Copyright 2000 Federal News Service, Inc.
Federal News Service
March 22, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 7836 words
HEADLINE:
PREPARED TESTIMONY OF ROBERT PITOFSKY CHAIRMAN THE FEDERAL TRADE COMMISSION
BEFORE THE SENATE COMMITTEE ON THE JUDICIARY
SUBCOMMITTEE ON ANTITRUST, BUSINESS RIGHTS AND COMPETITION
BODY:
Mr. Chairman and Members of the
Subcommittee, I am pleased to appear before you to present testimony of the
Federal Trade Commission that will provide an overview of our antitrust
enforcement activities. Today I will review the Commission's activities during
the approximately two and a half years since I last testified for general
antitrust oversight purposes? The Commission is charged with the enormous
responsibility of ensuring that consumers receive the benefits of a competitive
marketplace, a mission that we share with the U.S. Department of Justice. We
welcome that responsibility and believe that we are fulfilling our obligation.
The Commission strongly believes in the bedrock principle that
protecting competition by preventing improper creation, acquisition, or exercise
of market power enhances the welfare of consumers. Congress decided long ago
that a competitive economy is vastly preferable to an economy reliant on
government regulation of the conduct of firms with market power. Competition is
the best way to ensure that consumers receive the benefits of lower prices,
higher quality and quantity of goods and services, and greater innovation. That
approach has been validated throughout the past hundred and ten years of
antitrust enforcement.
These are dynamic times for the economy, and with
these changes come many challenges for the antitrust agencies. The economy is
rapidly being reshaped, and markets are being created or redefined, by numerous
forces operating at the same time, including: the explosion of electronic
commerce; deregulation of critical industries such as telecommunications,
financial services and electricity; convergence of technologies and, indeed, of
markets; and globalization. These forces result in a fast-changing, more complex
economy, even with respect to basic sectors of the economy such as electricity.
While these changes carry the promise of tremendous benefits for consumers, some
may also create incentives and opportunities for anticompetitive behavior. The
challenge for us, apart from the sheer magnitude of the amount of activity, is
to understand these changes and to know when antitrust intervention is
appropriate.
The Commission's approach to antitrust enforcement is
guided by two important principles. First, we seek to enforce the antitrust laws
with vigor, and protect consumers from abuses of market power in whatever form.
It is the Commission's responsibility to protect consumers from anticompetitive
consequences of private agreements, the abuse of monopoly power, or illegal
mergers. The Commission also recognizes, however, the costs that government
intervention can place on private parties. For this reason, our second guiding
principle is to avoid unnecessary intrusions and to minimize, to the extent
possible, the burdens placed on businesses by our efforts to protect consumers.
We have an important responsibility to ensure that antitrust policy makes sense
and is sensibly and effectively applied.
I will begin this overview with
a topic that is not new news, but is still big news - the astounding level of
merger activity. We are busier than ever on that front. I will review some
recent merger enforcement actions that have had particularly immediate
significance for consumers. I will then cover several other areas that receive
our close attention: competitor collaborations, retailing, and health care
markets.
Level of Merger Activity
The number of mergers reported
to the FTC and the Justice Department pursuant to the Hart-Scott-Rodino Act has
more than tripled over the past decade, from 1,529 transactions in fiscal year
1991 to 4,642 transactions in fiscal 1999. Thus far in fiscal year 2000, filings
are at a record pace; if this continues, filings for the year will be over 15%
above the record set in fiscal 1998.
Currently, more than two-thirds of
our competition resources are dedicated to merger enforcement, compared to an
historical average of closer to 50%. The merger wave strains the FTC resources
to the breaking point. The Washington Post recently characterized the merger
wave as a "frenzy of merger madness, capping a dramatic wave of corporate
consolidation that has been gaining momentum through much of the decade." 2 The
article quotes merger experts who note that a key force driving merger activity
is the new world of electronic commerce.
While the number of merger
filings has more than tripled in the past decade, the dollar value of commerce
affected by these mergers rises on an even steeper trajectory, increasing an
astounding eleven-fold during the past decade? But mere numbers do not fully
capture the complexity and the challenge of the current merger wave. Today's
merger transactions not only are larger, but often raise novel or complex
competitive issues requiring more detailed analysis. In the past year alone,
companies filed notifications for 273 mergers with a transaction size of one
billion dollars or more, and many of these mergers involved overlaps in several
products or services.
