal display (“LCD”) panels,[97] component parts incorporated into electronics products sold in the United States and elsewhere.[98] Specifically, between 2001 and 2006, “representatives from six leading [LCD] manufacturers,” including defendant AU Optronics, met in Taiwan for a “series of meetings” that “came to be known as the ‘Crystal Meetings.’”[99] The Ninth Circuit explained that after these meetings,

participating companies produced Crystal Meeting Reports. These reports provided pricing targets for TFTLCD sales, which, in turn, were used by retail branches of the companies as price benchmarks for selling panels to wholesale customers. More specifically, [AU Optronics Corporation of America] used the Crystal Meeting Reports that [AU Optronics] provided to negotiate prices for the sale of TFTLCDs to United States customers including HP, Compaq, ViewSonic, Dell, and Apple.[100]

The government alleged that the foreign conspiracy constituted a textbook example of a concerted agreement among direct competitors to restrain trade: “[s]pecifically, the indictment charged that ‘the substantial terms’ of the conspiracy were an agreement ‘to fix the prices of TFTLCDs for use in notebook computers, desktop monitors, and televisions in the United States and elsewhere.’”[101] From 2001 to 2006, the United States constituted “one-third of the global market for personal computers incorporating [LCD panels],” and sales by conspirators into the U.S. market generated “over $600 million in revenue.”[102]

After being indicted in the Northern District of California for price fixing under section 1 of the Sherman Act, the defendants twice unsuccessfully attempted to dismiss the charges before proceeding to trial.[103] The panel suggests that “the reach of the Sherman Act to conduct occurring outside of the United States” marked “a contentious subject” in pretrial proceedings.[104] The district court instructed the jury that it may uphold the charges upon finding that the government proved “beyond a reasonable doubt . . . that the conspiracy had a substantial and intended effect in the United States,” even without a single action taken by a single member of the conspiracy in furtherance of the conspiracy within the United States.[105] The district court also instructed that the jury could uphold the charge separately upon finding that the government proved beyond a reasonable doubt that at least one member of the conspiracy took at least one action in furtherance of the conspiracy within the United States.”[106] Ultimately, the jury convicted the defendants and determined that combined gains derived from the conspiracy were in excess of $500 million.[107] Individual and corporate defendants appealed their convictions, and AU Optronics appealed imposition of a $500 million fine.[108]

On appeal, the Ninth Circuit initially declined to determine whether the government had satisfied its burden to convict based on the domestic effects prong, instead concluding narrowly that “the FTAIA did not bar the prosecution because the government sufficiently proved that the defendants engaged in import trade.”[109] The panel subsequently amended their initial opinion (“amended opinion”) and noted that whenever a case involves nonimport trade with foreign nations, the Sherman Act presumptively does not apply—unless the FTAIA’s domestic effects prong applies.[110]

But the panel’s amended analysis did not stop there. The decision independently sustained the defendants’ convictions based on “domestic effects.”[111] Despite a dearth of meaningful discourse regarding the FTAIA’s “claim” language,[112] the panel independently authorized criminal penalties amounting to $500 million against AU Optronics (matching “the largest fine imposed against a company for violating U.S. antitrust laws”), individual fines totaling $400,000, and a total of six years in federal prison.[113] In this sense, the amended opinion reasoned to the same conclusion as the initial opinion, but with considerably broader precedential scope.

The Ninth Circuit aimed to include within the scope of the Sherman Act only those acts that actually have a direct and proximate “effect” on domestic markets. The panel explains in great length that an effect must be “direct, substantial, and reasonably foreseeable” to trigger Sherman Act jurisdiction on the basis of alleged “domestic effects.”[114] Yet despite noting that the FTAIA presents additional substantive elements for a Sherman Act prosecution involving international commerce with domestic effects,[115] the panel declined to warrant its conclusion that the government proved an essential element of its case beyond a reasonable doubt––that AU Optronics’ conduct “[gave] rise” to the government’s so-called “claim” under the antitrust laws.[116]

A subtle aspect of the Ninth Circuit’s amended opinion underscores an important development in post-FTAIA extraterritorial antitrust jurisprudence: “[t]o allege a nonimport trade claim under the Sherman Act, the claim must encompass the domestic effects elements.”[117] Under the domestic effects exception, the government must now prove the existence of (1) a domestic effect that (2) “gives rise to” a “claim” as substantive elements of a criminal charge. Hui Hsiung reinforces the dominant interpretation of the FTAIA as providing additional substantive requirements of antitrust claims in the extraterritorial context, concomitantly placing additional burdens on all plaintiffs in such actions.[118] Viewing the FTAIA’s elements as substantive, rather than jurisdictional, requires that government plaintiffs’ allegations and, ultimately, direct proof must satisfy each of the “domestic effects” elements in cases not involving direct import commerce.[119]

In Motorola Mobility, the Seventh Circuit reviewed a judgment entered in a suit brought by Motorola, along with “its ten foreign subsidiaries,” which purchased liquid-crystal display panels and incorporated them into cellphones.[120] The panel first briefly explained the nature of the disputed panel sales in the civil action:

[a]bout 1 percent of the panels sold by the defendants to Motorola and its subsidiaries were bought by, and delivered to, Motorola in the United States for assembly here into cellphones; to the extent that the prices of the panels sold to Motorola had been elevated by collusive pricing by the manufacturers, Motorola has a solid claim under section 1 of the Sherman Act. The other 99 percent of the cartelized components, however, were bought and paid for by, and delivered to, foreign subsidiaries (mainly Chinese and Singaporean) of Motorola. Forty-two percent of the panels were bought by the subsidiaries and incorporated by them into cellphones that the subsidiaries then sold to and shipped to Motorola for resale in the United States. Motorola did none of the manufacturing or assembly of these phones. The sale of the panels to these subsidiaries is the focus of this appeal.[121]

Ultimately, the court concluded that Motorola’s “derivative” competitive claims were barred under the indirect-purchaser doctrine.[122] AU Optronics and related conspirators were therefore immunized from civil antitrust liability to indirect customers, like Motorola and its customers, although its subsidiaries could still pursue independent civil claims overseas.

The court stated that under the FTAIA’s “domestic effects” exception “[t]he first requirement, if proved, establishes that there is an antitrust violation; the second determines who may bring a suit based on it.”[123] Implicitly, the panel reasoned that Motorola—a party directly affected on its balance sheet by overcharges from the panel sales, despite integrating these technologies into final consumer products through foreign subsidiaries—was, unlike the United States government, not among the select few “who may bring a suit” involving foreign commerce under the Sherman Act.

The decision concluded by suggesting, “[i]f price fixing by the component manufacturers had the requisite statutory effect on cellphone prices in the United States, the Act would not block the Department of Justice from seeking criminal . . . remedies.”[124] Although this statement stands as non-binding dicta with respect to the FTAIA’s domestic effects prong, its implications are straightforward: federal criminal prosecutions are “claims” under the domestic effects exception and may support a conviction under the antitrust laws if the government can satisfy proof beyond a reasonable doubt. Obtusely, however, the court barred civil recovery for an American corporation harmed directly by the conspiracy, reasoning that Motorola could better pursue such claims through its subsidiaries “direct” claims in foreign jurisdictions.[125]

The final circuit opinions include analytical deficiencies, particularly with respect to the threshold requirements for invoking “domestic effects.”[126] Neither decision identifies a clear reason for concluding that the “domestic effects” test supports criminal prosecutions under the Sherman Act, as both leave untouched the question of whether a criminal action may ever “give rise to” a “claim” under the antitrust laws. In that vein, Part II posits that the FTAIA’s “claim” language should be narrowly interpreted in line with its original meaning, which did not authorize international criminal prosecutions.

II.  The FTAIA Does Not Authorize Extraterritorial Criminal Prosecutions

Congress passed the FTAIA to limit the criminal justice authority of American antitrust authorities over nonimport foreign commerce—not to expand it. Part II argues the case for narrow construction of the FTAIA’s “claim” language with respect to extraterritorial criminal prosecutions. After presenting a case for departure from the approach laid out in Hui Hsiung, Part III considers various implications of the current state of the law on international businesses, multinational corporate executives, and their agents.

A.  Textualism Foundationally Supports a Narrow Construction of the Domestic Effects Exception’s “Claim” Language

Courts frequently begin an assessment of apparent ambiguities in statutory meaning based on “pure textual reliance.”[127] In some cases, American courts divine the “meaning of a statute . . . entirely from the words used in the law under consideration.”[128] The plain statutory language, authoritative definitions of terms in secondary source materials, and the ordinary or common usage of terms or phrases in the statute, as well as related sections of the law, may illuminate statutory meaning in the absence of clear legislative intent.[129] These engrained methods suggest that the FTAIA’s domestic effects prong does not support criminal prosecutions.

The Act ought to be interpreted in line with its unambiguous terms. Fortunately, the words “claim” and “prosecution” are terms with distinct meanings in the legal lexicon. At the outset, it is useful to note that the more general term “action” may encompass civil and criminal redress under the Sherman Act. By contrast, at least in the American legal system, plaintiffs asserting a “claim” under a given statute ordinarily would do so only with respect to the civil aspects of the statute––as where a civil plaintiff alleges “claims” against a civil defendant in adversary legal proceeding. This textual distinction is not accidental; it is reflective of fundamental underlying differences between civil and criminal actions under the FTAIA. The courts should treat it as such.

The Act does not expressly define the term “claim,” however. Thus, legal practitioners and jurists should typically import the plain or ordinary meaning of the term, as defined in secondary source materials. One source commonly relied upon is an authoritative definition in a legal dictionary. According to Black’s Law Dictionary, a claim may entail the “assertion of an existing right,” a “right to payment or to an equitable remedy,” or a “demand for money, property, or a legal remedy to which one asserts a right, esp[ecially] the part of a complaint in a civil action specifying what relief the plaintiff asks for.”[130] By contrast, criminal “prosecutions” ordinarily entail “criminal proceeding[s] in which an accused person is tried.”[131] From a textual standpoint, then, these terms entail distinct proceedings in statutory parlance. This observation strongly suggests that it would be erroneous to casually equate the term “claim” with any “criminal proceeding.”

Moreover, the sharp contrast between authoritative legal definitions of the terms “claim” and “prosecution” is accentuated by ingrained uses for the terms in distinct legal proceedings. In ordinary use, surely, the word “claim” would not be used to describe highly specialized terms in criminal procedure, such as “prosecution,” and “indictment,” and “plea.” Broad usage of “claim” would, in fact, more likely lead to greater confusion than clarity in the course of criminal proceedings. In other words, loosely speaking, the government may allege “claims” against alleged perpetrators in criminal proceedings. However, stretching the term “claim” so far as to encompass the government’s entire “prosecution” against the defendant would appear facially obtuse in most contexts—in large part based on the ordinary usage of the terms in distinct legal settings.

Such judgments about “plain meaning” and “ordinary usage” are naturally disputed. Yet the foregoing discussion rapidly approaches an alternative conclusion from that rendered by the panel in Hui Hsiung: the plain terms of the FTAIA’s domestic effects exception are unambiguous, but they authorize only civil “claims” under the Sherman Act. And, turning beyond the black letter of the statute, ordinary usage of the words “claim” and “prosecution” lends further credence to this view. Thus, claims and prosecutions can and should be understood to entail distinct legal meanings; criminal “prosecutions” do not fall within “claims” based on a textualist analysis of the FTAIA’s domestic effects prong.

To the extent that the Act’s terms are subject to multiple reasonable meanings, however, other interpretive canons suggest that its domestic effects prong does not extend to criminal actions under the Sherman Act where wholly foreign acts are concerned. The remainder of this Part evaluates arguments for and against extending the FTAIA to authorize extraterritorial criminal prosecutions based in non-textual interpretive canons, including: (1) extraterritoriality principles of comity and fairness; (2) applicable canons of statutory construction; and (3) consideration of the varied remedy schemes for criminal and civil Sherman Act violations.

B.  Narrow Interpretation of the FTAIA Comports with International Comity Principles and Applicable Canons of Construction

Extraterritoriality principles further counsel departure from the prevailing interpretation of the FTAIA’s domestic effects prong. Notions of comity and fairness undergird extraterritorial antitrust jurisprudence. These adjudicatory principles also clarify U.S. competition policy for foreign governments and firms, as courts share legal authority with the executive and legislative branches where extraterritorial liability is involved. This discussion reflects that adherence to these principles would be best advanced by interpreting the FTAIA to presumptively prohibit domestic criminal prosecutions of wholly foreign conduct under the domestic effects prong.

The international comity doctrine historically served a central role in limiting the extraterritorial jurisdiction of federal courts. And today, even under the far narrower “direct conflict” standard set forth in Hartford Fire,[132] American courts regularly invoke “reasons of international comity” while describing the FTAIA as limiting “the extraterritorial application of U.S. antitrust law.”[133] Judge Posner’s statement is characteristic:

[A]re we to presume the inadequacy of the antitrust laws of our foreign allies? Would such a presumption be consistent with international comity, or more concretely with good relations with allied nations in a world in turmoil? . . . Why should American law supplant, for example, Canada’s or Great Britain’s or Japan’s own determination about how best to protect Canadian or British or Japanese customers from anticompetitive conduct engaged in significant part by Canadian or British or Japanese or other foreign companies?[134]

Comity similarly counsels courts in criminal matters under the FTAIA. American laws should not presumptively supplant foreign governments’ judgments concerning criminal liability, particularly in an interconnected global marketplace. Application of criminal punishment thus warrants hesitation upon consideration of “good relations with allied nations in a world in turmoil.”[135] The principles of fairness and reasonableness help to outline a doctrinally consistent conception of the FTAIA’s domestic effects prong, as these principles have historically aided federal courts in crafting remedies and resolving international conflicts.[136]

Alternatively, however, comity may counsel in favor of enabling criminal remedies for extraterritorial antitrust violations. For example, leading antitrust commentator Robert Connolly notes, “there is a difference between actions brought by the DOJ and private class action damages,” particularly with respect to the extent to which government and private plaintiffs consider “comity considerations.”[137] Arguing that[n]o nation has objected to the DOJ’s successful prosecution of foreign companies and even citizens of that country in the LCD panel investigation,” and that “the DOJ seriously considers the views of foreign nations before bringing cases,” Connolly, an experienced practitioner with decades of experience at the Antitrust Division of the Department of Justice, projects confidence that past practice makes perfect.[138] This conception of the comity doctrine clearly influenced the court’s decision in Motorola Mobility:

[T]he . . . court should reach a decision that preserves the ability of the DOJ to protect American consumers and continue to lead the way in prosecuting international cartels—including appropriate component cartels. The court could also acknowledge the comity concerns of foreign nations and find application of [the indirect purchaser doctrine] a bar to foreign component civil damage cases.[139]

This view of comity appears highly limited, however, when cast against the principles underlying the doctrine and the weighty penalties associated with criminal antitrust actions under the Sherman Act. Neither the opinion in Motorola Mobility nor Connolly’s commentary acknowledge the limited nature of justifying the extension of American criminal penalties abroad based upon foreign states’ as-of-yet unstated approval of a single case arising from a single foreign conspiracy involving only several nations.

Under this view, to defend extraterritorial prosecutions beyond the Crystal Meetings conspiracy, something affirmative or principled is needed—something more than silence from foreign governments in the face of American action. Although coordination with foreign governments provides prima facie evidence that prosecutors can avoid chafing foreign sovereigns while applying the Sherman Act to wholly foreign conduct, the mere acquiescence of foreign states to such conduct should not temper characterization of American prosecutions as potential overreaching.[140] A more reasonable standard would presumptively limit the criminal domain of American prosecutors to domestic markets. This would encourage enhanced criminal enforcement activity by foreign governments, whose interests and authority are often more directly implicated in cases involving disputed extraterritorial conduct.

Fortunately, this is not a new concept. International comity already reflects an ingrained presumption against extraterritorial prosecutions under the Sherman Act. Generally, criminal law reflects social judgments regarding the proper magnitude of punishment acceptable for given violations in market competition and to consumer welfare. Different sovereign jurisdictions may make different judgments regarding whether to criminalize the same putatively anticompetitive conduct.[141] Moreover, different states punish offenders in different ways for the same crimes.[142] Variation in criminal punishment among developed nations reflects concomitant variation in social judgments regarding individual moral culpability and foundational precepts to systems of criminal justice. In this vein, from one dominant theoretical perspective, criminal liability confers a judgment of community condemnation of moral culpability.[143]

Amidst political uncertainty regarding norms of free trade and global economic cooperation,[144] American competition law should privilege the principles of reason and fairness imbued in the comity doctrine. Fairness lies at the heart of American criminal law––particularly when applied in the extraterritorial and criminal contexts.[145] Historical weighing of domestic and foreign sovereignty, which generally informs courts’ extraterritorial jurisdiction, should be imported into analysis of the FTAIA’s “claim” language in the context of criminal penalties. Certainly, the antitrust laws should not apply extraterritorially in criminal contexts when: (1) the parties are wholly foreign and foreign conduct constitutes the basis for the allegations; (2) direct effects are principally centered abroad; (3) there is a lack of foreseeable purpose to affect or harm domestic commerce; (4) foreign laws and policies conflict with American laws and policies to a high degree; and (5) simultaneous compliance with U.S. and foreign law is impossible.[146] The FTAIA’s “claim” language therefore naturally compliments the historically entrenched comity doctrine by barring criminal enforcement of the Sherman Act against foreign acts with effects on nonimport domestic commerce.[147]

Moreover, the strong presumption against extraterritorial application of federal law clearly applies in the case of criminal actions under the FTAIA. Courts presume that federal statutes do not apply extraterritorially in the absence of express legislative intent to the contrary.[148] To avoid this presumption against extraterritorial application of U.S. law, a plaintiff typically must bring a significant showing before the court of some “clear” expression of legislative intent to invoke the law beyond U.S. sovereign control.[149]

Relatedly, Morrison v. National Australia Bank Ltd. provides that the test of territoriality must look to the “focus” of a federal statute in determining the scope of a law.[150] In Morrison, for example, the Court held the territorial connections related to a statute’s “focus” may overcome the statutory presumption against territoriality.[151] Here, similarly, the focus of the FTAIA should guide federal courts in divining the extraterritorial scope of the statute’s criminal dimensions. Moreover, United States v. Bowman held that ambiguous criminal statutes generally should not apply extraterritorially, at least absent an extraterritorial intent clearly inferred from the nature of the offense itself.[152] Overall, these canons of construction reinforce comity considerations and counsel against interpreting the FTAIA to independently authorize criminal actions.

