Antitrust, Competition, and Corporate Accountability

ANTITRUST, COMPETITION, AND CORPORATE ACCOUNTABILITY

I. GENERAL STATEMENT

A market-driven economy should serve the interests of consumers by assuring fair pricing, innovation, and maximum choice. However, free markets do not occur naturally; they are affected by a variety of forces, including governmental policies. Markets are subject to failure.

CFA believes that monopoly and economic concentration are problems that must be vigorously addressed by enforcement of effective antitrust laws. Governments have a duty to assure that markets are in fact, not just in theory, competitive and working in the interests of both consumers and producers.

To achieve and maintain a fair and competitive marketplace, effective and vigorously enforced antitrust laws are often the only alternative to government regulation. Therefore, in an increasingly deregulated economy, antitrust laws are more important than ever. They should be strengthened and exemptions should be scrutinized. The Department of Justice (DOJ) and the Federal Trade Commission (FTC) should vigorously enforce the antitrust laws and Congress should ensure that such a commitment is made and carried out.

II. MERGERS

An unprecedented merger wave has been restructuring the American economy in recent years, particularly in the energy, financial services, airline, and telecommunications industries (for more specific discussions, see the ENERGY, CREDIT AND FINANCIAL SERVICES, TRANSPORTATION, and COMMUNICATIONS sections). The great increase in numbers of mergers and in the size of mergers makes it imperative that the antitrust agencies receive more resources from Congress so that mergers may be properly investigated and, where appropriate, enjoined.

CFA favors review and strengthening of the merger enforcement policies used by federal antitrust agencies. Section 7 of the Clayton Act clearly states that investigation of antitrust must look beyond the immediate impacts of a merger to its long-term effects on markets. This “incipiency” provision of the Act should be more rigorously applied to prevent industry-wide trends toward concentration, instead of being enforced only on a case-by-case basis. Enforcement resources should be deployed more frequently against mergers that fall into the “potential trouble” range of the standard index used to measure market concentrations. Dominant corporations that expand into or buy up the various units in the production chain of their product pose a great threat to fair markets. These so-called “vertical” mergers should be scrutinized by antitrust agencies.

CFA supports legislation to amend Section 7 of the Clayton Act to prohibit mergers that create firms larger than an industry-specific threshold, unless there is either (1) a spin-off of comparable assets and revenues or (2) proof that the merger is at least competitively neutral and will result in substantial efficiencies or economies of scale not otherwise attainable within a reasonable period or (3) proof that the merger will increase competition.

CFA is also concerned that conglomerate mergers, not addressed under current antitrust law except when competition is reduced in particular market niches, raise the question of how much concentration of the nation’s productive assets is consistent with a democratic system. Such mergers have increased the already dangerous level of concentration in the hands of a few giant (and not necessarily American) corporations. This trend places the integrity of our political process in jeopardy, increases the impact that corporate decisions have on our lives, and ultimately reduces competition. For example, the merger of Exxon and Mobil corporations may represent an aggregation of capital and market power that could create an entity unresponsive to rule of law.

Leveraged buy-outs do not contribute to price competitiveness, job or capital creation, or economic stability. Rather, they amass large debt, which in turn limits the viability of affected entities. Therefore, CFA urges Congress to pass legislation to change disclosure laws, provide for contract successorship, and limit the debt that may be assumed to achieve an LBO.

CFA believes that corporations have an obligation to give consumers, communities, and workers timely notice of such expected impacts as plant closings, lay-offs, or site relocations resulting from corporate restructuring such as LBOs, mergers, and acquisitions. CFA also supports legislation clarifying the right of a takeover target to have judicial standing to resist the takeover on antitrust grounds; this would facilitate the self-interested policing of competition and bring possible antitrust issues to public attention. And CFA supports

legislation to ease the negative effects of mergers and acquisitions on the economic welfare of employees of affected companies or on their communities.

III. VERTICAL PRICE FIXING AND OTHER RESTRAINTS

Consumers are best served when retailers compete against each other in an aggressive manner. We believe this occurs when there is both interbrand and intrabrand competition and when retailers are permitted to set their own prices, regardless of their suppliers' wishes. Manufacturer efforts to control retail prices were in the past protected by “Fair Trade” laws, which fortunately have been repealed.

Today, manufacturers rely on judge-created “rule of reason” analysis in antitrust challenges to vertical restraints. Given the expense and complexity of antitrust suits and the ease with which manufacturers are allowed to demonstrate a legitimate business reason for their decisions, “rule of reason” is tantamount to “rule of the manufacturer.” This has been the situation since the Supreme Court's decisions in the Monsanto and Sharp Electronics cases, which narrowed “per se” interpretations of vertical price restraints and made it very easy for manufacturers to terminate their relationships with discounters. The recent Kahn case eliminates the “per se” illegality of a manufacturer's restriction on how high a retailer might price goods it manufactured. CFA firmly opposes any action that would undermine the “per se” rule against the fixing of minimum prices. And CFA supports legislation to create a presumption of illegality in other types of vertical cases in which the manufacturer holds a dominant position in the relevant market.

