Daniel A. Crane, professor of law at the University of Michigan Law School, drafted an analysis of the FTC’s case against Intel (based on the requirements of the Sherman Antitrust Act) and found it lacking.  Crane argues that:

From the face of the FTC’s complaint, it is unlikely that the case will withstand scrutiny in the courts. While appearing to accept that, in at least some contexts, it may have to prove that Intel’s loyalty rebates resulted in predatory pricing, Complaint Counsel argue that the measure of cost used in their predatory pricing analysis must include a share of Intel’s fixed sunk costs on every CPU or GPU it sells. Such an effort to force a manufacturer to cover a share of sunk costs on every unit sold has been widely rejected by the courts, and for good reason. Consumers’ interests would be seriously harmed by a rule requiring producers to price based on an arbitrary sunk costs allocation formula rather than upon the changing demands of the marketplace.

In the first section of this paper, I discuss the importance of using a cost- price test to decide the legality of all forms of unilateral discounting or rebating by dominant firms. Without such analysis, it is impossible to determine whether the supposedly thwarted competitors fell victim to the dominant firm’s misconduct or to their own inefficiency.

In the second section, I show why courts have used an incremental or marginal cost test for predation claims rather than requiring the defendant to cover fixed costs, as the Complaint Counsel now suggest. One of the key intuitions behind this approach is that it would be suicidal for a firm to follow a self-imposed rule of recouping a pro rata share of sunk costs on every unit it sells. Sunk costs are often incurred in research and development or production functions that serve many different products or potential products at once, and allocating these costs among various product lines in a “pro rata” way is simply not something that businesses can or should do. Further, businesses make real-world pricing decisions based on their competitive position in the marketplace and the costs of producing further units, not based on their bygone costs.

Crane notes that the paper was funded by the Intel Corporation, but the views expressed were solely his own.

The full article can be downloaded here: Dan Crane- Predation Analysis and the FTC’s Case Against Intel

As part of a chronicle of articles in Competition Policy International, Amanda Reeves wrote an article that looked at the FTC’s use of Section 5 case against Intel. The article argues that:

Over the last few years, the Federal Trade Commission (“FTC”) has awakened Section 5’s “unfair methods of competition” prong from its slumber and ignited a debate about when, if ever, it is proper to use Section 5 to reach conduct beyond the Sherman Act’s four corners. Complicating matters is the dearth of federal court guidance on the issue. It has been a quarter of a century since any federal court has opined on Section 5’s scope and nearly 40 years since the Supreme Court last chimed in. Consequently, discussions about Section 5’s reach often sound as if they are occurring in a doctrinal vacuum with proponents of Section 5 relying on the statute’s legislative history; opponents arguing that, as a policy matter, there should rarely be a need to resort to Section 5; and those in the middle trying to achieve consensus on limiting principles.

While the Supreme Court has said nothing during this period about Section 5, it has been vocal about its views on antitrust common law more generally, asserting that antitrust rules need to be administrable and predictable. That emphasis has undoubtedly spurred the important search for limiting principles, but the identification of those principles should only be part of the Section 5 doctrinal equation. If and when the Commission provides the federal courts with an opportunity to revisit Section 5, the Commission is most likely to succeed if it persuades the courts that it has applied Section 5 in a predictable fashion. The Commission can do so if it pleads conduct-specific theories of liability (as opposed to just an “unfair method of competition”) and, in consent orders and opinions, identifies conduct-specific tests that govern those theories of liability.

The full article is available for Competition Policy International.

As part of a chronicle of articles in Competition Policy International, Geoff Maney wrote an article that looked at the FTC’s use of Section 5 in its case against Intel. The article argues that:

There is a real danger that the Federal Trade Commission (“FTC”) actually believes its stated rationale for bringing its case against Intel under Section 5 of the FTC Act. Frankly, I’d prefer if its arguments were just the callous and disingenuous post hoc rationalizations of a powerful agency, undeterred by effective oversight. But I fear this is not the case. While there may be good reasons for bringing some cases under Section 5, the reasons put forth by Chairman Leibowitz and Commissioner Rosch to explain the decision in Intel’s case reflect a worrisome disregard for the central role of the judiciary in constraining well-meaning-but-overly-confident technocratic enforcement and the fundamental role of error cost analysis in a well-ordered antitrust enforcement regime.

Commissioners Rosch and Leibowitz have been making noise about Section 5 for some time, and I think it likely that they saw the Intelcase as the perfect opportunity to put Section 5 to the test—to make some new law that would favor the Commission in cases like this one where it “knows” there is injury but the Sherman Act case law makes prevailing difficult. They have found their case for bolstering the role of Section 5 in FTC enforcement, and Intel, its shareholders, consumers, and competition generally will suffer mightily for their hubris. And, in the end, the Commission may suffer as well.

The full article is available at Competition Policy International.