C.  Distinct Remedies Reflect Distinct Treatment of Civil and Criminal Actions Under the FTAIA

A final consideration concerns the distinct remedies that the overall statutory scheme envisions for civil and criminal antitrust violations. According to regulators’ conception of the Sherman Act and its penalties, violations “may be prosecuted as civil or criminal offenses,” and punishments for civil and criminal offenses vary.[153] For example, available relief under the law encompasses penalties and custodial sentences for criminal offenses, whereas civil plaintiffs may “obtain injunctive and treble damage relief for violations of the Sherman Act.”[154] Regulators also recognize that the law envisions distinct means of enforcing criminal and civil offenses under the Sherman Act. For example, the DOJ retains the “sole responsibility for the criminal enforcement” of criminal offenses and “criminally prosecutes traditional per se offenses of the law.[155] In civil proceedings, private plaintiffs and the federal government may seek equitable relief and treble damage relief for Sherman Act violations.[156]

These recognized remedial distinctions matter when assessing the FTAIA’s meaning. Along with the interpretive argument that the Sherman Act’s various provisions ought to be enforced in a way that is internally consistent, practical assessment of the varied remedies and parties that may pursue such remedies reinforces a narrow conception of the FTAIA’s language. The weighty power to seek imprisonment of offenders critically distinguishes criminal and civil remedies under the Sherman Act. The federal government alone retains such authority, predicated on principles of legality and sovereignty. For many reasons, it remains reasonable to permit civil redress—encompassing the full range of injunctive and damage relief—in extraterritorial proceedings under the Sherman Act. Aggrieved consumers and competitors targeted in American markets by foreign activities can sue for injunctive and treble damage relief under the Sherman Act’s civil provisions. Notably, the FTAIA permits as much by its own terms, at least where substantive elements under the Act are satisfied with respect to the requisite effect on domestic or direct import commerce.

In this sense, American law maintains a strong deterrent to foreign actors through a robust system of civil, as opposed to criminal, redress. Extraterritorial competitive injuries are left to the civil sphere under the FTAIA. Such civil remedies are more than sufficient to advance the objectives of the American competition regime abroad—namely, to prevent through legal means artificial distortions on the price and output of goods and services. American courts play a major role in the adjudication of disputes spanning distinct sovereign jurisdictions; that role is best maintained through established civil remedies. But criminal remedies—being reserved to the sovereign aloneshould not extend extraterritorially. The remedial distinctions under the Sherman Act reflect the aims of criminal and civil competition law—criminally, to vindicate public wrongs, and civilly, to remedy private injuries.

Criminal antitrust remedies are logically limited in the context of foreign sovereign jurisdiction. By contrast, the Sherman Act’s civil remedies provide injunctive and damage relief that may compensate victims despite traditional notions of foreign sovereign authority. Far from one sovereign intervening in the backyard of another, a civil action enables individually aggrieved parties to receive compensation from an antitrust offender. This is an intuitive remedial extension of basic principles of legality and sovereignty. Thus, far from the government’s current position—that the FTAIA’s claim prong empowers prosecutors to independently seek criminal remedies for extraterritorial antitrust offenses—the overall remedy scheme for antitrust offenses reinforces a limited conception of criminal redress, particularly where the FTAIA provides the basis for government action.

The preceding discussion substantiates a narrow interpretation of the FTAIA as cabining the extraterritorial criminal antitrust jurisdiction of federal courts. Based on the factors cited––along with substantial historical evaluation of the Sherman Act and FTAIA––this interpretation is consistent with the plain letter of the Act, engrained legal norms, and applicable canons of construction. The current state of U.S. antitrust law tacitly endorses potential executive overreach into criminal judgments of co-equal sovereigns, which is questionable even under consensual arrangements with such governments.[157] Such sovereigns’ domestic political and legal processes properly decide criminal judgments, absent American influence or legal process. In light of growing economic globalization, Part III briefly considers various implications of the prevailing construction of the FTAIA as independently supporting criminal prosecutions of foreign anticompetitive conduct.

III.  Implications for an Interconnected Global Political Economy

The foregoing analysis makes clear that the FTAIA was never intended to apply to criminal activity. Its drafters did not design the Act to reinforce American hegemony in the political economy of global competition policy. Rather, the statute provides express legislative guidance regarding the extraterritorial limits on criminal liability under the Sherman Act.

To date, the Supreme Court remains notably silent on the issue. In the meantime, Hui Hsiung and Motorola Mobility suggest that international businesses that participate in certain anticompetitive acts anywhere in the world should beware potential criminal redress in American courts. The chief implication of the “Crystal Meetings” cases is that anticompetitive conduct presents a massive criminal liability risk that may attach to commercial transactions that in many ways appear removed from American sovereignty. In particular, firms with foreign headquarters that deal significantly in American domestic commerce while operating abroad should consider the wide range of criminal remedies available to American prosecutors under the FTAIA.

In that vein, contractual agreements among segments of global supply chain networks should be drafted to avoid traditional areas of American criminal antitrust enforcement, such as price-fixing and bid rigging, territorial allocation mechanisms, and other naked collusive activities. Given thatat least in recent timesU.S. criminal enforcement actions are far more likely to stem from agreements between firms, rather than agreements enacted within a single entity, international businesses should factor antitrust enforcement concerns into assessing the relative risk of commercial dealings with partners. Owning subsidiaries, rather than dealing with others, may be a preferable alternative.[158]

Although vertical integration may shield firms from horizontal liabilities under section 1 of the Sherman Act, section 2 proscribes certain single-firm activities. Section 2 prohibitions include bans on attempted monopolization and the illegal maintenance or acquisition of monopoly power.[159] There are tensions inherent between self-dealing and dealing with others under U.S. antitrust law. Ironically, foreign firms may feel paralyzed by the vast scope of American antitrust law under courts’ expansive reading of the FTAIA in the criminal context—thus the Act may in fact fuel the type of commercial chilling effect bemoaned by legislators before its passage.[160]

Whereas the petitioners in Hui Hsiung failed to raise challenges to the criminal application of the domestic effects prong based on the FTAIA’s plain language and related arguments, future businesses and individuals targeted by criminal indictments should put the government to the test.[161] Multinational businesses play a major role in addressing the current conception of the FTAIA’s criminal dimensionsmost notably by challenging the U.S. government to prove the Act should apply to extraterritorial criminal acts. The plain text of the statute should give new life to extraterritoriality jurisprudence by reasonably limiting the domain of American authorities. This development is only possible, however, if foreign defendants raise facial challenges to the Act’s extraterritorial criminal application.

In the meantime, beyond reflecting the risk of criminal antitrust liability in international business transactions, multinational businesses should consider the panoply of behavioral and structural remedies available to federal prosecutors. In particular, behavioral remedies encompass fines, penalties, and potential prison time, as well as long-term monitoring and compliance regimes.[162] Foreign firms like AU Optronics, if caught in the crosshairs of a criminal prosecution, could lose control of certain areas of corporate governance altogether, in order to ensure such firms continuing compliance with American law.[163]

The range of behavioral remedies available to American competition authorities underscores the importance of avoiding criminal liability altogether by embracing a culture of prospective caution regarding potentially collusive conduct.[164] Foreign executives intending to maintain full control of corporate affairs and eschew long-term compliance monitors should craft deals as though American competition law operates globally, or otherwise entirely avoid collusive activities that could reasonably wash up on American shores.[165] Given the depth of consumer demand in American markets, caution appears to be the best policy at present for the vast majority of major global businesses.


The foregoing discussion indicates that domestic antitrust laws play a major role in modern global trade regulation. Arguably more than any time since the passage of the FTAIA, today the international dimensions of competition policy warrant careful consideration by lawmakers, businesses, and legal practitioners. Markets are increasingly global, and the application of domestic competition law to international business has necessarily become more complex.

Although global trade can unlock market efficiencies and enhance consumer welfare, it must be managed diligently among co-equal sovereign collaborators.[166] The FTAIA clarifies that U.S. antitrust law plays a limited role in managing foreign anticompetitive activities. Moving forward, the FTAIA’s effects exception should therefore not be permitted to independently support extraterritorial criminal prosecutions under the Sherman Act. The plain language of the FTAIA, in tandem with other traditional tools of statutory interpretation, suggests a limited range of legal redress for competitive harms stemming from wholly foreign acts. Such activities are cabined to the domain of civil redress and should not be subject to criminal prosecution under the FTAIA.

An interpretation of the FTAIA that would reduce reliance on American criminal law enforcement in favor of civil redress and enhanced criminal action by foreign governments in the competition sphere would be preferable, as this approach would reduce the risk of impolitic prosecutorial overreach. Spirited arguments can be made for rigorous domestic criminal enforcement where Americans face competitive injuries, but these arguments become less clearcut in the global marketplace. Yet one thing is clear: The FTAIA—a pronouncement designed by Congress to clarify the limited range of extraterritorial claims under the Sherman Act—did not speak clearly enough for federal courts. Absent judicial action, Congress should enunciate that criminal penalties are in fact authorized by the FTAIA’s plain terms.

In the meantime, American competition authorities are prepared to exercise every ounce of extraterritorial authority meted out by the federal judiciary.[167] This portends potential conflict where rigorous international competition is involved. Although the litigants in Hui Hsiung failed to fully raise arguments challenging a Sherman Act criminal prosecution under the FTAIA, the decision remains instructive. Criminal penalties under the Sherman Act are currently available to American prosecutors under a domestic effects theory.[168] Sherman Act remedies are structural and behavioral. Thus, international businesses and their agents may face U.S. competition remedies that directly interfere with corporate governance structures, including, but not limited to, compliance monitors, deferred-prosecution agreements, and non-prosecution agreements.[169]

This portends trouble in a world already plagued by political uncertainty surrounding global trade.[170] Businesses and individuals facing the current legal regime should challenge criminal enforcement of the Sherman Act under the FTAIA’s domestic effects exception. Given a lack of a clear controlling precedent, a domestic effects theory should not permit U.S. authorities to pursue criminal sanctions against wholly foreign activities, which fall more reasonably within the domain of foreign governments’ competition authorities.[171] By challenging the law in this way, businesses might topple the edifice of judicial inference that has resulted in uniform treatment of civil claims and criminal actions under the Sherman Act’s extraterritorial dimensions.

Given the proliferation of domestic competition laws worldwide in recent decades,[172] in particular, the Sherman Act should not be elevated to the status of global doctrine.[173] Nor should American jurists desire it to be treated as such.[174] The application of domestic criminal law to foreign activities demands propriety, which, in the immediate context, is best achieved by presumptively tempering domestic executive authority. To the extent short-term underdeterrence follows from respecting foreign governments’ criminal antitrust regimes, American law offers a robust range of civil redress.[175]

Trade talk has shifted from an overall cooperative tenor to a chorus of conflict.[176] The amended panel decisions will stand as good law for the time being. However, presumptive equivocal treatment of the civil and criminal provisions of the Sherman Act after the FTAIA demands meaningful justification from U.S. courts in the immediate future. For although American antitrust laws play a significant role in the contemporaneous global political economy, words matter: A rose by any other name may smell as sweet,[177] but an indictment does not a claim make.

[*] *.. Executive Senior Editor, Southern California Law Review, Volume 92; J.D. Candidate 2019, University of Southern California Gould School of Law; B.S., summa cum laude, Political Science and Economics 2016, Bradley University. I thank my mother, Barbara J. Simmons, for her steadfast support and dedication to the memory of my father, Brian S. Simmons. I also thank USC Professors Brian Peck and Jonathan Barnett for sparking my interest in transnational competition law. Lastly, I thank the Law Review staff and editors for their thoughtful work. All errors are my own.

 [1]. See Jason Margolis, Trump’s Trade Policies Worry Economists, USA Today (July 25, 2016, 10:57 AM),
mexico/87521852. In one of many regrettable juxtapositions in American history since June 16, 2015—the day Donald Trump announced his presidential candidacy—Mr. Margolis’s article portended calamitous results relatively well. See also David J. Lynch et al., U.S. Levies Tariffs on $34 Billion Worth of Chinese Imports, Wash. Post (July 6, 2018), (“The conflict over U.S.-China trade has been brewing for years but has intensified rapidly in 2018. On April 3, the United States released a list of targets for proposed tariffs on $50 billion worth of Chinese imports, taking aim at high-tech and industrial goods. On April 4, China fired back.”). Entering October 2018, the United States and China, two leading jurisdictions in terms of the international sale of goods, have engaged in a disturbing series of retributory tariffs. Anna Fifield, China Thinks the Trade War Isn’t Really About Trade, Wash. Post (Sept. 24, 2018), (reporting, in wake of announcement that China will “retaliate with tariffs on $60 billion of U.S. goods” in response to U.S. decision to “slap tariffs on an additional $200 billion worth of Chinese goods,” that Chinese officials view combative trade policy as part of a larger geopolitical threat from the United States); see also Robyn Dixon, China Accuses the U.S. of Holding a Knife to Its Neck and Rules Out New Talks to Resolve the Trade War, L.A. Times (Sept. 25, 2018), (reporting Chinese officials considered “U.S. tariffs on $200 billion in Chinese goods . . . so massive that it made trade talks impossible”); Donald J. Trump (@realDonaldTrump), Twitter (Jul. 24, 2018, 8:29 AM), (“Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs. It’s as simple as that – and everybody’s talking! Remember, [the United States is] the ‘piggy bank’ that’s being robbed. All will be Great!”).

 [2]. Margolis, supra note 1; see also Dixon, supra note 1. See generally Issues: Foreign Policy,, (last visited Nov. 28, 2018) (“The promise of a better future will come in part from reasserting American sovereignty and the right of all nations to determine their own futures.”).

 [3]. Remarks by President Trump to the World Economic Forum, (Jan. 26, 2018), (“We cannot have free and open trade if some countries exploit the system at the expense of others. We support free trade, but it needs to be fair and it needs to be reciprocal. Because, in the end, unfair trade undermines us all.”); see also Donald J. Trump (@realDonaldTrump), Twitter (Mar. 4, 2018, 4:10 PM), (“We are on the losing side of almost all trade deals. Our friends and enemies have taken advantage of the U.S. for many years. Our . . . industries are dead. Sorry, it’s time for a change!”); Donald J. Trump (@realDonaldTrump), Twitter (Mar. 2, 2018, 2:50 AM),
/status/969525362580484098 (suggesting, in light of U.S. trade deficit of billions of dollars, “trade wars are good, and easy to win” (emphasis added)).

 [4]. See Margolis, supra note 1 (“Trump’s major policy positions [on trade] are primarily focused on two countries: China and Mexico.”); see also Phil Levy, Dumping, Cheating and Illegality: Trump Misleads the Public on Steel Tariffs, Forbes (Mar. 12, 2018, 2:59 PM),
/sites/phillevy/2018/03/12/dumping-cheating-and-illegality-trump-misleads-the-public-on-steel-tariffs; accord Donald J. Trump (@realDonaldTrump), Twitter (Jun. 10, 2018, 6:17 PM),
/realDonaldTrump/status/1005982266496094209 (“Why should [the United States] allow countries to continue to make Massive Trade Surpluses, as they have for decades, while our Farmers, Workers & Taxpayers have such a big and unfair price to pay? Not fair to the PEOPLE of America!”); Donald J. Trump (@realDonaldTrump), Twitter (Jun. 2, 2018, 2:23 PM),
/status/1003024268756733952 (“The U.S. has been ripped off by other countries for years on Trade, time to get smart!”); Donald J. Trump (@realDonaldTrump), Twitter (Mar. 5, 2018, 7:47 AM), (“We have large trade deficits with Mexico and Canada.”).

 [5]. Pankaj Ghemawat, Globalization in the Age of Trump, Harv. Bus. Rev., July–Aug. 2017, (“The myth of a borderless world has come crashing down. Traditional pillars of open markets—the United States and the UK—are wobbling, and China is positioning itself as globalization’s staunchest defender.”); see also Josh Zumbrun & Bob Davis, Trade Tensions Intensify as Allies Rebuke U.S., Testing Trump Ahead of G-7, Wall St. J. (June 3, 2018, 8:02 PM),; cf. Gao Shangquan, U.N. Comm. for Dev. Policy, U.N. Doc. ST/ESA/2000/CDP/1, Economic Globalization: Trends, Risks, and Risk Prevention 1–4 (2000),
/development/desa/policy/cdp/cdp_background_papers/bp2000_1.pdf (asserting economic globalization trends are “irreversible,” and forecasting developmental risks posed by economic globalization).

 [6]. Lynch et al., supra note 1; cf. Donald J. Trump (@realDonaldTrump), Twitter (June 2, 2018, 2:23 PM), (“When you’re almost 800 Billion Dollars a year down on Trade, you can’t lose a Trade War!”).

 [7]. See Sherman Antitrust Act, 15 U.S.C. §§ 1–7 (2018); see also Ian Simmons et al., Where to Draw the Line: Should the FTAIA’s Domestic Effects Test Apply in Criminal Prosecutions?, 29 Antitrust 42, 42–46 (2015) (evaluating debate over extraterritorial contours of Sherman Act in criminal context).

 [8]. See, e.g., Melinda F. Levitt & Howard W. Fogt, International Trade and Antitrust: Clarity Put on Hold as FTAIA Conflict/Confusion Continues, Foley (July 30, 2015),
/international-trade-and-antitrust–clarity-put-on-hold-as-ftaiaconflictconfusion-continues (“Maybe the ball is back in Congress’s court. . . . However, given the present level of functionality with the United States Congress, I don’t think we are going to see that in the near future, unfortunately. And so, anybody who treads in these waters needs to continue to be very careful and monitor the situation as we go forward.”) (Melinda F. Levitt, at 1:01:12–1:01:48). But see Simmons et al., supra note 7, at 46 (suggesting plain language and clear legislative intent permit only civil liability for foreign actors under the FTAIA’s “domestic effects” exception).

 [9]. Appalachian Coals, Inc. v. United States, 288 U.S. 344, 359–60 (1933) (“As a charter of freedom, the act has a generality and adaptability comparable to that found to be desirable in constitutional provisions.”); see also Directorate for Fin. & Enter. Affairs Competition Com., Roundtable on the Extraterritorial Reach of Competition Remedies – Note by the United States 3–4 (Dec. 4–5, 2017), (“[The Antitrust Division and DOJ] require relief sufficient to eliminate identified anticompetitive harm that has the requisite connection to U.S. commerce and consumers, even if this means reaching assets or conduct in a foreign jurisdiction.” (footnote omitted)).

 [10]. See, e.g., United States v. Hui Hsiung, 778 F.3d 738, 758–59 (9th Cir. 2015), cert. denied, 135 S. Ct. 2837 (2015) (upholding criminal sentence under FTAIA for foreign price-fixing conspiracy with “effect” on United States).

 [11]. Cf. Levitt & Fogt, supra note 8 (detailing ongoing debate over extraterritoriality in American antitrust jurisprudence after FTAIA).

 [12]. Concerns surrounding extraterritoriality in U.S. competition policy are heightened in light of businesses’ widespread embrace of lean methodology and global supply-chain management strategies, which increasingly distribute goods and services throughout a single firm’s transnational network to maximize profit and minimize waste. See generally Michael H. Hugos, Essentials of Supply Chain Management (3d ed. 2011). Specifically, the emergence of global supply chain networks has unleashed a variety of associated complications with respect to commercial regulations. Cf. U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidelines for International Enforcement and Cooperation 16–25 (2017), [hereinafter International Guidelines] (describing agencies’ extraterritorial prerogatives under the FTAIA); Joseph P. Bauer, The Foreign Trade Antitrust Improvements Act: Do We Really Want to Return to American Banana?, 65 Me. L. Rev. 3, 5 (2012).

While there is extensive disagreement about the specifics with respect to what behavior and structure the antitrust laws should seek to prohibit or permit, there is broad, general consensus on the goals of the antitrust laws. . . . [E]nhancement of consumer welfare, the promotion of competition, and compensation of the victims of antitrust violations. . . . [T]he FTAIA has significantly undermined the achievement of these goals.

Bauer, supra, at 5.