IV. PREDATION

Until the Supreme Court rulings in such cases as Matsutshita and Brooke Group, it was understood to be illegal for a company to engage in predatory pricing. These cases — based on the unrealistic economic theory that predatory pricing rarely if ever occurs, because the ease of future entry into a market makes it difficult to recoup an investment in predation — encourage predatory activities by dominant companies.

Recent experience with airline domination of hub terminals demonstrates that consumers may benefit from price wars in the short term, but in the long term predatory price wars eliminate competitors from the market and create an opening for monopoly pricing. CFA favors aggressive price competition, but opposes allowing predatory behavior by deep-pocket companies that kills off efficient but smaller competitors.

V. ROBINSON-PATMAN ACT

The Robinson-Patman Act has fallen into disrepute and is only sporadically enforced because of an over-emphasis on the goal of efficiency. CFA believes that efficiency should not be the only goal of anti-trust policy; stopping unfair transfers of wealth from consumers to firms with market power is also important. The antitrust agencies should not disregard the Act; they should analyze it carefully to identify areas in which its enforcement can benefit consumers.

VI. INDIRECT PURCHASER

The Supreme Court's decision in Illinois Brick denied standing under the antitrust laws to indirect purchasers. As a result, if a manufacturer engages in illegal price fixing — charging retailers an above-competitive price, which the retailers pass onward to consumers — the consumers are deemed indirect purchasers and not permitted to bring a class action for recovery of their damages. CFA considers this fundamentally unjust. It urges Congress to overturn Illinois Brick and urges that all states pass legislation clarifying the right of consumers and producers to sue for damages as indirect buyers and sellers. It also supports the right of states to act on behalf of their municipalities and subdivisions to seek damages for price-fixing practices.

VII. CORPORATE ACCOUNTABILITY

The existing structure of corporate law, with its often lax and haphazard enforcement and mild penalties, has apparently failed to deter violations, which include bribes to foreign countries and businesses, domestic payoffs and kickbacks, price fixing, practices that create or exacerbate health and safety hazards and disregard for shareholder and employee rights.

To protect shareholders and consumers from the substantial economic and social cost of corporate abuses, CFA urges enactment and enforcement of federal legislation specifying minimum corporate standards that would accomplish the following:

A.Permit cumulative voting by shareholders and change proxy rules to encourage more active shareholder involvement in corporate policymaking, including corporate funding of proxy contests by shareholders with opposing viewpoints.

B.Provide for adequate shareholder rights when a company goes private — that is, buys back its stock from shareholders.

C.Preclude hiding existing debt through such accounting practices as defeasance. Contingent liabilities provided for through reserves or sinking funds should be so noted on balance sheets.

D.Reform the process by which corporate directors are nominated.

E.Protect corporate employees who are “whistleblowers.”

F.Require disclosure of the cost of all lobbying expenditures by issue or by bill number.

CFA supports full disclosure of corporate profits. The Federal Trade Commission’s line-of-business program should be reinstated to provide profit data from individual profit lines owned by conglomerate companies. Securities and Exchange Commission filing requirements should be changed to require conglomerate corporations to disclose financial information for each of their subsidiaries.

CFA calls for fundamental reform of the audit system, including strong structural protections to ensure the independence of the audit, improved regulatory oversight of auditors, a more independent rule-setting process for accounting rules, and stronger independence standards for corporate boards and, particularly, for the audit committee of the board.

Interlocking directorates concentrate economic power in too few hands and facilitate collusion. Although certain interlocks are illegal under the antitrust laws, the laws are rarely enforced and have not received much attention for many years. CFA urges Congress to hold hearings to determine whether the law should be amended and whether enforcement efforts should be expanded.

CFA believes that manufacturers and retailers are responsible for the working conditions under which their products are made. CFA, therefore, urges U.S. manufacturers and retailers not to contract with companies, either in the U.S. or abroad, that produce goods under sweatshop conditions. Toward this end, CFA calls for U.S. businesses to enact and rigorously enforce a code of conduct, translate the code into the workers’ language and require its posting in all subcontractor workplaces, and agree to independent monitoring of all subcontractors.

CFA urges American-owned corporations to support indigenous efforts in developing countries and other international endeavors to stop the use of child labor in industry and commercial agriculture.

CFA encourages such corporations to permit, and not oppose, the formation of workers associations (unions) in the host country.

CFA supports the enactment of legislation establishing criminal penalties, including jail sentences, for corporate executives who knowingly market unsafe products that fail to meet federal safety standards or otherwise present unreasonable and imminent hazard to employees or consumers.

CFA is concerned about the growth of multi-national corporations and the resulting decline in accountability to the needs and concerns of consumer, community, and national interests.

CFA further urges action to hold multi-national corporations accountable on an international level through regulatory cooperation between governments and through a United Nations code of conduct to

govern multi-national corporations. CFA encourages the establishment of government tracking of foreign ownership of U.S. assets.