 [13]. Phillip Areeda et al., Antitrust Analysis: Problems, Text, and Cases ¶¶ 168–69 (7th ed. 2013) (“With ever-expanding globalization, instances of conflicting—as well of complementary—interests among jurisdictions involving multinational business activity will become increasingly frequent. . . . [I]n many individual cases an anticompetitive practice may well benefit some jurisdictions . . . [however,] the reciprocal nature of foreign trade suggests the existence of opportunities for mutual gain.”); see also Jennifer B. Patterson & Terri A. Mazur, Kaye Scholer, Recent Developments in the Extraterritorial Reach of the U.S. Antitrust Laws (2014),
_pattersonmazurinsidecounselarticleaugust132014pdf; Levitt & Fogt, supra note 8.

 [14]. Foreign Trade Antitrust Improvements Act, 15 U.S.C. § 6a (2018). The statute’s language is overly formalistic and consequently complicated. Accord United States v. Nippon Paper Indus. (Nippon II), 109 F.3d 1, 4 (1st Cir. 1997) (describing the FTAIA as “inelegantly phrased”). In effect, its terms cabin the Sherman Act’s scope to activity beyond U.S. borders, providing that such conduct gives rise to domestic antitrust liability only if it: (1) involves “import commerce;” or (2) has a “direct, substantial, and reasonably foreseeable effect” on domestic trade or commerce, which “gives rise to a claim” under the Sherman Act. See 15 U.S.C. § 6a (emphasis added).

 [15]. F. Hoffman-La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 169 (2004) (“[T]he FTAIA’s language and history suggest that Congress designed the FTAIA to clarify, perhaps to limit, but not to expand in any significant way, the Sherman Act’s scope as applied to foreign commerce.”).

 [16]. See United States v. Hui Hsiung, 778 F.3d 738, 738, 756–60 (9th Cir. 2015).

 [17]. Id. at 743 (quoting 15 U.S.C. § 6a).

 [18]. See id.

 [19]. Id. at 743, 748, 750–53, 756–60 (providing the required test under the first prong of the “domestic effects” exception, as articulated under the FTAIA).

 [20]. See, e.g., id. at 743 (“Crystal Meeting participants stood to make enormous profits from TFT–LCD sales to United States technology retailers. . . . [T]he United States comprised approximately one-third of the global market for personal computers incorporating TFT–LCDs, and sales . . . generated over $600 million in revenue.”). For example, the conspiracy targeted commercial electronics retailers, like Motorola and Apple, which incorporated the price-fixed panel technologies in overseas production processes earlier in the supply chain. See id.

 [21]. See id. at 751–53 (“The FTAIA . . . provides substantive elements under the Sherman Act in cases involving nonimport trade with foreign nations.” (emphasis added)). See generally 15 U.S.C. § 6a(2) (“[S]uch effect gives rise to a claim under the provisions of [the Sherman Act] . . . .” (emphasis added)).

 [22]. The court’s final analysis lacks any substantive discussion of whether a criminal indictment may give rise to a domestic antitrust “claim” within the meaning of the FTAIA’s domestic effects prong, while concluding that the question of “what conduct [the FTAIA] prohibits is a merits question, not a jurisdictional one.” Hui Hsiung, 778 F.3d at 752 (internal quotation marks omitted). Colorable arguments exist to support a broad interpretation of the FTAIA as authorizing both civil and criminal “claims” if wholly foreign conduct has a “direct, substantial, and reasonably foreseeable” effect on nonimport domestic commerce, see, for example, infra text accompanying notes 6772, but the panel decision offers none. See, e.g., Simmons et al., supra note 7, at 42 (“[T]he amended opinion upheld the convictions . . . without any significant discussion of whether [the “domestic effects” prong] can independently support a criminal prosecution [under the Sherman Act].”). At the very least, the panel owed the public a legal justification for its implicit ruling that a criminal indictment constitutes a “claim” under the “domestic effects” exception. In reality, a more efficacious reading of the FTAIA’s exception would limit the reach of the Sherman Act to only civil claims, at least where nonimport “domestic effects” form the basis of an extraterritorial competition “claim.” See, e.g., infra Part II (arguing that the FTAIA facially prohibits extraterritorial criminal prosecutions on the independent “domestic effects” theory, in part because neither prosecutions nor indictments actually amount to “claims” within the plain meaning of the “domestic effects” exception).

 [23]. Accord Levitt & Fogt, supra note 8.

 [24]. See generally supra notes 723 (reviewing FTAIA’s “domestic effects” exception and Hui Hsiung).

 [25]. Moreover, in light of the proliferation of highly integrated global supply chain networks, see generally Hugos, supra note 12, as well as the emergence of a tense global political economy surrounding free trade and international competition, see supra notes 15, this subject appears increasingly relevant to federal courts, legal practitioners, and the tens of thousands of firms doing business in America.

 [26]. See, e.g., Hartford Fire Ins. Co. v. California, 509 U.S. 764, 796 n.23 (1993) (noting disagreement regarding whether the FTAIA’s “direct, substantial, and reasonably foreseeable effect” standard amends existing law or merely codifies it, but declining to take up the issue).

 [27]. See infra Part II.

 [28]. For rich academic discussion of foreign commerce and the complex relationships forged between foreign commerce and domestic antitrust laws, see generally Wilbur L. Fugate & Lee H. Simowitz, Foreign Commerce and the Antitrust Laws (5th ed. 1996 & Supp. 2018). Sections I.A.1–2 are designed to provide useful historical context for the FTAIA’s substantive provisions and recent judicial decisions; they are not intended to provide exhaustive review of the Sherman Act in international commerce.

 [29]. 15 U.S.C. §§ 1–2 (2018) (criminal antitrust violations). See also Areeda et al., supra note 13, ¶ 168 n.101 (discussing definitions of “commerce” and the extraterritorial reach of various antitrust provisions, including sections 1, 2, and 7 of the Sherman Act, as well as the Clayton Act, and the Federal Trade Commission Act).

 [30]. Am. Banana Co. v. United Fruit Co., 213 U.S. 347, 357 (1909) (Holmes, J.) (holding the Sherman Act does not apply to acts taken in Panama and Costa Rica, which fall beyond territorial borders of United States); see also Edward D. Cavanagh, The FTAIA and Claims by Foreign Plaintiffs Under State Law, 26 Antitrust L.J. 43, 43–44 (2011) [hereinafter Cavanagh, The FTAIA]; Edward D. Cavanagh, The FTAIA and Subject Matter Jurisdiction over Foreign Transactions Under the Antitrust Laws: The New Frontier in Antitrust Litigation, 56 SMU L. Rev. 2151, 2153–56 (2003) [hereinafter Cavanagh, The New Frontier].

 [31]. See United States v. Aluminum Co. of Am. (Alcoa), 148 F.2d 416, 440–45 (2d Cir. 1945) (Hand, J.) (“[A]ny state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders which the state reprehends.”); Cont’l Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 705 (1962) (approving of the Second Circuit decision in Alcoa and finding jurisdiction where foreign defendants’ conduct abroad had an “impact within the United States and upon its foreign trade”).

 [32]. Bauer, supra note 12, at 8.

 [33]. Alcoa, 148 F.2d at 443–44. The panel noted, “[b]oth agreements would clearly have been unlawful, had they been made within the United States; and it follows from what we have just said that both were unlawful, though made abroad, if they were intended to affect imports and did affect them.” Id. at 444. Although the case is famous for its domestic implications and market share analysis, the decision also marks a key moment in extraterritorial antitrust jurisprudence. Under the panel’s view, criminal liability under the antitrust laws historically attached to wholly foreign conduct involving imports; foreign conduct that affected nonimport domestic commerce was historically only subject to civil liability, not criminal prosecution. Alcoa therefore provides only limited authority for extraterritorial criminal liability in nonimport contexts, as when foreign actors are prosecuted on the basis of downstream effects on domestic commerce.

 [34]. Id. at 443–44.

 [35]. An interesting aspect of the Alcoa case was simply its procedural posture. In 1944, the Supreme Court announced that it would not have a quorum to hear the case. Congress subsequently designated the case to the Second Circuit through a special act that stands to this day. See generally Act of June 9, 1944, 28 U.S.C. § 2109 (2018).

 [36]. See, e.g., Areeda et al., supra note 13, ¶ 168.

 [37]. Alcoa, 148 F.2d at 443.

 [38]. Cf. id. This inference appears reasonable given federal courts’ position as legal custodians in the United States, one of the foremost consumer markets in the developed world. Cf. United States v. Hui Hsiung, 778 F.3d 738, 743 (9th Cir. 2015) (noting “Crystal Meetings” conspiracy targeted leading firms in American consumer electronics market); Shangquan, supra note 5.

 [39]. Alcoa, 148 F.2d at 443 (emphasis added).

 [40]. See, e.g., United States v. Nippon Paper Indus., 109 F.3d 1, 2, 4–5 (1st Cir. 1997). Indeed, this widely-adopted standard for extraterritorial antitrust analysis has been referred to as the “effects doctrine” or “effects test” in civil and criminal actions. See John W. Head, Global Business Law: Principles and Practice of International Commerce and Investment 643 (3d ed. 2012); Developments in the Law: Extraterritoriality, 124 Harv. L. Rev. 1226, 1269–74 (2011).

 [41]. See, e.g., Hartford Fire Ins. Co. v. California, 509 U.S. 764, 796 (1993) (adopting Alcoa effects test following passage of FTAIA where it could be shown that conduct “was meant to produce and did in fact produce some substantial effect in the United States”); accord Filetech S.A. v. Fr. Telecom, S.A., 157 F.3d 922, 931 (2d Cir. 1998) (following Hartford Fire’s construction of the prevailing Alcoa effects test).

 [42]. See generally Harold G. Maier, Extraterritorial Jurisdiction at a Crossroads: An Intersection Between Public and Private International Law, 76 Am. J. Int’l L. 280 (1982) (describing role of the comity doctrine in extraterritorial application of domestic laws). The Supreme Court recently clarified the doctrine of “international comity” with respect to a foreign government’s official statement concerning the meaning of its own domestic law. See generally Animal Sci. Prods., Inc. v. Hebei Welcome Pharm. Co., 138 S. Ct. 1865 (2018), vacating and remanding In re Vitamin C Antitrust Litig., 837 F.3d 175 (2d Cir. 2016). The Court suggested American courts are “not bound to accord conclusive effect to the foreign government’s statements,” in such instances, but declined to undertake the analysis itself and instead remanded the case for further consideration consistent with its opinion. Animal Science, 138 S. Ct. at 1869, 1875 (“The correct interpretation of Chinese law is not before this Court, and we take no position on it.”).

 [43]. See, e.g., Timberlane Lumber Co. v. Bank of Am. N.T. & S.A., 549 F.2d 597, 613 (9th Cir. 1977) (court may refrain from asserting “extraterritorial authority,” despite finding of some actual or intended effect, upon presence of factors implicating international comity concerns in rendering judgment), superseded by statute, 15 U.S.C. § 6a (2018), as recognized in McGlinchy v. Shell Chem. Co., 845 F. 2d 802, 813 n.8 (9th Cir. 1988).

 [44]. Areeda et al., supra note 13, ¶ 168(b) (citing Timberlane Lumber Co. v. Bank of Am. N.T. & S.A., 749 F.2d 1378 (9th Cir. 1984), cert. denied, 472 U.S. 1032 (1985)). The Timberlane court ultimately dismissed the plaintiff’s claim based on the legitimacy of the defendant’s foreign acts under Honduran law, as well as the meager effects on competition within the United States. Timberlane, 749 F.2d at 1384–86.

 [45]. Timberlane, 749 F.2d at 1386.

 [46]. Cavanagh, The New Frontier, supra note 30, at 2154. But see id. (“While one cannot fault these courts for attempting to develop comprehensive jurisdictional standards, it is undeniable that infusing the issue of comity into the jurisdictional analysis has generated more confusion than certainty and has created significant unpredictability in the law.” (emphasis added)).

 [47]. Restatement (Third) on Foreign Relations Law of the United States §§ 402–03, § 403 cmt. a (Am. Law Inst. 1987) [hereinafter Restatement].

 [48]. See, e.g., F. Hoffman-La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 165–69 (2004) (discussing prescriptive comity considerations in connection with FTAIA’s domestic effects exception and concluding that the Act did not apply given Congress’s adherence to principles of comity in international commercial relations).

 [49]. See Joel R. Paul, The Transformation of International Comity, 71 Law & Contemp. Probs. 19, 36, 38 (2008) (noting that courts’ application of comity doctrine reflects concerns for separation of powers, historical experience, and respect for foreign sovereignty in context of extraterritorial antitrust disputes).

 [50]. See McGlinchy v. Shell Chem. Co., 845 F.2d 802, 813 n.8 (9th Cir. 1988) (adopting Timberlane standard and noting that the FTAIA “did not change the ability of courts to exercise principles of international comity” in antitrust actions); see also Mannington Mills v. Congoleum Corp., 595 F.2d 1287, 1297–98 (3d Cir. 1979) (affirming Timberlane and listing ten comity factors relevant to “balancing process”); Pillar Corp. v. Enercon Indus. Corp., 694 F. Supp. 1353, 1360–61 (E.D. Wis. 1988) (discussing “concerns raised” by Mannington Mills and Timberlane courts); Dominicus Americana Bohio v. Gulf & W. Indus., 473 F. Supp. 680, 687 (S.D.N.Y. 1979) (following Mannington Mills analysis of ten factors relevant to comity analysis). But see Hartford Fire, Ins. Co. v. California, 509 U.S. 764, 796–99 (1993) (principles of international comity are only raised upon a “true conflict” between U.S. and foreign law).

 [51]. Timberlane v. Bank of Am. N.T.& S.A., 749 F.2d 1378, 1384–86 (9th Cir. 1984).

 [52]. Hartford Fire, 509 U.S. at 796–99.

 [53]. Id. at 798–99.

 [54]. Id. at 797.

 [55]. Id. at 799.

 [56]. Id. at 796.

 [57]. See id. at 796 n.23.

 [58]. However, it is essential to note at the onset of this discussion that, despite judicial treatment of the Act’s thornier components, compelling commentary has called for repeal of the FTAIA altogether. See generally Robert E. Connolly, Repeal the FTAIA! (Or at Least Consider It as Coextensive with Hartford Fire), CPI Antitrust Chron. (Sept. 2014), [hereinafter Connolly, Repeal the FTAIA!] (noting “[a] primary motivation behind the FTAIA was to give immunity to American exporters to engage in anticompetitive conduct—as long as it negatively affected only foreign consumers,” and arguing the FTAIA should not govern the extraterritorial reach of the Sherman Act). Connolly reiterates and extends portions of his argument in a companion article. Robert E. Connolly, Motorola Mobility and the FTAIA, CartelCapers (Sept. 30, 2014),

 [59]. See 15 U.S.C. § 6a (2018).

 [60]. Id. (emphasis added).

 [61]. See id.; accord United States v. Hui Hsiung, 778 F.3d 738, 750–51 (9th Cir. 2015); Carpet Grp. Int’l v. Oriental Rug Imps. Ass’n, 227 F.3d 62, 71 (3d Cir. 2000) (citing Eskofot A/S v. E.I. Du Pont Nemours & Co., 872 F. Supp. 81, 85 (S.D.N.Y. 1995)) (noting the implication that the Sherman Act applies to “import trade and import commerce is unmistakable”). The import commerce prong likely applies where a defendant sells a finished product directly to American consumers in the United States. See Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845, 855 (7th Cir. 2012) (en banc), cert. denied, 570 U.S. 935 (2013).

 [62]. F. Hoffman-La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 163 (2004).

 [63]. See Carpet Grp. Int’l, 227 F.3d at 71.

 [64]. See Connolly, Repeal the FTAIA!, supra note 58.

 [65]. H.R. Rep. No. 97–686, at 2–3 (1982), as reprinted in 1982 U.S.C.C.A.N. 2487, 2491; see also 15 U.S.C. § 4001 (2018) (“It is the purpose of this chapter to increase United States exports of products and services by encouraging more efficient provision of export trade services to United States producers and suppliers, in particular by . . . modifying the application of antitrust laws to certain export trade.”).

 [66]. H.R. Rep. No. 97–686, at 6 (1982).

 [67]. Id. at 5.

 [68]. Id. (emphasis added) (citing Cont’l Ore Co. v. Union Carbide, 370 U.S. 690, 704–05 (1962) and Steele v. Bulova Watch Co., 344 U.S. 280, 286 (1952)).

 [69]. H.R. Rep. No. 97–686, at 2–3 (1982).

 [70]. Of critical importance to subsequent analysis in this Note—an unstated desire to protect U.S. commercial interests also pervades modern judicial interpretations of the FTAIA, at least with respect to civil actions. See, e.g., Bauer, supra note 12, at 24 (“Arguably, the courts are seeking to protect the interests of American companies doing business abroad and of foreign companies doing business in the United States, with the unstated assumption that somehow this will result in a net benefit to the American economy.”).

 [71]. See, e.g., Connolly, Repeal the FTAIA!, supra note 58 (proposing outright repeal of the Act).

 [72]. See, e.g., Cavanagh, The New Frontier, supra note 30, at 2159 (“It has therefore fallen to the courts to determine the precise meaning and scope of the FTAIA.”). Indeed, given prolonged legislative inaction on the subject, federal courts arguably must define the scope of the FTAIA to yield some measure of clarity for litigants. See Levitt & Fogt, supra note 8 (suggesting legislative revision of FTAIA is unlikely but may be necessary).

 [73]. Hartford Fire Ins. Co. v. California, 509 U.S. 764, 796–97, 796 n.23 (1993); see also supra Section I.A.2 (discussing comity concerns in Hartford Fire).

 [74]. Hartford Fire, 509 U.S. at 796–97.

 [75]. United States v. Nippon Paper Indus. (Nippon I), 944 F. Supp. 55, 57–58 (D. Mass. 1996) (dismissing criminal antitrust indictment for lack of jurisdiction under Sherman Act).

 [76]. See id. at 58. The thrilling basis for the government’s prosecution stemmed from Nippon Paper Industries’ corporate predecessor, “Jujo Paper,” allegedly agreeing with unnamed Japanese firms to “fix prices of jumbo roll thermal facsimile paper (‘fax paper’) sold in the United States,” in violation of section 1 of the Sherman Act. Id.

 [77]. Id. at 64.

 [78]. Id. at 65 (emphasis added) (construing United States v. Bowman, 260 U.S. 94, 97–98 (1922) as holding the presumption against extraterritorial application of federal law “carries even more weight when applied to criminal statutes”).

 [79]. See id. at 64–66.

 [80]. United States v. Nippon Paper Indus. (Nippon II), 109 F.3d 1, 2–3 (1st Cir. 1997) (detailing the essential “Fax” underlying the panel’s decision); Raymond Krauze & John Mulcahy, Antitrust Violations, 40 Am. Crim. L. Rev. 241, 278–79 (2003) (“[T]he First Circuit reinstated the indictment of a foreign-based defendant for conduct occurring wholly outside of the United States, and the case looks to be a harbinger of the Antitrust Division’s growing ability to combat international price-fixing.”); see also 15 U.S.C. §§ 1–2 (2018) (criminal antitrust violations for horizontal restraints of trade and monopolization practices).