VIII. PUBLIC PARTICIPATION

CFA supports legislation to ensure that consumers are represented in private antitrust cases that have significant impact on the public, both during trial and during any settlement process.

IX. STANDARDS

The voluntary standards-setting process is critical to the development of many industries and can have a major impact on both competition and consumer protection. Standards-making is typically dominated by the leaders in an industry. The public is not generally represented and consumers are rarely heard for several reasons: (a) standards-setting takes a long time, so only those with significant resources and a large stake can afford or justify such long-term commitment; (b) to participate meaningfully, a person must have substantial expertise in the history, technology, competitive dynamics, and jargon of the industry; and (c) industry insiders do not generally welcome outsider participation. CFA urges the FTC to create and staff a unit of antitrust and consumer-protection attorneys and economists dedicated to monitoring and participating in voluntary-standards activities. It also urges legislation requiring groups engaged in formal standard-setting to disclose the nature of their efforts to the FTC.

X. ANTITRUST EXEMPTIONS

The antitrust exemptions contained in the McCarran-Ferguson Act (insurance) and the Webb-Pomerene Act (exporting companies) should be repealed or tightened. Major League Baseball should not be exempt from antitrust, nor should railroad transportation corporations be exempt.

CFA opposes amendments to the FTC's authority that would prevent it from enforcing antitrust standards against professions regulated by the states or that would diminish the FTC's authority over the “learned professions.”

CFA opposes any legislation to repeal, or create exemptions, to the First Sale provision of the Copyright Act. Copyright owners deserve just compensation for their work product. However, legislation should not condone price fixing and artificial limitations on supply that would abrogate important antitrust protections that help to maintain competition in home entertainment. The First Sale doctrine should remain intact.

XI. ENFORCEMENT AND PENALTIES

CFA does not believe that Congress has allocated sufficient resources to antitrust. It supports dramatically increased appropriations for both the Antitrust Division of the Justice Department and the FTC. In addition, it recommends the following actions:

A.Authorization of Senior Executive Service status for designated senior trial attorneys in the DOJ Antitrust Division and the FTC.

B.Fines adequate to deter violations of FTC special orders or subpoenas.

C.Amendment of Section 5(a) of the Clayton Act to make conclusive evidence in subsequent litigation any final judgment or decree rendered in any civil or criminal proceeding brought by or on behalf of the United States under the antitrust laws to the effect that a defendant has violated those laws.

D.Enactment of legislation permitting the courts to use special masters and economic and other experts to assist in handling major antitrust cases.

E.Enactment of legislation strengthening enforcement of antitrust laws against foreign corporations doing business in the U.S.

F.Rejection by Congress of any efforts to end joint and several liability for antitrust damages.

G.Rejection by Congress of any efforts to end treble damages as a remedy in antitrust cases.

Many corporations plead nolo contendere (no contest) to criminal antitrust charges to avoid litigating the issues. This practice deprives private plaintiffs of an evidentiary record that would help them prove their cases. CFA favors amending the Clayton Act to make the entry by a defendant of a plea of nolo contendere in a criminal antitrust prosecution prima facie evidence against that defendant in any other antitrust action.

CFA supports legislation to increase the statutory ceiling on Sherman Act Section 1 criminal fines from $10 million to $100 million.

XII. STATE REGULATORY BODIES

CFA urges the states to review their professional-licensure laws to reduce unjustified barriers to entry and to adopt less restrictive forms of regulation that can protect consumers while increasing competition. The states should also review remaining barriers to advertising to the general public by regulated professionals; most such laws violate antitrust as well as First Amendment principles.

Where regulatory boards exist, these should be independent bodies with consumer majority memberships; boards should not be dominated by members of the regulated profession.

XIII. INDUSTRIAL DESIGN LEGISLATION

CFA opposes legislation that would give manufacturers design protection unavailable under current copyright or patent law standards for product repair or replacement parts. This legislation would reimpose the hundreds of millions of dollars annually that consumers have saved from competitive production of automobile crash parts and could make unavailable innumerable other competitive products now available to consumers at discount prices. CFA supports legislation that affirms consumers’ right to repair motor vehicles with parts offered for sale by competing manufacturers.

XIV. ENERGY (see ENERGY section)

CFA supports vigorous enforcement of antitrust laws with respect to the energy industry. Federal agencies should be given stronger laws and additional resources to address market-power issues in an emerging competitive electricity industry (see ENERGY section, IV. T). And increasing numbers of mergers among already large oil companies should be reviewed for their cumulative potential to reduce competition and raise prices.

XV. FRANCHISING

CFA urges repeal of the Soft Drink Interbrand Competition Act and opposes giving similar exemptions for exclusive territory franchising to the malt beverage or other industries (See ENVIRONMENT).

XVI. HEALTH CARE

In general, CFA opposes special grants of immunity from competition laws to producers of health care products and providers of health care services to discuss and act in concert regarding their prices. However, changes in the structures of health care delivery systems, especially managed care, and their impacts on quality of care may warrant targeted exceptions.