 [81]. Nippon II, 109 F.3d at 5 (emphasis added).

 [82]. Id. at 4.

 [83]. Id. at 6. The panel further noted that although Nippon and its expert witnesses argued that this was “the first criminal case in which the United States endeavor[ed] to extend Section One to wholly foreign conduct,” an “absence of earlier criminal actions is probably more a demonstration of the increasingly global nature of our economy than proof that Section One cannot cover wholly foreign conduct in the criminal milieu.” Id. In the court’s view, the mere lack of precedent imposing criminal liability to wholly foreign conduct did not bar prosecutors from bringing charges under section 1. Id. Critically, in the view of the court, the language of the FTAIA itself also did not impact the ability of U.S. authorities to bring criminal prosecutions against solely extraterritorial conduct. See id. at 4–6.

 [84]. Id. at 9 (emphasis added).

 [85]. Id. at 9 (Lynch, J., concurring) (emphasis added) (quoting Appalachian Coals, Inc. v. United States, 288 U.S. 344, 359–60 (1933)).

 [86]. Id. at 4–6.

 [87]. Rather, along with the language and history of the FTAIA, Nippon I provides a helpful interpretive model for understanding the boundaries of U.S. law in the extraterritorial criminal context. In many ways, Nippon I challenges convention, as many courts have inferred substantially similar treatment of the Sherman Act’s criminal and civil provisions after Hartford Fire—a case in which only civil antitrust claims were at issue.

 [88]. F. Hoffman-La Roche, Ltd. v. Empagran S.A., 542 U.S. 155, 174–75 (2004) (internal quotation marks omitted) (quoting 15 U.S.C. § 6a(2) (2018)).

 [89]. Id.

 [90]. Id. at 173–75 (“Respondents concede that this claim is not their own claim; it is someone else’s claim. . . . “[T]hat is, the conduct’s domestic effects did not help to bring about that foreign injury.”); see also Empagran S.A. v. F. Hoffman-La Roche, Ltd., 417 F.3d 1267, 1270–71 (D.C. Cir. 2005) (noting on remand that the FTAIA codifies a proximate cause standard for Sherman Act claims involving foreign trade or commerce).

 [91]. See Empagran, 417 F.3d at 1270–71.

 [92]. United States v. Hui Hsiung, 778 F.3d 738, 750–51 (9th Cir. 2015).

 [93]. Motorola Mobility, LLC v. AU Optronics Corp., 775 F.3d 816, 824 (7th Cir. 2014), cert. denied, 135 S. Ct. 2837 (2015).

 [94]. Motorola Mobility, 135 S. Ct. at 2837 (denying petitions for certiorari in Motorola Mobility and Hui Hsiung). However, independent state-law actions have proceeded parallel to federal litigation surrounding the “Crystal Meeting” conspiracy. For example, consumer plaintiffs in the State of Washington will receive a total of $41.1 million in “overcharge” damages stemming from the conspiracy’s agreement to manipulate the supply of LCD panels to artificially increase prices. See Press Release, Wash. State Office of the Attorney Gen., More Than $41M Headed to Consumers in AG Ferguson’s LCD Price-Fixing Case (Sept. 14, 2017),

 [95]. But see Robert E. Connolly, Why the Supreme Court Refused to Hear the FTAIA Appeals, Law360 (June 16, 2015, 10:22 AM), (arguing that Hui Hsiung and Motorola Mobility were correctly decided and that the cases were sufficiently factually dissimilar to avoid facial contradiction between the final Circuit opinions).

 [96]. See infra Part II.

 [97]. LCD panels sold above competitive prices were incorporated in laptops, desktops, and television screens purchased by American consumers. See Brandon Garrett, Too Big to Jail: How Prosecutors Compromise with Corporations 235–36 (2014) (describing “Crystal Meetings” conspiracy, harms to American consumers, and federal prosecution). One definition of “LCD” describes the technology as “an electronic display (as of the time in a digital watch) that consists of segments of a liquid crystal whose reflectivity varies according to the voltage applied to them.” LCD, Merriam-Webster’s Collegiate Dictionary (11th ed. 2017). LCD panels are increasingly incorporated into handheld technologies, such as smartphones, watches, telephonic displays, as well as computer screens and televisions, among many other products. See generally Joseph A. Castellano, Liquid Gold: The Story of Liquid Crystal Displays and the Creation of an Industry (2005) (tracing history of LCD panel technology and modern applications of technology).

 [98]. See Hui Hsiung, 778 F.3d at 743 (outlining “Crystal Meetings” conspiracy). The final judgment notes that affected panels were purchased by market leaders, including “Dell, Hewlett Packard (‘HP’), Compaq, Apple, and Motorola for use in consumer electronics.” Id.

 [99]. Id.

 [100]. Id.; accord Brent Snyder, U.S. Dep’t of Justice, Antitrust Div. Individual Accountability for Antitrust Crimes 6 (2016),
/download (“High-level executives were also prosecuted in the . . . LCD investigations, including two chairmen/CEOs, four presidents, more than 20 vice presidents, and a number of managers and directors. Among these were the president and executive vice president of the third largest LCD maker in the world. . . . [A] jury convicted these two, and they are currently serving 36-month jail terms—the longest sentences ever imposed on foreign-national defendants for antitrust offenses.”); Dep’t of Justice, Antitrust Div., Antitrust Primer for Federal Law Enforcement Personnel 4 (2018) [hereinafter Antitrust Primer], (discussing LCD-panel price-fixing conspiracy proceedings in U.S. federal courts).

 [101]. Hui Hsiung, 778 F.3d at 757.

 [102]. Id. at 743.

 [103]. Id. at 744.

 [104]. Id.

 [105]. Id.

 [106]. Id.

 [107]. Id. at 745; accord Snyder, supra note 100, at 6; Antitrust Primer, supra note 100, at 4 (noting final fines in the LCD antitrust investigation and prosecutions “led to criminal fines totaling more than $1.39 billion and charges against 22 executives,” the majority of whom pleaded guilty or were convicted at trial before U.S. tribunals).

 [108]. H              ui Hsiung, 778 F.3d at 745.

 [109]. United States v. Hui Hsiung, 758 F.3d 1074, 1095 (9th Cir. 2014), amended by United States v. Hui Hsiung, 778 F.3d 738 (2015).

 [110]. Hui Hsiung, 778 F.3d at 743, 751, 756.

 [111]. Id. at 743, 751, 760.

 [112]. See, e.g., supra notes 2122.

 [113]. Press Release No. 12-1140, Dep’t of Justice Office of Pub. Affairs, Antitrust Div., Taiwan-Based AU Optronics Corp. Sentenced to Pay $500 Million Criminal Fine for Role in LCD Price-Fixing Conspiracy (Sept. 20, 2012), In total, the Department of Justice (“DOJ”) reported that “eight companies have been convicted of charges arising out of the . . . ongoing investigation” into the LCD-panel price-fixing conspiracy, which “have been sentenced to pay criminal fines totaling $1.39 billion.” Id. (emphasis added). As of September 2012, the DOJ boasted that twenty-two executives had been charged in the foreign conspiracy; twelve had been convicted and “sentenced to serve a combined total of 4,871 days in prison” in the United States. Id. (emphasis added). These weighty penalties associated with criminal antitrust prosecutions particularly warrant heightened judicial scrutiny of the FTAIA’s language, purpose, and scope in the criminal context. Accord Antitrust Primer, supra note 100, at 3–4 (summarizing total fines and penalties in LCD-panel cases).

 [114]. Hui Hsiung, 778 F.3d at 758–60 (evaluating defendants’ sufficiency of evidence challenges to government’s alleged “direct, substantial, and reasonably foreseeable” effect on U.S. nonimport trade or commerce).

 [115]. Id. at 752–53.

 [116]. See id. at 756–60. The court notes that “even disregarding the domestic effects exception, the evidence that the defendants engaged in import trade was overwhelming” and demonstrated that the defendants participated in direct import commerce under 15 U.S.C. § 6a, and that this “import trade theory alone was sufficient to convict the defendants of price-fixing.” Id. at 760. However, the court’s discussion notably lacks any analysis of the second substantive element of the FTAIA’s domestic effects prong. See id. at 756–60.

 [117]. Id. at 757.

 [118]. See Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845, 851–52 (7th Cir. 2012); see also Animal Sci. Prods., Inc. v. China Minmetals Corp., 654 F.3d 462, 466–69 (3d Cir. 2011). The dilemma of whether the FTAIA presents additional merits or jurisdictional elements for extraterritorial Sherman Act claims is contentious, with different lower courts adopting different rules since the 1990s. See Hui Hsiung, 778 F.3d at 751–52, 752 n.7, 753 (holding that the FTAIA is “not a subject-matter jurisdiction limitation on the power of the federal courts but a component of the merits of a Sherman Act claim involving nonimport trade or commerce with foreign nations,” and reviewing cases adopting and rejecting this rule); see also Edward Valdespino, Note, Shifting Viewpoints: The Foreign Trade Antitrust Improvements Act, a Substantive or Jurisdictional Approach, 45 Tex. Int’l L.J. 457, 457 (2009) (noting a shift from jurisdictional to substantive view). The source of contention is the burden-shifting effect of viewing the FTAIA’s terms as substantive elements: the “[e]xpense and shifting burdens of proof greatly increases settlement pressure.” Levitt & Fogt, supra note 8. Rather than being challengeable on the pleadings through a Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction, see Fed. R. Civ. P. 12(b)(1), a merits question requires courts to evaluate evidence and legal arguments, see Levitt & Fogt, supra note 8. Thus, viewing the FTAIA as a matter of “substantive liability” requires “resolution through motion[s] for summary judgment after . . . discovery or trial,” which may be extremely expensive in the context of extraterritorial antitrust actions. Levitt & Fogt, supra note 8. With that in mind, the trend in recent years is decidedly in favor of viewing the FTAIA as additional substantive elements. See id.

 [119]. See Hui Hsiung, 778 F.3d at 752.

 [120]. Motorola Mobility, LLC v. AU Optronics Corp., 775 F.3d 816, 817–18 (7th Cir. 2014) (describing procedural posture and factual basis of case). The panel decision, penned by economist and now-retired Judge Richard Posner, noted the criminal convictions entered in Hui Hsiung at the onset of its analysis. Id. (“We’ll drop ‘allegedly’ and ‘alleged,’ for simplicity, and assume that the panels were indeed price-fixed—a plausible assumption since defendant AU Optronics has been convicted of participating in a criminal conspiracy to fix the price of panel components of the cellphones manufactured by Motorola’s foreign subsidiaries.”).

 [121]. Id. (emphasis added).

 [122]. Id. at 821–25. Under the indirect-purchaser doctrine, only direct purchasers harmed by overcharging have cognizable antitrust claims under federal law. See Ill. Brick Co. v. Illinois, 431 U.S. 720, 723–26 (1977). Thus, the panel noted, “Motorola’s subsidiaries were the direct purchasers of the price-fixed LCD panels” whereas “Motorola and its customers [were the] indirect purchasers of the panels.” Motorola Mobility, 775 F.3d at 821 (emphasis added).

 [123]. Id. at 818 (emphasis added).

 [124]. Id. at 825 (emphasis added). Interestingly, the Seventh Circuit’s final opinion noted that the FTAIA has historically been interpreted to limit the extraterritorial application of domestic antitrust laws, in line with considerations of international comity, id. at 818, yet impliedly concluded that the Act’s “claim” language should be broadly construed to encompass civil claims and criminal indictments, see id. at 825.

 [125]. Id. at 824–25 (“The foreign subsidiaries can sue under foreign law—are we to presume the inadequacy of the antitrust laws of our foreign allies? Would such a presumption be consistent with international comity, or more concretely with good relations with allied nations in a world in turmoil?”). In response to Judge Posner—it seems readily discernible that American antitrust law does in fact presume the inadequacy of the competition laws of foreign collaborators, at least insofar as American prosecutors increasingly pursue criminal enforcement prosecutions involving foreign commerce. Moreover, in the wider array of international transactional regulation, the United States frequently dispatches with consideration of “good relations with allied nations” in pursuit of national economic objectives. See generally Head, supra note 40 (broadly surveying the role of U.S. law in regulation of international trade and investment).

 [126]. Notably, here, no petitioner raised this “claim” of error in Hui Hsiung or Motorola Mobility. Nevertheless, particularly if the FTAIA is to be construed as a series of additional substantive, non-jurisdictional requirements for Sherman Act claims, a full analysis of both parts of the two-part conjunctive domestic effects test is certainly warranted.

 [127]. Frank B. Cross, The Significance of Statutory Interpretive Methodologies, 82 Notre Dame L. Rev. 1971, 1971 (2013) (citing Jonathan R. Siegel, The Polymorphic Principle and the Judicial Role in Statutory Interpretation, 84 Tex. L. Rev. 339, 339 (2005)). For authoritative discussions of the interaction between textualism and other recognized statutory interpretive methodologies in American judicial opinions, see generally Cross, supra and Stephen Breyer, On the Uses of Legislative History in Interpreting Statutes, 65 S. Cal. L. Rev. 845 (1992). Part II begins from a textualist foundation and in subsequent sections, see infra Sections II.B–D, also considers alternative rationales for strictly interpreting the domestic effects exception to not authorize extraterritorial criminal prosecutions. Cross briefly notes that “[d]escriptive statistics reveal that textualism and legislative intent are [the] most common [interpretive methodologies], but all the approaches find material use in Court opinions.” See Cross, supra, at 1972; cf. id. at 1973–74 (“Textualism is broadly accepted as an interpretive methodology, the controversy is over its exclusivism. . . . Critics argue that there are many cases in which the plain meaning of the text does not offer a clear resolution and these difficult cases are . . . most likely to be taken by the . . . Supreme Court.” (citing Breyer, supra, at 862)).

 [128]. Cross, supra note 127, at 1972 (citing John F. Manning, Textualism and Legislative Intent, 91 Va. L. Rev. 419, 434 (2005)).

 [129]. See id. at 1972–74.

 [130]. Claim, Black’s Law Dictionary (10th ed. 2014).

 [131]. Prosecution, Black’s Law Dictionary (10th ed. 2014).

 [132]. Hartford Fire Ins. Co. v. California, 509 U.S. 764, 799 (1993).

 [133]. See, e.g., Motorola Mobility, LLC v. AU Optronics Corp., 775 F.3d 816, 818 (7th Cir. 2014) (citing Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application 273(c)(2) (3d ed. 2006)).

 [134]. Id. at 825 (quoting F. Hoffman-La Roche, Ltd. v. Empagran, S.A., 542 U.S. 155, 165 (2004)). Of course, the court in Motorola Mobility dealt with civil claims. Comity holds the same, if not greater, weight in criminal prosecutions, where judgments of community condemnation and moral culpability are implicated to far greater degrees than in civil actions. Accord International Guidelines, supra note 12, at 49–51 (highlighting “Special Considerations” in connection with criminal investigations and prosecutions undertaken against international price-fixing cartels).

 [135]. Motorola Mobility, 775 F.3d at 825 (emphasis added).

 [136]. See Restatement, supra note 47 §§ 402–03, § 403 cmt. a.

 [137]. Connolly, Repeal the FTAIA!, supra note 58, at 3. Connolly seems to suggest that American federal prosecutors will always have a greater concern for international relations, foreign sovereignty concerns, and other attendant comity considerations, than will civil plaintiffs. See id.

 [138]. See id. at 4.

 [139]. Id. at 7. Notably, Judge Posner cited Connolly’s article at length in the final opinion, including the relevant portion cited herein. See Motorola Mobility, 775 F.3d at 826–27 (citing Connolly, Repeal the FTAIA!, supra note 58). This suggests that Connolly’s colorable conception of comity had at least a persuasive impact on the panel’s reasoning with respect to the domestic effects prong.

 [140]. Connolly relies in part on the fact that, as DOJ prosecutors noted in their Motorola Mobility briefs, before commencing with a case, the DOJ contemplates the views of foreign nations, whereas, in his view, “the comity considerations with private plaintiffs are quite different.” Connolly, Repeal the FTAIA!, supra note 58, at 4. For example, Connolly contends that private individuals seeking civil damage remedies may fail to exercise the “degree of self-restraint and consideration of foreign governmental sensibilities generally exercised by the U.S. Government.” Id. at 4–5 (emphasis added) (citing F. Hoffman-La Roche, Ltd. v. Empagran S.A., 542 U.S. 155, 171 (2004)). In defense of Connolly and the Court in Empagran, this praise of “self-restraint” and “consideration of foreign government sensibilities” in the American executive branch came prior to January 2017.

 [141]. In fact, “substantial differences . . . exist among various countries in respect of competition laws.” Head, supra note 40, at 643–45; see also id. at 634–54 (outlining American, Japanese, and EU competition regimes, multilateral competition policy efforts, and bilateral and regional competition policy efforts). In sharp contrast to imposition of criminal penalties for violations of competition policy, most countries of the world do agree on near-universal condemnation of “core international crimes,” such as “war crimes, crimes against the peace or aggression, crimes against humanity, and genocide.” Beth Van Schaack & Ronald C. Slye, International Criminal Law and Its Enforcement 205 (3rd ed. 2015). See id. at 205–581 (describing internationally recognized mechanisms for condemnation of war crimes, crimes against the peace, crimes against humanity, genocide).

 [142]. For instance, recent research suggests that criminal punishment in the United States is increasingly “harsh,” relative to peer nations. See generally James Q. Whitman, Harsh Justice: Criminal Punishment and the Widening Divide Between America and Europe (2003).

 [143]. See Paul H. Robinson, The Criminal-Civil Distinction and Dangerous Blameless Offenders, 83 J. Crim. L. & Criminology 693, 693–95, 698–710 (1993) (discussing interdependence between civil and criminal law, contrasting reasons for civil and criminal commitment, and arguing that “the distinctiveness of criminal law is its focus on moral blameworthiness”); Robert Cooter & Thomas Ulen, An Economic Theory of Crime and Punishment, in Law and Economics 454–84 (6th ed. 2016) (contrasting “traditional,” retributivist justifications for criminal punishment with utility-based “economic” approaches). Robinson traces first principles surrounding civil and criminal commitment to provide a robust take on the association between community values and the type of culpability associated with criminal condemnation. See Robinson, supra, at 693–95. Ultimately Robinson arrives at the conclusion that “it would be better to expand civil commitment to include seriously dangerous offenders who are excluded from criminal liability as blameless for any reason,” in part because American laws frequently set high standards for criminal commitment based upon offenders’ mental states and associated blameworthiness, as opposed to dangerousness. Id. at 716–17.

 [144]. See supra notes 16 and accompanying text (discussing the currently fractious political economy of international trade and international economic cooperation).

 [145]. See, e.g., EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991).

 [146]. Cf. Timberlane Lumber Co. v. Bank of Am. N.T. & S.A., 749 F.2d 1378, 1384–86 (9th Cir. 1984) (noting international comity factors traditionally applied by federal courts to assess propriety of exercising jurisdiction). But see Hartford Fire Ins. Co. v. California, 509 U.S. 764, 798–99 (1993) (suggesting comity factors only relevant in assessing jurisdiction upon finding of “direct” conflict between American law and foreign law).

 [147]. See Hilton v. Guyot, 159 U.S. 113, 164 (1895) (noting comity reflects “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation”).

 [148]. See Arabian Am. Oil Co., 499 U.S. at 248, 252 (“We assume that Congress legislates against the backdrop of the presumption against extraterritoriality. . . . [U]nless there is ‘the affirmative intention of the Congress clearly expressed,’ we must presume it ‘is primarily concerned with domestic conditions.’” (citations omitted)); see also Morrison v. Nat’l Austl. Bank, Ltd., 561 U.S. 247, 255 (2010) (quoting Arabian Am. Oil Co., 499 U.S. at 248) (“It is a ‘longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’” (citations omitted)); Small v. United States, 544 U.S. 385, 388–89 (2005) (noting the “legal presumption that Congress ordinarily intends its statutes to have domestic, not extraterritorial, application” (emphasis added)); Sale v. Haitian Ctrs. Council, Inc., 509 U.S. 155, 173 (1993); Smith v. United States, 507 U.S. 197, 203 (1993); cf. The Antelope, 23 U.S. 66, 123 (1825) (“The Courts of no country execute the penal laws of another.”); United States v. Ballestas, 795 F.3d 138, 143–44 (D.C. Cir. 2015) (quoting Morrison, 561 U.S. at 255).

 [149]. See Labor Union of Pico Korea, Ltd. v. Pico Prods., Inc., 968 F.2d 191, 194 (2d Cir. 1992), cert. denied, 506 U.S. 985 (1992) (suggesting burden of overcoming presumption against extraterritorial application of U.S. law lies with the party asserting application of U.S. law to events that occurred abroad); United States v. Gatlin, 216 F.3d 207, 211–12 (2d Cir. 2000) (discussing burden on party seeking extraterritorial application vis-à-vis legislative intent). But see United States v. Bowman, 260 U.S. 94, 101–03 (1922) (suggesting there is no presumption against extraterritoriality when dealing with statutes prohibiting crimes against the U.S. government); Kollias v. D & G Marine Maint., 29 F.3d 67, 71 (2d Cir. 1994), cert. denied, 513 U.S. 1146 (1995) (holding Bowman should be read narrowly to only apply to “criminal statutes . . . and . . . only those relating to the government’s power to prosecute wrongs committed against it” and exempt such actions “from the presumption [against extraterritoriality]”).

 [150]. See Morrison, 561 U.S. at 266–67 (citing Arabian Am. Oil Co., 499 U.S. at 255 and Foley Bros. v. Filardo, 336 U.S. 281, 283, 285–86 (1949)) (suggesting the mode of analysis the Court applied concerned the “‘focus’ of congressional concern”).

 [151]. Id. at 266–67 (holding that the “focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States,” so section 10(b) of the Exchange Act only regulates “domestic transactions in other securities”); cf. Zachary D. Clopton, Bowman Lives: The Extraterritorial Application of U.S. Criminal Law After Morrison v. National Australia Bank, 67 N.Y.U. Ann. Surv. of Am. L. 137, 159–60 (2011) (noting, in the civil context, “cases like [Arabian Am. Oil Co.] have made it harder to overcome the presumption,” and “Morrison seems to have made it harder to avoid the presumption with claims of territoriality”).

 [152]. Bowman, 260 U.S. at 97–98; see also Clopton, supra note 151, at 161 (“Bowman and its progeny do not question the power of Congress to enact extraterritorial criminal laws. Instead, these cases ask whether a court should apply an ambiguous criminal statute extraterritorially. For centuries, the answer . . . was flatly ‘no.’” (emphasis added)). But see Clopton, supra note 151, at 166 (suggesting lower courts have interpreted Bowman as “merely restat[ing] the American Banana rule that statutes are presumed to apply territorially unless Congress has indicated otherwise,” while other courts have “suggested that Bowman created a limited exception to the presumption” (footnotes omitted)).

 [153]. International Guidelines, supra note 12, at 5.

 [154]. Id.

 [155]. Id.

 [156]. Id.

 [157]. There is a wide divergence in the “substance and enforcement” of competition law among leading jurisdictions—including the United States, Japan, and the European Union (“EU”). See Head, supra note 40, at 648–49. Leading commentary suggests that the values undergirding competition policy in the EU and United States “differ significantly,” in that the EU does not follow the United States’ unilateral “focus on ensuring competitive markets through limitations on abusive business practices.” Jerold A. Friedland, Understanding International Business and Financial Transactions 295–96 (4th ed. 2014). Moreover, Japanese law “does not begin with the premise of U.S. law that private agreements to regulate trade are injurious,” and, for many decades “cartels of the largest Japanese businesses were encouraged to stabilize the economy through practices that prevented unemployment and focused private economic activity on public goals.” Id. at 296.

 [158]. Nevertheless, the DOJ may maintain a focus on “individual accountability” in criminal antitrust enforcement, even in extraterritorial cases. Snyder, supra note 100, at 3–5.

 [159]. See 15 U.S.C. § 2 (2018).

 [160]. See, e.g., H.R. Rep. No. 97–686, at 6 (1982) (noting how extraterritorial application of the Sherman Act prior to the FTAIA caused many international business transactions to “die on the drawing board”).

 [161]. The government’s emphasis on “individual accountability” is underscored in the LCD investigation and eventual prosecutions. See Snyder, supra note 100, at 3–5; Antitrust Primer, supra note 100, at 4.

 [162]. Snyder, supra note 100, at 6 (“AU Optronics . . . pa[id] a then-record fine of $500 million and accept[ed] a compliance monitor, after the same jury convicted it.”). The former Deputy Assistant Attorney General’s remarks reinforce the importance of compliance monitors to maintain a long-term culture of antitrust enforcement—even cases involving foreign companies and extraterritorial application of criminal antitrust law. Id.

Corporate accountability is important as well because it incentivizes compliance with our laws. The Antitrust Division emphasizes that compliance with antitrust laws must be ingrained in a corporation’s culture—one that is established from the top down. And we insist on probation and corporate monitors in criminal resolutions, where corporate offenders fail to demonstrate serious compliance efforts.

Id. at 1–2.

 [163]. Id. at 6.

 [164]. See generally id. The fact that leaders among the DOJ antitrust enforcement community view compliance monitors and cultures of corporate compliance as essential to the U.S. criminal antitrust regime generally reinforces this point.

 [165]. Regrettably, this response arguably both reflects and reinforces American hegemony in competition policy.

 [166]. At least at present, the prospects for a truly global competition regime appear scant. See Head, supra note 40, at 641­–54 (discussing regimes regulating anticompetitive conduct beyond domestic laws). Since the 1990s, nearly 150 sovereign states have enacted competition regimes; these are predominately molded from American common law principles. See Levitt & Fogt, supra note 8. States, rather than intergovernmental organizations or non-governmental actors, simply retain principal authority over this aspect of international trade policy. Thus, efforts toward effective transnational regulatory frameworks should proceed from principles of collaborative management between coequal sovereigns. Accord id.

 [167]. See, e.g., International Guidelines, supra note 12, at 16–19 (broadly interpreting domestic effects standard based on cited precedents).

 [168]. Although in both cases the courts applied the direct import commerce prong as an independent basis for their respective decisions, each also noted that the domestic effects prong—if independently relied upon—would support the same outcome. These results are just as analytically problematic, albeit in a more attenuated sense, as a decision rendered solely upon application of the domestic effects prong.

 [169]. For example, in the case of AU Optronics, a criminal remedy included a long-term compliance monitor, on site at the company, to tackle a perceived culture of criminal corruption at the firm. See Antitrust Sanctions 2.0 – Evolving Views on Behavioral Remedies, Allen & Overy LLP, (last visited Dec. 4, 2018). Behavioral obligations for foreign individuals may be the next phase of the Antitrust Division’s shift toward behavioral remedies, as at least one major international law firm currently advises. Id. Given remedies available to prosecutors, foreign individual defendants may be more inclined to settle with U.S. authorities directly, in order to craft personally tailored monitoring remedies in lieu of more punitive mechanisms, such as a custodial sentence in the federal prison system. Id.

 [170]. See, e.g., supra notes 18, 12.

 [171]. Notably, Judge Posner substantively agreed with this observation in Motorola Mobility, drawing upon the seminal Empagran decision to suggest that it would be highly improper for courts to “presume the inadequacy of the antitrust laws of our foreign allies” and that doing so may constitute “unjustified interference with the right of foreign nations to regulate their own economies.” Motorola Mobility, LLC v. AU Optronics Corp., 775 F.3d 816, 824–25 (7th Cir. 2014) (citing F. Hoffmann-La Roche, Ltd. v. Empagran, S.A., 542 U.S. 155, 165 (2004)). Certainly, this logic should be imported into the criminal antitrust analysis to prevent interference with the rights of foreign sovereigns.

 [172]. International Guidelines, supra note 12, at 28 (“[M]ore jurisdictions have adopted and enforce antitrust laws that are compatible with those of the United States . . . .”).

 [173]. But see Developments in the Law: Extraterritoriality, supra note 40, at 1279. In the alternative, extensive criminal enforcement under the Sherman Act may be viewed as a positive, given

[t]he decrease in civil jurisdiction and the increase in criminal prosecution do more than cancel out each other’s downsides: the beneficial synergies between them can further the purposes of antitrust law. When viewed as a single trend instead of two, this shift involves the courts’ deferring to institutional competence and disengaging from foreign relations, more optimal deterrence attained by encouraging the preferred types of enforcement, and more international cooperation achieved without damaging reciprocity-based trade and foreign relations interests. . . . [I]t may represent a more coherent development in the law.

Id. Yet this proposed interpretation ignores the facial incongruence in “cutting back on protections afforded by the antitrust laws” in the civil context, see, for example, Bauer, supra note 12, at 26, while casually endorsing enhanced extraterritorial criminal enforcement under the FTAIA, see Developments in the Law: Extraterritoriality, supra note 40, at 1274–78 (describing increased criminal prosecutions of extraterritorial conduct under the Sherman Act in recent years).

 [174]. International Guidelines, supra note 12, at 16–19 (broadly interpreting domestic effects standard based on cited precedents) (citations omitted).

 [175]. As previously outlined, criminal laws and remedies canonically apply to delinquency that, within a given community, is adjudged morally deserving of condemnation. Cf. Robinson, supra note 143 (discussing justifications for punishment). This is not the case with respect to competition violations, at least in most instances.

 [176]. See, e.g., supra notes 17.

 [177]. William Shakespeare, Romeo and Juliet act 2, sc. 2.

Friendly Skies or Turbulent Skies: An Evaluation of the U.S. Airline Industry and Antitrust Concerns – Note by Kevin Kinder

From Volume 91, Number 5 (July 2018)

Friendly Skies or Turbulent Skies: An Evaluation of the U.S. Airline Industry and Antitrust Concerns

Kevin Kinder[*]



I. United States Commercial Aviation Background

A. Deregulation: Pushback and Taxi to Today’s U.S. Airline Industry

B. Cleared for Takeoff: A Twenty-First Century Merger Mania

C. Resulting Composition and Financial Picture of the Industry

D. Capacity Discipline: Corporate Catch-22

II. Legal Framework

A. Theoretical Basis for Consolidation and Existing Literature

B. Antitrust Statutes and Regulatory Regime

C. Foreign Airline Collaboration Models and Their Significance

1. Foreign Ownership Restrictions

2. Interline Agreements

3. Alliances

4. Joint Ventures

5. Antitrust Immunity

D. ATI Regulatory Scheme

1. Competitive Analysis

2. Public Interest Considerations


A. Constrain the “Public Interest” and Emphasize Predictability in Determining ATI

B. Periodic Reviews of Immunized Alliances that Minimize the Burden on Airlines

C. Increase DOJ Involvement in ATI Competitive Analysis

D. Knock Down Barriers to Entry, While Respecting the
Tenets of Deregulation and Free Competition




Chances are any evening news coverage lately about the commercial airline industry in the United States was not positive. Indeed, 2017 was not a banner year for U.S. airlines on the public perception front, with numerous videos showcasing conflicts between airlines and passengers. No incident garnered the attention and ubiquitous condemnation from the public better than the violent removal of Dr. David Dao from United Express Flight 3411.[1] Videos of a bloodied Dr. Dao being dragged down the aisle like a rag doll as he cried for help and fellow passengers gasped in horror saturated news networks for weeks.

While United Airlines takes the cake for most viral incident of 2017, it was certainly not the only airline to face negative publicity. The NAACP warned African Americans that flying on American Airlines could subject them to disrespectful, discriminatory or unsafe conditions” after a pattern of disturbing incidents.[2] Delta Airlines faced a spring break fiasco after severe weather hit Atlanta and forced more than 3,500 flight cancellations over five days; the incident highlighted systemic flaws in Delta’s operations and ability to recover.[3] An electrical fire at the Atlanta airport in December again tested Delta’s preparedness in flight operations, luggage handling, passenger accommodations, and so forth as it was forced to cancel 1,400 flights.[4]

Notable incidents were not confined to legacy airlines. Shortly after the Dr. Dao incident, low-cost carrier (“LCC”) Southwest Airlines had police forcibly remove a passenger after she complained of allergies to dogs in the cabin.[5] JetBlue Airways’ “cakegate” incident drew headlines after a family was removed from a flight after a dispute over where to store their child’s birthday cake.[6] Alaska Airlines suffered a slew of cancellations after falling behind on hiring and training for a new aircraft in its fleet.[7] A Spirit Airlines pilot union dispute led to more than 300 flight cancellations and a violent brawl at the Fort Lauderdale Airport between customers and employees.[8] Ultra-low cost carriers (“ULCC”) Spirit, Frontier, and Allegiant occupied three of the four worst rankings in the American Customer Satisfaction Index.[9]

A common theme—one that is likely here to stay—in the above incidents is the presence of social media, with its ability to amplify incidents by transmitting news and images in real time. On any flight with the faintest whiff of an issue brewing there might suddenly be 200 aspiring Steven Spielbergs armed with camera phones ready to catch the next viral incident. News media outlets often compound the issues by running passenger-submitted content that only captures a snippet of the incident and failing to confirm facts. Facts, unfortunately, often take a back seat to the race to be first. For instance, the Dr. Dao incident did not actually involve any United Airlines employees as it occurred on a contracted United Express carrier, Republic Airline, and the forceful escalation was initiated by Chicago Department of Aviation officers.[10] Yet United Airlines was the focus of the pervasive news coverage and became the public villain. United did not help itself by borrowing from the “WhatNottoDoinaCorporateCrisis” playbook and issued a defensive, non-apologetic statement that effectively blamed “re-accommodat[ing]” Dr. Dao because of his “disruptive” and “belligerent” behavior.[11] After the public firestorm, congressional inquiries, and sinking share prices, United’s CEO, Oscar Munoz, put out a revised statement[12] and began a TV apology circuit. But, by the time Mr. Munoz sat down on Good Morning America,[13] it was too late. United was the clear public villain, representing everything wrong with air travel.

The public discord is understandable. To many, Dr. Dao’s treatment struck a nerve and perfectly epitomized the shortcomings of all U.S. passenger airlines.[14] Flying has become increasingly unpleasant for those unable or unwilling to fly in premium cabins. Passengers feel more like cattle in a metal tube squeezed into shrinking seats on crowded flights where airlines nickel and dime every conceivable charge. An oft-cited statistic is that, following a slew of mergers, the four largest airlines now control over 80% of the U.S. domestic air transportation market.[15] This consolidation is viewed as the engine behind the industry’s newfound ability to turn profits at passengers’ expense.[16] While including a catchy number without context or deeper analysis is effective in producing a mechanical reaction, it leaves open crucial questions that lead to better answers about the level of actual competition by airlines for passenger share in existing and new markets.

This Note attempts to answer some of these questions. It is clear that the failures listed above demonstrate operating flaws and areas for improvement. But with the number of passengers and flights already at an all-time high—U.S. airlines carry more than 928 million passengers annually on over 9.7 million regularly scheduled flights,[17] and the number of people flying is increasing faster than the overall population[18]—it is also clear that unfortunate passenger incidents are the exception, not the norm.

Recent antitrust decisions and policy initiatives by both the Department of Justice (“DOJ”) and Department of Transportation (“DOT”) have shaped the current U.S. airline landscape. The consolidation trend is not unique to the U.S. domestic air transportation market. The emergence of three global airline alliancestogether accounting for around 80% of air traffic across the transatlantic, transpacific, and Europe–Asia marketshas transformed the international air transportation market as well.[19] This Note evaluates the results of the DOJ’s antitrust approach to U.S. airline mergers and reconciles these results with the DOT’s “public interest” emphasis in determining airline applications for antitrust immunity (“ATI”). Given the current domestic market, it is likely that the remaining legacy carriers will leverage their respective global alliances and seek ATI with foreign airlines for continued network growth.

Part I of this Note tracks the tumultuous history of the U.S. airline industry from deregulation to its current health. Part II presents the legal framework, including U.S. antitrust laws, that govern domestic airline mergers and international ATI. Part III proposes practical solutions for the DOT to improve the ATI regulatory process and incubate open market competition, thereby better serving passengers and airlines by edging closer to deregulation.

I.  United States Commercial Aviation Background

A.  Deregulation: Pushback and Taxi to Today’s U.S. Airline Industry

At the outset of commercial aviation in the early twentieth century, there was little to no regulation by the U.S. government. Accidents were frequent, and aviation leaders viewed federal regulation as a key to bolstering public confidence by establishing safety standards.[20] To this end, President Coolidge signed the Air Commerce Act into law in 1926, which formed an Aeronautics Branch under the Department of Commerce and vested it with authority to promulgate regulations to ensure civil air safety.[21] The Aeronautics Branch set about making and enforcing flight safety rules, licensing pilots, ensuring airworthiness of aircraft, and establishing airways.[22] In 1926, the first regulations arrived in a forty-five page document titled “Air Commerce Regulations;” by stark contrast, today’s federal aviation regulations span over 3,600 pages in four volumes of the Code of Federal Regulations.[23]

The commercial aviation industry’s next major transformation came in 1938, when the United States government began regulating domestic interstate and foreign passenger air transportation.[24] The Civil Aeronautics Board (“CAB”) regulated air transportation as a public utility, exerting control over airline hubs, routes, schedules, and fares.[25] These economic regulations were crucial in managing the rapidly growing commercial airline industry; following World War II, the industrial complex and transition to the jet age revolutionized air travel and spiked demand. Airlines found solid footing and shed existing government support such as subsidies for carrying mail.[26] However, by the 1970s, bureaucratic inefficiencies,[27] hyperinflation, and oil supply shocks sparked concern over the continued viability of the U.S. airline industry.[28]

President Carter, therefore, signed the Airline Deregulation Act of 1978 (“ADA”) into law in October 1978.[29] It was intended “to encourage, develop, and attain an air transportation system which relies on competitive market forces to determine the quality, variety, and price of air services”[30] by relaxing and eventually terminating economic controls by the government.[31] Thus the modern U.S. airline industry was born—one that “relie[s] on competition among airlines to promote affordability, innovation, and service and quality improvements.”[32]

The initial foray into economic deregulation was mixed, at best. While it benefited passengers by reducing fares and expanding service and routes, many airlines struggled to adapt and survive under evolving industry dynamics.[33] A driving theory behind deregulation is that it lowers barriers to entry, which creates a more economically efficient market when coupled with competitive market forces. There were two periods when new airlines entered the market: immediately after deregulation (19781984) and the early 1990s.[34] But these sporadic bouts of entry were dwarfed by exits and consolidation.[35]

Years of sustained operating losses, job cuts, and periodic bankruptcies forced an intense consolidation that grounded many historical carriers.[36] In 1978, fifteen legacy airlines provided interstate and/or foreign air transportation; by 1988, just ten legacies remained and 168 airlines had failed or were absorbed.[37] The Reagan Administration’s laissez-faire approach was crucial in setting the industry down a path of consolidation—seventeen of eighteen proposed airline mergers between 1985 and 1988 were approved, increasing the market share of eight major airlines from 74.1% in 1983 to 91.7% in 1988.[38] From 1978 to 2005, twenty mergers involving a legacy airline had transpired.[39] However, industry mergers pale in comparison to bankruptcies. Over 190 airline bankruptcies/reorganizations were filed between 1979 and 2012.[40] Upstart airlines were not the only casualties—legacy airlines Delta, Northwest, United, American, US Airways, and Continental all filed for Chapter 11 bankruptcy.[41] Every remaining legacy airline has declared bankruptcy since 2000.[42]

While deregulation can be judged a success in expanding networks and departure frequency, increasing airline efficiency, and improving safety, financial instability at individual airlines has triggered industry volatility, employment losses, and service quality deteriorations.[43] A common response to these issues was increased consolidation, a trend that continues today.

B.  Cleared for Takeoff: A Twenty-First Century Merger Mania

Seven legacy carriers entered the new Millennium, down from fifteen at the deregulation mark.[44] By 2014, that number was reduced to three.[45] The first to fall was TWA in 2001, with American Airlines acquiring the remaining assets of the faltering carrier that had become a shell of its former iconic self.[46] This was a small foreshadowing of what was to come.

Entering 2005, six legacy carriers and nine total major carriers remained; the four largest carriers, in terms of passengers carried, accounted for 56% of domestic traffic.[47] A series of mergers quickly altered that composition. First, America West Airlines acquired US Airways in 2005, then Delta Airlines and Northwest Airlines merged in 2008, followed by the merger of United Airlines and Continental Airlines in 2010, the acquisition of AirTran Airways by Southwest Airlines in 2011, and lastly the American Airlines and US Airways merger in 2013,[48] which created the world’s largest airline.[49] The American-US Airways merger was initially hotly contested, but the eventual settlement caught many by surprise and caused many industry observers to express stern disagreement.[50] There was a strong sense that because the DOJ had approved a “super-Delta and a super-United,” it had no choice but to permit a “super-American” to act as a counterweight and restraint on the two.[51]

The result of these mergers is a highly concentrated U.S. airline industry, in both the aggregate and certain city-pair routes. The four largest U.S. airlines account for more than 80% of domestic passenger traffic.[52] A common criticism of consolidation is that it harms passengers as airlines, in tandem, match fare increases, impose new fees, reduce or eliminate service on certain routes, and downgrade amenities.[53] Stakeholders of the airlines, however, have cheered consolidation amidst steadily improving financial health. One airline executive referred to industry consolidation as the “New Holy Grail” given that “fewer and larger competitors” allow airlines to “reap the benefits,” such as reduced capacity and increased ancillary revenue.[54]

Most recently, Alaska Airlines merged with Virgin America, receiving DOJ approval in December 2016.[55] The resulting Alaska Airlines will hold just roughly 5% of the domestic passenger market.[56] Given the current market share of the legacies and Southwest, any future mergers will likely be similar mergers of smaller airlines positioning themselves to compete with the big four.

C.  Resulting Composition and Financial Picture of the Industry

Wall Street has viewed the airline industry mergers favorably. A 2014 Goldman Sachs report cheered the American-US Airways merger as a furtherance toward “dreams of oligopoly.”[57] The report envisioned that consolidation would continue to push the industry toward “lower competitive intensity” and greater “pricing power with customers due to reduced choice.”[58] The recent wave of mergers has helped airlines exercise better capacity control and set prices significantly above marginal cost relative to prior years.[59] Stock performance of the airlines reflect this newfound pricing power: American Airline’s stock increased more than 300% after its 2013 merger compared to a roughly 90% gain in the S&P 500 index across the same time.[60] American Airlines is not the only airline stock to take off. The recent industry-wide performance caught the eye of Warren Buffet and his Berkshire Hathaway invested more than $1.4 billion into the four largest U.S. airlines in 2016.[61]

What used to be an unattractive investment (industries in which every leading company has undergone bankruptcy usually do not inspire confidence) is no longer so amidst surging profits. U.S. airlines collectively hauled in profits of approximately $15.5 billion in 2017, marking the fifth consecutive year an after-tax net profit was produced as a group.[62] Strong profitability should continue in 2018; North American airlines are projected to record net profits of close to $16.4 billion.[63]

The price of jet fuel is a major factor in the recent profitability of U.S. airlines. However, many pundits question why record low fuel prices have not had a more direct impact on airfare. Senator Chuck Schumer (D-NY) called for an investigation, writing to the DOJ, “[i]t’s hard to understand, with jet fuel prices dropping by 40 percent since last year, why ticket prices haven’t followed.”[64] Indeed, after a sustained period of high fuel costs, jet fuel prices dipped nearly 70% between 2014 and 2016, while average airfares dropped 8.6%.[65] Airlines captured gains from cheaper fuelDelta projected $2 billion in savings on fuel costs alone in 2015, while Southwest was able to nearly cut its average price per gallon of fuel in half from the fourth quarter of 2014 to the first quarter of 2015.[66]

But expecting a direct relationship between fuel costs, albeit a major marginal cost, and airfares is naïve. So too is comparing U.S. airlines’ reaction to cheaper fuel with the reaction of European airlines. While fuel is a global commodity, U.S. airlines and European airlines make business decisions in distinctly different markets.[67] European airlines “[d]runk on the profit boost served up by cheap fuel” added capacity at a greater rate than passenger demand, causing fares to dip.[68] The European airline industry’s collective financial health lately pales in comparison to the United States—two European airlines, Monarch Airlines and AirBerlin, ceased operations in 2017, and a third, Alitalia, entered bankruptcy.[69] Granted, recent terrorist attacks and Brexit have not helped matters, but the remaining European airlines have had little choice but to scale back earnings expectations and slash ticket prices in an attempt to fill seats in a high capacity environment.[70]

As jet fuel prices continue to creep upwards, the responsiveness of U.S. airlines will be tested. Every cent that fuel per gallon increases equates to roughly $200 million in U.S. airline industry fuel expenses.[71] U.S. airlines are often hit harder by rising fuel costs compared to international airlines that are more aggressive in fuel hedging.[72] The recent consolidation has allowed the U.S. airline industry to mature to a level of sustainable adaptability while Europe lags behind. While European airlines flooded the market with seats in the wake of cheaper fuel, U.S. airlines were better disciplined in capacity; this difference was no doubt due in large part to consolidation and fewer U.S. airlines with sizeable market shares when compared to Europe.

D.  Capacity Discipline: Corporate Catch-22

A common feeling is that consolidation has allowed U.S. airlines to better exercise “capacity discipline,” a key term that became the crux of a DOJ investigation and class action lawsuits. Capacity discipline refers to “restraining growth or reducing established service.”[73] A large share of customer dissatisfaction with flying can reasonably be attributed to it. Load factor, the percentage of available seats filled with revenue passengers, has increased from around 70% in the early 2000s to nearly 85% in 2015.[74] When you mix in shrinking seats—average legroom has decreased two inches in the last decade[75]—with fuller flights and an increased chance of a middle seat neighbor, it is easy to understand the perception that flying is not what it used to be.

The U.S. airlines’ affinity for capacity control caught the eyes of federal lawmakers, regulators, and passengers alike. In June 2015, Senator Richard Blumenthal (D-CT) requested that the DOJ investigate capacity control as a form of collusion and anticompetitive behavior.[76] He referenced numerous public comments by airline executives committing their respective airline to continued “capacity discipline.”[77] For example, at the 2015 annual International Air Transport Association (“IATA”) conference, chief executives from Delta, Air Canada, and American Airlines all stressed the need for capacity discipline in their public remarks.[78] Similar comments were regularly made by executives on earnings calls and other communications with securities analysts.[79]

The DOJ opened an investigation in July 2015 into possible collusion between Delta, American, United, and Southwest to limit seats and artificially inflate fares.[80] The DOJ’s investigation posed an interesting question—“whether the airline executives have talked so much publicly about discipline to appease Wall Street’s profit demands, or whether there is any smoking gun showing that airline executives have colluded privately.”[81] Effectively, the DOJ inquired whether the level and persistence of stressing discipline could be interpreted “as thinly veiled invitations to restrict capacity increases to keep ticket prices high.”[82] In rare cases, explicit communication and collaboration are easy to prove. When collusion need[s] to be inferred from statements by executives to analysts, and other signaling,” it is exponentially more difficult because something beyond circumstantial evidence must be proven.[83] The DOJ investigation shifted toward a possible nexus between airline executives and Wall Street via dominant shareholders; DOJ investigators questioned whether airlines signaled or communicated strategy with competitors through mutual large shareholders as a proxy.[84] However, by January 2017, the DOJ effectively shuttered its investigation as it concluded that the airlines’ conduct did not cross the line of an antitrust violation.[85]

Shortly after the DOJ opened its investigation in 2015, numerous class action lawsuits were filed in federal district courts based on the same capacity and price fixing concerns of the DOJ investigation.[86] The multi-district litigation (“MDL”) survived a major hurdle in November 2016 when D.C. District Judge Colleen Kollar-Kotelly denied the airlines’ motion to dismiss, finding “that plaintiffs sufficiently set forth circumstantial evidence to demonstrate a plausible claim.”[87] The MDL is currently ongoing. Southwest Airlines reached a $15 million settlement in January 2018 followed by American Airlines in June 2018 for $45 million; Delta and United remain in litigation and have pushed discovery to January 2019—more than three years after the suits were originally filed.[88]

When airlines embrace capacity discipline, they find themselves at the center of a DOJ investigation and multiple class action suits. But airlines that resist capacity discipline do so at their own peril. For years, “Wall Street analysts have browbeat airline executives to either have discipline, or they will bust their recommendations on their stock.”[89] In 2015, Southwest CEO Gary Kelly announced capacity growth plans, but was forced to roll back these plans less than two months later after facing intense Wall Street backlash and coming under fire at the abovementioned IATA conference—this conference spurred the DOJ investigation.[90] More recently, United Airlines announced plans in January 2018 to raise capacity by 4% to 6% annually over three years.[91] Investors immediately swatted the plan, and United’s shares dipped 16% over the following three days.[92] The impact of United’s capacity growth plans was felt industry wide: Delta, American, and Southwest each saw share prices decline more than 7%, and collectively the combined market of the largest four airlines fell by 9.7% from $133 billion to $120.1 billion in the immediate aftermath of the announcement.[93]

Officers and directors of corporations owe a fiduciary duty only to the corporation itself and its shareholders.[94] Thus, officers at the largest U.S. airlines have found themselves in a corporate catch-22 between DOJ investigations and multi-district class action lawsuits on the one hand, and tumbling share prices and shareholder pressures on the other hand.

II.  Legal Framework

A.  Theoretical Basis for Consolidation and Existing Literature

Mergers and acquisitions (“M&A”) are external integration strategies in which legally and financially independent companies combine to form a larger entity.[95] Consolidation motives “include increasing revenues, improving management efficiency and capital investment performance, and eliminating a competitor from the market.[96]

Two main views exist for what drives airline M&A: (1) efficiency gains in the resulting airline or (2) market power gains. The first view involves the potential to reduce costs by enhancing the “hub-and-spoke” networks of legacy airlines, while the second view perceives an improved ability to raise passenger fares.[97] Some see financial and competitive pressures as the primary driver, i.e., a solution to increase profitability and financial stability. Another view is that airline consolidation is “necessary to minimize asset devaluation to prevent a domino effect, as most major US airlines are ‘too big to fail.’”[98]

At a basic level, the goal of M&A is to increase shareholder value.[99] A number of benefits are typically touted by airlines to gain regulatory approval and justify the merger to shareholders, including, but not limited to, “increase[d] . . . revenues by extending the airlines’ network, increase[ed] market share . . . higher fares on some routes, improv[ed] network connectivity, increas[ed] frequent flyer loyalty, [and] better aircraft utilization.”[100] In reality, however, receiving unanimous approval from all stakeholders is virtually impossible as shareholders, management, employees, customers, and governments harbor competing interests. M&A failure often results from a combination of factors, among them clashing company cultures, union resistance, or other operational difficulties.[101] Three major obstacles to airline mergers include: (1) workforce integration; (2) fleet integration; and (3) information technology integration.[102]

To regulators, the airline industry is, theoretically, inherently susceptible to coordinated behavior—a few large airlines dominate the industry, each transaction is small, and most pricing by competitors is transparent and readily accessible.[103] In evaluating mergers, much of the focus has been on existing network overlap, particularly non-stop routes. “The larger the degree of overlap between the networks of the two merging carriers, the larger is the potentially anti-competitive effect of the transaction. This ‘enforcement principle’ still guides the decisions of antitrust authorities on both sides of the Atlantic.”[104] Thus, market concentration is a key factor in the regulatory authorities’ antitrust analysis.

A measure of market concentration is the Herfindahl-Hirschman Index (“HHI”), calculated as the sum of the squared market shares of all firms in a market.[105] The DOJ considers markets “highly concentrated” when HHI exceeds 2,500.[106] A 2014 study found that [n]early 97 percent of city pair markets are highly concentrated and well over half have HHIs in excess of 4,000. Some of those city pairs involve small cities.[107] Yet nearly 90% of all passengers traveled on city-pairs with HHIs above 2,500, and about 40% of city pairs have HHIs in excess of 4,000 . . . [t]he average passenger flew on a city pair with HHI of 4,202.[108]

On the surface, these HHI figures support the argument that the U.S. airline industry has become too concentrated following the recent mergers. However, as with any single statistic, the HHI has its limitations and does not account for every variable of competition.

Academic literature examining airline mergers is mixed, at best. Maruna and Morrell’s investigation of eighteen mergers involving U.S. airlines between 1978 and 2005 found that only one merger could be judged a success.[109] Their review of existing literature suggested that between 50% to 80% of mergers failed to meet their stated goals.[110] A 2016 study judged the 2005 US Airways-America West merger “a success” as the emerging US Airways improved operations and cost controls, increased shareholder value, and developed long-term synergies.[111]

Post-merger studies often focus on routes in which both merging airlines previously competed, expecting any anti-competitive effects to occur most strongly on such routes.[112] Multiple studies of airline mergers prior to the recent wave beginning in 2005 generally found that the mergers resulted in loss of competition and higher fares.[113] Such effects were, surprisingly, not confined to overlap routes, but also routes in which one merged airline was only a potential competitor.[114] However, studies evaluating the recent legacy airline mergers are generally inconclusive as to the competitive impacts.[115] The 2008 Delta-Northwest merger received a healthy amount of academic attention, with most studies unable to discern any large effects other than small fare increases ranging from 1% to 4% on overlapping routes.[116] Research into the 2010 United-Continental merger is limited, but it has generally found the merger produced competitive results with reduced fares of 3% to 4% on some routes.[117] A study of the three recent legacy carrier mergers found them to be, as a whole, pro-competitive.[118] Across the three mergers, “overlap routes . . . experienced statistically significant output increases and statistically insignificant nominal fare decreases relative to non-overlap routes.”[119]

Thus, there is analytical support that the recent airline mergers and industry consolidation were not anticompetitive or bad for passengers. This Note does not seek to add to the voluminous record evaluating mergers (particularly in the domestic market) or question regulators for past decisions; rather, it seeks to explore the current regulatory approach and propose solutions for greater transparency and competition promotion moving forward.

B.  Antitrust Statutes and Regulatory Regime

The principal architect of deregulating the U.S. airline industry, Alfred E. Kahn, recognized that a deregulated industry would require vivid antitrust law enforcement to realize the potential benefits of competition it was intended to promote.[120] Two chief antitrust laws exist in the United States to protect consumers from lack of competition: the Sherman Act (1890)[121] and the Clayton Act (1914).[122] Section 1 of the Sherman Act declares “[e]very contract, combination . . . or conspiracy, in restraint of trade or commerce . . . to be illegal.[123] The Clayton Act focuses on specific types of conduct or transactions believed to threaten competition, such as mergers.[124] For example, § 7 prohibits mergers when “the effect of the acquisition may substantially lessen competition or tend to create a monopoly.”[125] The DOJ Antitrust Division and the Federal Trade Commission (“FTC”) are the primary enforcers; however, any state attorney general or individual alleging economic harm by a violation of the antitrust laws may also file suit.[126]

The Clayton Act lacks explicit definitions of prohibited activities; therefore, historical enforcement is determinative. The legislative history shows the drafters’ intent was to protect ‘competition, not competitors, and [Congress’s] desire to restrain mergers only to the extent that such combinations may tend to lessen competition.’”[127] This does not invite regulators “to thwart business efficiencies that may be achieved through the combination of two firms’ resources.”[128] Congress’ intent was to “cope with monopolistic tendencies in their incipiency and well before they have attained such effects as would justify a Sherman Act proceeding” by authorizing the review of activities that might “create, enhance, or facilitate the exercise of market power.”[129]

The Supreme Court’s approach in Brown Shoe Co. v. United States[130] set out the pattern used in modern antitrust jurisprudence:

There, the Court (1) defined the relevant product and geographic markets; (2) analyzed the probable effects of the merger by examining the market shares of the firms, the current concentration of the industry, the trend toward continued consolidation in the industry, and the statements and behavior of the individual firms; and (3) found a lack of mitigating factors that would provide procompetitive benefits from the merger.[131]

Effectively, any merger that increases market share or market concentration enough to “raise an inference” of illegality is presumed to be anticompetitive, and the merging entities carry the burden to “rebut the inherently anticompetitive tendency manifested by these percentages.”[132]

Judicial decisions concerning section 7 of the Clayton Act historically drove antitrust enforcement until the Hart-Scott-Rodino Antitrust Improvements Act of 1976[133] imposed new pre-merger notification requirements and signaled a shift of authority to enforcement agencies.[134] Prior to its passage, Merger Guidelines were drafted to assist in the movement from judicial interpretation toward agency law.[135] The Antitrust Division of the DOJ published the first Merger Guidelines in 1968 “to acquaint the business community, the legal profession, and other interested groups and individuals with the standards currently being applied.”[136] The Merger Guidelines have undergone multiple revisions as the rules guiding merger enforcement have developed;[137] The DOJ and FTC released their current version in 2010.[138] While the Merger Guidelines are not binding legal authority, their influence on the business community cannot be overstated, particularly in improving DOJ and FTC transparency.[139]

Turning to the U.S. airline industry, the DOJ Antitrust Division is responsible for reviewing airline mergers and acquisitions and enforcing controlling antitrust laws as a result of the ADA.[140] The ADA stipulated that approval of airline M&A would continue, but that jurisdiction would be transferred from the CAB (set to expire in 1984) to the DOJ.[141] However, the DOT filled this role from 1984 until the end of 1988 due to the Sunset Act of 1984,[142] modifying the deregulation transition.[143] The DOT’s authority expired, and since 1989, the DOJ has retained jurisdiction over applying the antitrust laws to airline M&A and other control relationships.[144] The DOT assists the DOJ by utilizing its expertise to advise and exert authority over slot controls and routes to remedy competitive concerns.[145]

Paradoxically, the authority to immunize foreign air services agreements between U.S. and foreign airlines from U.S. antitrust laws rests with the DOT.[146] This authority stems from the 1979 International Air Transportation Competition Act.[147] While the DOJ may submit comments during public comment periods, the DOT retains sole statutory authority to approve and immunize foreign air services agreements[148] from the same antitrust laws that the DOJ applies when evaluating domestic airline mergers and acquisitions. The DOJ, or DOT, has “no corresponding authority” to immunize domestic alliances between U.S. airlines.[149]

C.  Foreign Airline Collaboration Models and Their Significance

1.  Foreign Ownership Restrictions

Passengers today, particularly loyal and lucrative business travelers, demand seamless service from everywhere to anywhere in the world. Both U.S. and European legacy airlines have pursued business models reflecting such demands. However, few city-pairs generate enough daily demand to warrant non-stop service, and no airline could efficiently provide service with its own fleet to every destination their customers require.[150] Most businesses meet such global customer demands through cross-border mergers or the establishment of facilities abroad.[151]

Such a solution is not available for airlines; full cross-border airline mergers are restricted by long-standing government restrictions on foreign ownership and control of airlines by non-nationals.[152] Faced with these restrictions, airlines seek foreign airline partners and develop vast alliances to provide customers expanded network coverage and greater service options.[153] Global airline alliances, leveraging the “fundamentals of network economics and [the] global economy,” have prevailed as a next-best substitute[154] for airlines to realize the economic benefits of mergers and have become a dominant feature of the airline industry.[155]

Cooperation between foreign airlines first requires that “freedoms” be granted for airlines to serve foreign nations.[156] These freedoms, or rights to board and deplane passengers in a foreign country, are established in international commercial aviation agreements (bilateral or multilateral treaties between governments).[157] The terms vary as some “agreements may restrict the number of carriers that provide air service between the countries, the number of flights that they offer, and sometimes the fares that they charge for travel between the countries.”[158] The 1993 “Open Skies” agreement between the United States and Netherlands was crucial in spurring a liberalization of foreign air transportation access.[159] U.S. and Dutch airlines “no longer needed permission from either government to provide service, carry passengers, and offer particular fares between the [countries].”[160] This was just the beginning. In April 2008, the U.S.-E.U. Open Skies Agreement signaled a major culmination of the U.S. government’s push toward expanded foreign airline access.[161]

Despite providing for marked improvements in expanding access, the U.S.-E.U. agreement does not permit cabotage (the eighth and ninth “freedoms” of the air),[162] which is the right to transport passengers within the boundaries of another country, or relax foreign ownership restrictions on airlines.[163] Even the most liberal international aviation agreement in existence restricts airline operations and consolidation.[164] There are no indications these restrictions will be relaxed in the foreseeable future,[165] so cooperation among foreign airlines will continue to play a large role shaping the international air transportation market, particularly while foreign ownership and control restriction preclude higher levels of integration.

A broad spectrum of cooperation between airlines exists, ranging from arms-length interline agreements to full-fledged, highly-integrated joint ventures (“JVs”).[166] Within JVs, airlines participate on a revenue or profit-sharing basis and seek grants of ATI, the highest form of cooperation. The next section is a basic introduction to various levels of cooperation between foreign airlines. However, note that these levels are not absolute, so airlines are generally free to pursue unique and specific levels of cooperation.

2.  Interline Agreements

Simple interline agreements are at the lowest spectrum of the airline cooperation scale. When two or more airlines agree to a multilateral or bilateral agreement to accept other airlines’ passengers, travelers can then buy a single ticket itinerary with flights on two or more independent airlines.[167] An interline fare is typically less than the sum of available fares on the individual legs, resulting in a small pricing benefit and booking convenience for consumers.[168] But this arms-length level of cooperation does not approach the efficiencies and integration possible through consolidation, and the quality of the interline product may differ widely on different airlines or airports.[169] For example, travelers may face multiple check-ins, long distances between gates or terminal transfers, greater likelihood of lost luggage, and uncertainty over customer service responsibility for missed connections or related travel disruptions.[170]

3.  Alliances

Alliances depend upon agreements between airlines and can take a variety of forms. Alliance agreements typically begin as code share arrangements, with additional perks getting added over time.[171] Code share agreements are essentially enhanced marketing jointventures, whereby one airline sells and markets seats under its own designation on a flight operated independently by an alliance airline.[172] Alliances thus open new destinations and expand route networks for airlines without requiring additional aircraft.[173] Faced with foreign ownership rules and entry restrictions, airlines have increasingly joined one of three major global alliances—Star Alliance, SkyTeam, and OneWorld—to expand their route network in foreign nations.[174]

Alliance participants determine which international routes to include in the agreement. If the alliance partners are not competitors on a route, they can communicate about fares and other competitive matters without ATI.[175] If the allies are competitors on the same route, then the alliance agreement remains arms-length and the operating airline determines seat availability for the marketing partner, but each airline sets prices independently.[176] Further, alliances allow a flexibility that improves services and offers passengers a more seamless experience. Partner airlines may adjust flight schedules to coordinate connection schedules, benefit from better gate or terminal proximity, open lounge and club access with partners, and link frequent-flyer programs.[177] Airline alliances, in the absence of ATI, provide benefits to consumers relative to interline agreements by both improving networks and lowering fares through the economies of denser passenger flows.[178]

4.  Joint Ventures

A closer form of cooperation and integration between airlines is the joint venture (“JV”). Airlines agree to share revenue from JVs on specific international routes independent of which airline operates the flight.[179] JVs create an agreement that is “metal neutral” in the sense that the physical metal, or aircraft, involved in producing passenger revenue is irrelevant in determining the respective airline’s share of revenue, thereby erasing any incentive for opportunistic advantages in cooperating.[180] Metal neutrality is significant in capturing the possible pro-competitive efficiency gains from increased economies of scale.[181] Thus, under a metalneutral JV, the profits (or losses) are split equally amongst the carriers regardless even when Airline A’s flights are at capacity, but Airline B’s flights are empty. JVs are, in effect, mergers that apply to defined international routes.

5.  Antitrust Immunity

Airlines operating a revenue or profitsharing JV combined with a grant of ATI achieve the highest degree of cooperation.[182] As noted earlier, the DOT holds the statutory authority to immunize international air transportation agreements from U.S. antitrust laws.[183] However, the government of the foreign carrier’s country retains sole authority to immunize the agreement from its own antitrust laws; thus, JVs are often conditioned on receiving ATI approval from both governments. ATI effectively allows two airlines to operate as one on certain routes and jointly coordinate pricing, revenue sharing, flight schedules, marketing (such as aligning frequent flyer programs), sales, and any other competitively sensitive matters without concern that they violate antitrust laws.[184]

Some support ATI by pointing to benefits consistent with closer integration, while others criticize it as anti-competitive. Regulators are particularly concerned about consumer welfare on non-stop travel between partners’ hub cities, where overlapping services allow the trip to be taken on either airline.[185] Thus, the DOT has a longstanding policy precluding consideration of ATI until all elements of an Open Skies agreement are in place to ensure that un-aligned airlines may freely enter and compete.[186]

D.  ATI Regulatory Scheme

While jurisdiction over airline mergers was vested in the DOJ in 1988, the DOT retains exclusive authority to immunize international air transportation agreements from U.S. antitrust laws.[187] ATI applications are filed in a public docket and decided on by the Secretary of Transportation after a detailed competitive analysis.[188] Once an application is complete, the DOT allows a period of public comment and issues a written decision within six months.[189]

Applicant airlines have a high bar to meet. The DOT publicly recognizes that “the antitrust laws represent a fundamental national economic policy . . . that serves . . . travelers well” and that “immunity from [them] should be the exception, not the rule.”[190] Airlines’ applications for ATI are “strictly construed and strongly disfavored . . . to ensure that alliance partners maintain the ability and incentive to pass on the potential benefits . . . to consumers.”[191]

The DOT engages in a two-step review of air transportation agreements submitted for ATI involving both a competitive analysis and a public interest analysis.[192] First, the DOT evaluates whether approving ATI would be adverse to the public interest by “substantially [reducing] or [eliminating] competition.”[193] If the DOT makes that determination, it then decides whether ATI is nonetheless “necessary to meet a serious transportation need or to achieve important public benefits.”[194] If it makes that finding and the public benefits cannot be achieved by other “reasonably available” and “materially less anticompetitive” means, then the DOT must approve ATI pursuant to § 41309(b).[195]

Second, if the DOT concludes after its initial review that the application is not adverse to the public interest, § 41309(b) directs it to grant ATI.[196] The DOT next determines whether sufficient public benefits justify ATI under § 41308.[197] The DOT is authorized to exempt agreements from the antitrust laws “to the extent necessary to allow the [airlines] to proceed with the transaction specifically approved by the order,” provided that the public interest requires it.[198] In sum, the DOT must find that ATI would reduce or substantially eliminate competition and such harm would not be offset by consumer benefits generated by ATI to deny an application.

1.  Competitive Analysis

Because ATI results in similar commercial effects as a merger, the DOT conducts a full Clayton Act test just as when evaluating domestic airline mergers.[199] The Clayton Act test evaluates competitive implications and whether approval is likely to substantially reduce competition and “facilitate the exercise of market power.”[200] Applied to ATI applications, the DOT must determine whether approval would allow the immunized airlines “to profitably charge supra-competitive prices or reduce service or product quality below competitive levels.”[201] In determining this, the DOT evaluates: “(1) whether [ATI] would significantly increase market concentration; (2) whether [ATI] would cause potential competitive harm; and (3) whether new entry into the market would be timely, likely, and sufficient either to deter or to discipline the potential competitive harm.”[202]

The importance of defining relevant markets is not lost on enforcement agencies. The DOJ has stated that properly defining markets “could be ‘a central focus’ of the analysis and be outcome determinative.”[203] In the context of ATI requests, the DOT evaluates competitive effects at three market levels: (1) a broad network level; (2) a country-pair level; and (3) a city-pair level.[204] Because ATI diminishes competition on routes on which the airlines compete, ATI reviews have largely focused on the potential loss of competition in non-stop overlaps.[205]

Market power is “the ability to profitably raise prices above competitive levels (or reduce competition on dimensions such as [capacity]), for a significant period of time.”[206] Just as in DOJ domestic airline merger reviews, the HHI of impacted city-pairs is calculated to define the market concentration and quantify increased concentration attributable to ATI; any HHI increase of 200 points or more is presumed market power enhancing.[207] This presumption is rebuttable by airlines; Supreme Court doctrine allows parties to present evidence specific to itself or its industry to rebut statistical indicators of anticompetitive effects.[208] But rebutting statistical evidence with non-statistical defenses is difficult, often being rejected by courts.[209] While market concentration alone may not be determinative—as evidenced by the rebuttable presumptionit is influential in the analysis of other potential anticompetitive effects of ATI, such as unilateral and coordinated effects.[210]

The DOT must determine any unilateral effects of granting ATI. Unilateral effects stem from the “internalization of . . . competition” between the airlines.[211] Therefore, this determination is highly dependent on the level of competition between the airlines at the time of application and whether the respective airlines’ services can be considered close substitutes.[212]

Coordinated effects, on the other hand, consider potential impacts of ATI on how firms compete in the relevant market(s).[213] A reduction in competitors may diminish competition by encouraging coordinated interaction among fewer competing airlines. Evaluating coordinated effects is largely an offshoot of game theory, as it involves decisions by multiple airlines in which certain conduct is profitable for each of them, but only as a result of cooperative reactions by the others.[214] The DOT may also consider external factors such as infrastructure or slot constraints that act as barriers to open entry or potentially exacerbate competitive harm.

2.  Public Interest Considerations

The consideration of public benefits and mitigating factors in determining ATI is largely where the DOT’s approach diverges from the DOJ’s approach in reviewing mergers. Congress has enumerated numerous factors that the DOT may consider in its public interest evaluation, including “the availability of a variety of air service, maximum reliance on market forces, the avoidance of unreasonable industry concentration, and opportunities for the expansion of international services.”[215] While § 41308 imposes a more stringent test that ATI be “required by” the public interest, the DOT has proffered several forms of public benefits to justify approval, including reductions in double marginalization, cost and operational efficiencies, expanded networks, improved coordination and services, increased capacity, and aligned frequent flyer benefits.[216]

The expansion of international air services has undoubtedly emerged as the dominant public interest factor permitting ATI despite a competitive analysis indicating rejection, and the DOT recognizes U.S. foreign policy goals as a key public benefit.[217] Since the early 1990s, the DOT and the State Department have used ATI as an incentive and bargaining chip to induce foreign nations to enter into Open Skies agreements with the United States.[218] For instance, the first ATI grant in 1993 was a result of the U.S.-Netherlands Open Skies agreement. Recently, the DOT approved ATI proposals by both United-All Nippon Airways and American-Japan Airlines, conditioning approval on the U.S.Japan Open Skies Aviation Agreement being signed.[219] The State Department and DOT effort has succeeded as the United States currently has more than 120 open-skies partners.[220]

Occasionally, public interest considerations beyond Open Skies prove instrumental. The 2005 SkyTeam ATI application was denied because the DOT determined it was not required by the public interest given that “the carriers had not shown they could effectively reconcile” differing business practices to achieve commonality within the alliance.[221] In 2009, in the midst of a global recession and struggling airlines, the DOT approved a Star Alliance ATI request because it “[would] help Continental and the other participants manage cyclical changes in the industry to preserve existing services, with a view toward increasing capacity and enhancing competition between carriers and alliances.”[222] The DOT has justified airlines’ insistence of not proceeding with an agreement without ATI as a public benefit.[223] Lastly, OneWorld’s 2010 ATI application was approved because a OneWorld immunized JV was needed to “provide a third global network [to] better discipline the fares and services offered by the Star and SkyTeam alliances,” reasoning that “this too is a public benefit.”[224] Recall that this “competitive counterweight” line of reasoning was instrumental in the DOJ’s approval of the American-U.S. Air merger. [225]


The 1993 Open Skies Agreement between the United States and Netherlands opened a new industry order of cooperation among foreign airlines. Northwest Airlines and KLM immediately created an alliance and eventually expanded it into a JV.[226] United Airlines seized on the newfound expansion opportunities and launched the Star Alliance in 1996; American Airlines followed suit in 1999, creating the OneWorld Alliance, and Delta finished the alliance trifecta with its SkyTeam Alliance in 2000.[227] The DOT’s willingness to approve ATI is a significant development; more than twenty-eight international alliance agreements were granted ATI by the DOT after 1993, contributing to the formation of four vast, transatlantic JVs.[228]

The proliferation of foreign air services agreements is not confined to the lucrative transatlantic market. The United States and Japan completed an Open Skies agreement in 2010, signaling a countervailing shift toward greater liberalization in the transpacific air market.[229] Since then, American Airlines-Japan Airlines, Delta-Virgin Australia, United-Air New Zealand, and United-ANA created transpacific JVs with ATI.[230] As airlines across the globe increase cooperation with foreign counterparts, international travel demand has steadily increased. Each year, over 80 million U.S. residents travel abroad.[231] Global air passenger demand increased 7.6% in 2017 compared to 2016, above the ten year average annual growth rate of 5.5%.[232] International passenger traffic increased 7.9% in 2017, slightly edging domestic traffic which increased 7%; in sum, more than 4 billion passengers took to the skies in 2017, with the Asia-Pacific and Latin America regions capturing the highest year-to-year demand gains.[233]

While U.S. airlines were undergoing a merger-fueled movement toward greater concentration that left four airlines accounting for nearly 85% of the domestic market (up from 65% in 2010),[234] a similar battle opened on the international front. Nearly every major airline worldwide has joined one of the three global alliances: (1) Star Alliance consists of twenty-eight carriers;[235] (2) SkyTeam consists of twenty carriers;[236] and (3) OneWorld consists of thirteen carriers.[237] Immunized alliances operated 41% of transatlantic capacity in 2000; by 2015, that share increased to 86%.[238] During that time, HHI increased 1,592 points, a 155% increase.[239] Since 2015, the number of independent, non-aligned transatlantic airlines has decreased, leaving four transatlantic JVs in control of more than 90% of U.S.-E.U. traffic.[240] Similarly, the three global alliances provide over 80% of capacity in both the U.S.-Asia Pacific and E.U.-Asia Pacific markets,[241] and both shares are set to rise given the relative novelty of Open Skies agreements with Asian nations. Given this backdrop, it is no surprise that ATI applications are controversial and frequently spur regulatory disputes.[242] Two recent DOT decisions fueled the flames and left interested parties pondering whether they signal a DOT policy shift or are simply anomalies.

In November 2016, the DOT tentatively blocked American Airlines and Qantas Airwayss JV application for ATI finding that the JV, which would control around 60% of the U.S.-Australia market if approved, would “substantially reduce competition and consumer choice, without producing sufficient countervailing public benefits.”[243] The DOT did not believe that there would be greater capacity growth under the JV than what it expected would happen without it; thus, it found that many of the public benefits presented by an AmericanQantas JV could be achieved through materially less anticompetitive cooperation such as codesharing.[244] American and Qantas’ application invited challenges from LCC competitors over certain “exclusivity” provisions in the joint business agreement.[245] Lastly, JetBlue Airways highlighted that American Airlines was seeking ATI, a prerequisite of which is an active Open Skies agreement, while embroiled in a nasty industry dispute concerning Open Skies and the big three Middle Eastern carriers (ME3),[246] which could have impacted the DOT’s decision.

Less than a month later, the DOT approved Delta and Aeromexico’s application for an immunized JV; however, it imposed multiple conditions to address competition concerns. The DOT found that “the non-transparent slot allocation regime and infrastructure constraints at Mexico City’s Benito Juarez International Airport (MEX),” coupled with Delta and Aeromexico’s control of nearly 50% of the MEX slots, were unique constraints on the public realizing the benefits of the JV.[247] To remedy the airlines’ entrenched share at MEX and John. F. Kennedy International Airport (“JFK”) and to address the difficulty of new entrant airlines to acquire slots, the DOT conditioned approval on Delta and Aeromexico divesting twenty-four MEX slots and six JFK slots.[248] In a surprising development, the DOT also limited its ATI grant to five years.[249] After JetBlue and Hawaiian Airlines called for a three-year limit, the DOT determined a five-year limit and a de novo application to extend ATI was required by the public interest so interested parties could evaluate the effects of the slot divestures and proposals by the Mexican government to improve MEX slot allocation procedures.[250] Lastly, the DOT required Delta and Aeromexico to remove “certain anticompetitive,” or exclusivity, provisions from their JV agreement.[251]

Moving forward, the need for a clear and transparent approach to ATI by the DOT on international air travel cannot be overstated. With mergers involving U.S. legacy airlines likely off the table for the foreseeable future, these legacy airlines will continue to expand their respective alliances and favor ATI (the closest substitute to a merger facing foreign ownership restrictions) to expand their global network and capture maximum integration efficiencies. United Airlines is exploring an immunized JV with Air Canada following a shift in Canadian laws.[252] American Airlines and Qantas have reapplied for ATI with an improved application,[253] hoping for a better result under the Trump administration. The following subsections will explore practical regulatory and systematic reforms available to ensure “friendly skies” for both airlines and passengers alike. The key is a transparent and consistent approach by the DOT that allows robust free market forces (for which deregulation paved the way) to better regulate and ensure continued competition.

A.  Constrain the “Public Interest” and Emphasize Predictability in Determining ATI

The DOT justified its initial ATI approvals in the 1990s largely on the public interest factor that Congress provided it, finding that passengers would benefit from network efficiencies and increased competition “by allowing airlines with small market shares to combine their networks and become more effective in competing against larger airlines.”[254] In doing so, the DOT seemingly disregarded a fundamental principle of antitrust law—it exists to protect competition, not competitors—in its ATI approach. Indeed somewhere along the line, the public interest consideration has merged with an omnipresent “industry interest” review. And the DOT continues to tout “the benefits of creating alliances that could compete against one another, rather than against individual airlines” in granting ATI.[255]

Even after the DOT established a “heightened public benefits standard[],” which effectively required applicants to propose a metal-neutral JV for ATI approval,[256] its emphasis on competitors remained. But the recent American-Qantas and Delta-Aeromexico proceedings illustrate that how the DOT considers competitor-to-competitor effects as a public interest is anything but consistent. The DOT rejected American and Qantas’ ATI bid after it previously granted Delta-Virgin Australia and United-Air New Zealand immunity in the same U.S.-Australia market. Yet shortly after this rejection, the DOT approved ATI for Delta and Aeromexico finding it to be “required by the public interest because the proposed JV would provide . . . a third network competitor [to] the current first and second largest competitors.”[257] Interested parties, particularly airlines eying future immunized JVs, are left squinting to find the DOT’s rationale or distinction between these applications. When one compares the novelty of the U.S.-Mexico Open Skies agreement and the infrastructure/slot issues at MEX[258] to the established U.S.-Australia Open Skies agreement that led to two transpacific immunized JVs without similar concerns of barriers to entry, American Airlines and Qantas have to be left wondering how a third network in the U.S.-Australia market differs from a third network in the U.S.-Mexico network.

At the heart of its public benefits analysis, the DOT must consider “international comity and foreign policy considerations.”[259] A determinative factor in virtually every ATI approval has either been expanding the DOT and State Department’s Open Skies push or threats by airlines that they would not finalize a proposed deal without ATI.[260] Assertions of public benefits and threats of withholding agreements without immunity have accompanied airlines’ applications since the beginning.[261] It is precisely the DOT’s job to independently evaluate the anticompetitive effects and public benefits of an application and ferret out false claims or threats made by applicants from truth. Instead, the DOT’s public interest methodology has been critiqued as “nothing more than ‘copy and paste’” in accepting applicants’ claims as its justification for approval.[262] The consistent acceptance by the DOT of applicants’ claims, despite objections by the DOJ and other affected parties, has raised suggestions that the DOT is a “captured agency.”[263]

The DOT’s emphasis on expanding Open Skies should be a textbook example of foreign policy considerations. Open Skies agreements carry enormous potential to promote competition and liberalize air travel by removing barriers to entry in foreign airspace. However, when large legacy airlines hold prominent seats at the table consummating such agreements,[264] or the DOT links Open Skies to ATI with signatories’ national airlines,[265] Open Skies agreements can quickly turn to be protectionist and anticompetitive in their implementation.

The public interest is not served by entrenching incumbent national airlines’ positions and insulating them from robust competition. The three U.S. legacy carriers neither desire nor require government protection; instead, they have routinely demonstrated a willingness to compete with other legacies and LCC/ULCCs in the domestic U.S. market. There is no reason to expect anything different in the international market. Ample room exists for the DOT to reign in its public interest approach and emphasize that ATI applicants present verifiable benefits to passengers while still fulfilling its “foremost international aviation goal . . . [of] opening international markets to the forces of competition.”[266] In construing the public interest narrowly and, by default, placing greater emphasis on the competitive analysis, industry participants should experience a more transparent and uniform approach toward ATI applications. The DOT’s ability to clean up its public interest approach and improve the predictability of its evaluations would reduce the likelihood of a repeat of the two above-referenced ATI decisions—in which American and Delta highlighted the exact same public benefits of ATI as virtually every application, but American was denied while Delta was approved despite more troubling competition concerns in its applicable market. Such an approach by the DOT would provide airlines efficiency and cost improvements when evaluating whether a potential application might receive immunity. Lastly, a narrower public interest approach improves the chances that the DOT, crucially, keeps passenger welfare at the forefront of its evaluations and adheres to the fundamental principle of antitrust to protect competition, not competitors.

B.  Periodic Reviews of Immunized Alliances that Minimize the Burden on Airlines

Independent, non-aligned U.S. airlines have played an increasingly active role in recent DOT public dockets evaluating ATI applications. A consistent and vehement belief of such airlines is that approvals of immunity not be in perpetuity, but instead come with time constraints. Particularly, Southwest, JetBlue, and Hawaiian have argued for three to five-year time limitations on any new grants of ATI[267] and called for de novo reviews of existing immunized alliances.[268] Calls for periodic reviews of ATI is not a novel argument; multiple advocates have pushed for some form of mandatory review mechanism. In 2009, a House Bill by Rep. James L. Oberstar proposed to sunset ATI approvals after three years.[269] While his exact proposal may not have left the ground, it is past due for the DOT to implement a revised policy of periodic ATI reviews that reflects the present competitive dynamics of both the domestic and international markets, which have seen an unprecedented move toward greater consolidation.

The DOT’s recent five-year time limit imposed on Delta and Aeromexico was the first of its kind, yet the DOT recognizes its authority “to alter or amend its grant of ATI at any time if [it] believes a change in competitive circumstances has occurred.”[270] But the DOT’s regulations covering reviews of ATI were codified in 1985,[271] eight years before the DOT approved a single ATI application or realized the foreign policy implications of ATI in expanding Open Skies. Under § 303.06 of the DOT’s regulations, the DOT “may initiate a proceeding to review any [ATI] previously conferred . . . [and] may terminate or modify such immunity if the [DOT] finds . . . that the previously conferred immunity is not consistent with the provisions of section 414.”[272] Thus, while the DOT explicitly acknowledges its authority to amend or revoke ATI at any time, its actions reflect otherwise. In rejecting a request by JetBlue and Hawaiian to institute a de novo review of Delta and Korean Air’s ATI grant after they sought to implement a JV (fifteen years after initial ATI approval), the DOT again recognized its authority to undertake reviews at any time, but held that for it to do so “JetBlue and Hawaiian must show that a new proceeding is necessary . . . either because the existing process for reviewing the agreements is flawed or because there is a substantial basis to revisit the grant of [ATI].” [273] While the DOT may occasionally give lip service to the notion that immunity from antitrust laws is an exception, not the rule,[274] its actions fly in the face of that notion when it rejects calls for periodic review of ATI and shifts the burden of proof from those enjoying ATI to those challenging it.

At a basic level, it is difficult to accept that on the one hand the DOT categorizes ATI as an exception to the norm and only appropriate when the public interest requires it, but on the other hand approves ATI in perpetuity without an adequate regime of ex post review in place. Critics of the DOT’s current approach claim that after the initial public benefits review, ATI approval “is virtually permanent and the [airlines] are left unchecked to stifle innovation and competition in the market through coordinated pricing, scheduling, and operation functionalities, to the detriment of the travelling public.”[275] They argue that periodic reviews of five years or less in a public docket “will increase public transparency and ensure that immunized alliances remain beneficial and in the public interest, as defined not only by the immunized [airlines], but also by the public to whom they purport to bring benefits.”[276] Additionally, some studies have claimed that the pricing efficiencies and passenger benefits generated by alliances relative to interlining has not required ATI to capture such benefits.[277]

Opponents of instituting duration limits on ATI are primarily legacy airlines with portfolios of active immunized agreements. This is predictable given that any policy changes will have the largest impact on their global network strategies. They argue that a policy of ATI term limits would have a chilling effect on investment in joint operations and expanding route networks as airlines would be hesitant to make long-term investments, reducing the likelihood of reaching the level of cooperation that offers the greatest level of passenger benefits.[278] The effects of such a policy reduces the incentive to cooperate fully and creates uncertainty that diminishes consumer benefits and runs counter to the purpose of Open Skies agreements.[279] Additionally, factoring in the time constraints involved with the public docket and application process, a 3-5 year limit “would place the [DOT] and [airlines] in a state of perpetual re-application and re-review.”[280]

An optimal and practical policy that the DOT could adopt is to conduct a de novo review in a public docket of every active immunized agreement once every ten years (in the absence of unique competitive concern such as the slot/infrastructure issues at MEX). Such a policy would permit the DOT to regularly assess market conditions and verify that airlines are meeting the proposed public benefits that drove the DOT to approve their applications, while granting immunized airlines a longer horizon to entice full cooperation and investment with aligned foreign airlines and avoiding a perpetual administrative counterweight to international expansion. Current DOT regulations permit adopting such a policy via an informal, but clearly defined, case-by-case approach, thereby avoiding the difficulties of formal rulemaking or Congressional reengineering.[281] Additionally, this approach would allow the DOT to evaluate its projected docket volumes and work directly with airlines to set application and review timelines that minimize administrative burdens and facilitate quick reviews. For example, an airline may voluntarily agree to do its review after nine years if it would lead to quicker turnaround times and the DOT agrees to permit it eleven years of ATI, if approved.

It is clear that effective international JVs require significant long-term investment and advance work to facilitate optimal division of resources between airlines and maximum public benefits. The proposed policy attempts to weigh this against the reality that the DOT’s past and current approach does not grant verified and actual passenger benefits a seat at the ATI table. While it would impose a new burden on U.S. legacy airlines operating with numerous grants of ATI, it should not be considered an undue burden. These airlines already comply with numerous recurring DOT obligations such as continuing fitness reviews and renewal of certificates.[282] Further, “the vast majority of the United States’ aviation partners authorize alliances for limited periods including . . . Australia, the European Union, New Zealand and South Korea.”[283] Thus, network airlines are experienced in structuring alliances or JVs with ATI with advanced knowledge of an eventual requirement to re-apply. Lastly, airlines’ claims that ATI time limits will temper investments may carry an element of application gamesmanship with them. For example, despite teeing off on the DOT in accepting the DOT’s slot divestitures and five-year ATI limit, Delta invested more than $620 million to acquire a 49% equity stake in Aeromexico and consummated their U.S.-Mexico transborder JV.[284]

A tangential issue to ATI limits is the public release of annual ATI reports prepared by immunized airlines for DOT review. DOT has required ATI recipients to prepare annual reports on the implementation of alliance agreements and benefits resulting from ATI.[285] JetBlue has called for the public release of these reports, arguing that it “will increase transparency and promote a more robust understanding of the public benefits, if any, that are produced by . . . ATI.”[286] It claimed that both the procedural process and the substantive components are a mystery and that it was denied access to redacted versions of such annual reports.[287]

Delta responded to JetBlue’s request by highlighting that there are multiple types of reports prepared by airlines and sent to the DOT that are kept confidential that would seemingly fall under JetBlue’s push to increase transparency.[288] The DOT has sided with the airlines that prepare these annual ATI reports largely over concerns that requiring public disclosure could potentially inhibit competition and diminish airlines’ “candor with the [DOT].”[289]

The DOT’s hesitation to publicize immunized airlines’ annual reports is reasonably related to concerns with the free flow of information required to determine whether alliances are providing public benefits on a continual basis. Therefore, this Note does not suggest any changes to the DOT’s current annual review policy. Instead, the proposed periodic review and time limitations on ATI grants should adequately remedy the transparency concerns that JetBlue raises while respecting an airline’s right to confidential trade secrets and candor with the DOT.

There is no disputing the incredible difficulty antitrust regulators face in evaluating potential mergers and ATI requests. Using current and past information to project future competitive implications of corporate activities (in a constantly evolving competitive landscape) is certainly an art rather than science. To expect clairvoyance or perfection from regulatory agencies would indicate a complete lack of reality. The DOJ is tasked with the unenviable job of having to get it right on the first try in evaluating domestic airline mergers. A merged airline cannot simply be unwound ten years later if it is not delivering the expected consumer benefits. This is not the case with the DOT and its ATI role. Rather, the flexibility of ATI to account for evolving competitive landscapes of international markets is a tremendous safeguard and positive byproduct of the restrictions on foreign mergers. While there are valid concerns against imposing a firm time limit and periodic public reviews of immunized alliances, these concerns do not outweigh the DOT’s primary responsibility to promote competition to its primary constituent, the flying public, in fulfilling its antitrust responsibilities given to it by Congress. A reasonable and practical solution to balancing these interests is to establish a periodic ten-year ATI review.

C.  Increase DOJ Involvement in ATI Competitive Analysis

As previously detailed, following deregulation, the DOJ was given authority to evaluate U.S. domestic airline M&A while the DOT retained ATI authority.[290] During the short span in which the DOT held authority for both functions, it faced criticism over its performance with aviation-related antitrust issues and itself favored the transfer of M&A authority to the DOJ.[291] Since the division of antitrust roles in 1989, there have been periodic spats between the agencies and continued questions over the DOT’s fitness to perform its antitrust functions.

Given this backdrop, it is rather surprising that the DOT has often exhibited a proclivity to ignore the DOJ’s antitrust expertise. Although the DOT states that it “initially confer[s] with [the DOJ], given its experience [with] the antitrust laws,”[292] rhetoric between the two, at times, reasonably suggests otherwise. Concerns have been raised that the DOT does not give “sufficient consideration” to the impacts of ATI “on the competitive structure of the domestic airline industry.”[293] The DOT and DOJ publicly disputed the evidentiary standards used by the DOT in approving the Star Alliance-Continental (2009) and OneWorld-British Airways (2010) ATI applications. The DOJ charged that DOT’s review process was a complete abandonment of evidentiary standards because it rubber stamped the applicants’ unsubstantiated public benefits claims; some agreed with the DOJ and characterized the DOT’s “public benefits methodology [as] literally nothing more than ‘copy and paste.’”[294] The DOT claimed the DOJ attacks were “an inappropriate interference with [its] aviation policy and bilateral negotiation prerogatives.”[295]

Calls for increased DOJ involvement or even complete transfer of authority are not new. In 1998, the Transportation Research Board (“TRB”), under the Congressional direction to study government actions promoting airline industry competition, recommended that Congress shift ATI review to the DOJ; the TRB had concerns over the DOT’s policy linking consummation of Open Skies to ATI with signatories’ national airlines.[296] Others argue that the DOT is a “captured agency” as it frequently underestimates the potential anticompetitive effects of ATI because it favors the concerns of the largest shareholders of the industry it regulates.[297] Proposed solutions to the captured agency issue include retaining the initial ATI review with DOT given “its role in crafting U.S. global aviation policy,” but transferring authority to the DOJ for subsequent reviews and reapplications.[298]

This Note does not advocate for either approach. While there may be valid agency capture concerns over comingling regulatory and industry policy roles, the DOT’s authority over tangential matters such as airport slots and route certificates, expertise in the airline industry, and past successes working with the State Department to expand Open Skies make it the best agency to regulate ATI moving forward. That said, there is ample room for improvement in the ATI regulatory process. An increased role by the DOJ would facilitate many improvements. DOJ has demonstrated a tremendous ability to work with the Securities & Exchange Commission (“SEC”) and international regulators to effectively enforce the Foreign Corrupt Practices Act.[299] There is no reason that the DOT cannot similarly leverage the DOJ’s antitrust expertise in its quantitative competitive analysis of ATI applications and continuous monitoring obligations. Finally, given the interplay between the competitive situation in domestic and international markets, increased coordination will ensure that sufficient consideration is given to ATI impacts on both markets.

D.  Knock Down Barriers to Entry, While Respecting the Tenets of Deregulation and Free Competition

With most industries, high market concentration indicates an industry ripe for new entrants. The airline industry, however, contains numerous industry-specific barriers, including takeoff and landing slots (particularly at commercially-coveted airports), airport terminal/gate access, and the tremendous capital required to acquire aircraft and initiate services.[300] Additionally, the hub-and-spoke networks of legacy airlines effectively serve as operational barriers.[301] Collectively, these barriers inhibit the formation of new airlines and often create enormous difficulties for existing airlines to enter specific markets. The U.S. government should prioritize efforts to minimize barriers to entry and promote robust industry competition. However, in trying to spur competition, the government often finds itself potentially crossing a line of government intervention that deregulation was intended to leave behind in lieu of free market competition. This section steps beyond antitrust law and explores potential systematic and philosophical reforms to spur further innovation and competition in the U.S. airline industry.

Overhauling U.S. aviation infrastructure has tremendous potential to generate real economic benefits and fresh competition. The United States’ antiquated aviation infrastructure and policies carry costly effects. U.S. airports are increasingly congested as growing travel demands strain airports’ ability to keep up—72% of U.S. air passenger traffic flows through the thirty busiest airports and delays cost passengers and airlines billions annually.[302] President Trump touted improving U.S. transportation infrastructure, including U.S. airports which he referred to as “bottom of the rung” internationally, as a key policy agenda; he pushed for an investment of over $1 trillion in U.S. infrastructure improvements through public-private financing and tax incentives shortly after being elected.[303] Improving airport infrastructure is arguably just as important as easing air traffic congestion. For example, airlines without historical control of terminal space or gates at Los Angeles International (“LAX”) find lack of real estate is a huge barrier to entering or expanding service at LAX;[304] while LAX may not have the slot constraints or air space issues that the New York City airports do, the lagging infrastructure has the same practical effect in limiting the number of airlines and flights that can serve LAX. Expanding and improving U.S. airports will provide opportunities for those airlines without historical real estate holdings to enter or expand at airports that are currently space constrained.

Lastly, moving forward, the DOT should be cautious of pushing policies that position it to pick “winner and loser” airlines or overstep its regulatory authority abroad and disrupt international comity. Its approach toward “exclusivity clauses” in alliance or JV agreements applying for ATI presents a powder keg of issues moving forward. Hawaiian Airlines recently requested that the DOT require Qantas to codeshare on routes in Australia with other U.S. airlines on the same terms and availability that American Airlines would receive via their JV (thereby requiring ongoing price regulation and monitoring by the DOT).[305] While the request became moot after the DOT denied American and Qantas’ ATI bid, it offers an interesting case study. The DOT and State Department’s Open Skies objective has been to open and liberalize air travel between the U.S. and other countries; to entertain forcing foreign airlines to codeshare with U.S. airlines on flights entirely within a foreign country would seemingly undermine the entire notion of Open Skies and international comity. The DOT should be extremely hesitant to intervene in the contractual relations of private airlines, especially when foreign airlines are involved, and any DOT action may invite a reciprocal response by foreign regulators.

The DOT’s MEX slot divesture approach in granting Delta and Aeromexico ATI is also troubling and should not set a precedent moving forward. The DOT limited eligibility for the divested MEX slots to LCCs only and deemed Interjet, a Mexican LCC, ineligible because it was the second largest airline at MEX.[306] It reasoned that LCCs have the largest competitive impact in disciplining fares and that restricting slots to just LCCs would limit the total number divested.[307] The rationale behind the DOT’s decision is arguably sound; there is continued support for a “Southwest Effect”lower airfares on routes with a Southwest or other LCC/ULCC presence.[308] But its decision