There are many reasons for the current merger
wave. A large percentage of these transactions appear to be a strategic response
to an increasingly global economy. Many are in response to new economic
conditions produced by deregulation (e.g., telecommunications, financial
services, and electric utilities). Still others result from the desire to reduce
overcapacity in more mature industries. The rapidly evolving world of electronic
commerce has a substantial impact on the merger wave, because consolidations
often quickly follow the emergence of a new marketplace. These factors indicate
that the merger wave reflects a dynamic economy, which on the whole is a
positive phenomenon. But some mergers, as well as some other forms of
potentially anticompetitive conduct, may be designed to stifle competition in
important sectors of this dynamic economy.
Out of necessity, our scarce
resources are directed at preserving competition in the most important areas of
the economy. The Commission dedicates the bulk of its antitrust enforcement to
sectors that are critical to our everyday lives, such as health care,
pharmaceuticals, retailing, information and technology, energy, and other
consumer and intermediate goods. Rather than recite a litany of cases, I will
focus on some cases that underscore the importance of the Commission's antitrust
enforcement as we move forward in this new century.
Merger Enforcement
In the last two fiscal years and fiscal 2000 to date, the Commission has
brought over 60 enforcement actions in industries ranging from food retailing to
basic industrial products? Retailing, energy, and pharmaceuticals commanded the
most enforcement resources. 5
The Commission has committed considerable
resources to addressing the wave of consolidation in the petroleum and gasoline
industry. In fiscal years 1999 and 2000 to date, the FTC's Bureau of Competition
used a staggering one-third of its enforcement budget to address issues in
energy industries. In February of this year, we filed an action in federal
district court in San Francisco seeking a preliminary injunction against the
proposed merger of BP Amoco p.l.c. and Atlantic Richfield Company ("ARCO").
6 The complaint alleges that the merger would combine the two largest
firms exploring for and producing crude oil on the North Slope in Alaska; that
BP already exercises market power in the sale of crude oil on the West Coast;
and that by acquiring ARCO, BP would eliminate as an independent competitor the
firm most likely to threaten BP's market power. ARCO, the pioneer on the North
Slope, has been the most aggressive explorer for oil in Alaska's history.7 The
Commission's suit has been joined by suits filed by the States of California,
Oregon, and Washington. This is the latest of a number of enforcement actions in
which the Commission worked with various states in pursuit of our common
interest in protecting American consumers. Last week, the Commission, the states
and the parties obtained an order from the Court adjourning the preliminary
injunction hearing while the Commission evaluates the parties' proposal to sell
all of ARCO's Alaska operations to Phillips Petroleum Co.
The BP/ARCO
case comes on the heels of the Commission's investigation of the merger between
Exxon and Mobil. After an extensive review, from oil fields to the gas pump, the
Commission required the largest retail divestiture in FTC history- the sale or
assignment of 2,431 Exxon and Mobil gas stations in the Northeast and
Mid-Atlantic, and California, Texas and Guam.s The Commission also ordered the
divestiture of Exxon's Benicia refinery in California; light petroleum terminals
in Boston, Massachusetts, Manassas, Virginia, and Guam; a pipeline interest in
the Southeast; Mobil's interest in the Trans-Alaska Pipeline; Exxon's jet
turbine oil business; and a volume of paraffinic lubricant base oil equivalent
to Mobil's production. The Commission coordinated its investigation with the
Attorneys General of several states and with the European Commission (about 60%
of the merged firm's assets are located outside the United States).
There are several particularly noteworthy aspects of the Exxon/Mobil
settlement. First, the divestiture requirements eliminated all of the overlaps
in areas in which the Commission had evidence of competitive concerns. Second,
while several different purchasers may end up buying divested assets, each will
purchase a major group of assets constituting a business unit. This is likely to
replicate, as nearly as possible, the scale of operations and competitive
incentives that were present for each of these asset groups prior to the merger.
Third, these divestitures, while extensive, represent a small part of the
overall transaction. The majority of the transaction did not involve significant
competitive overlaps. In sum, we were able to resolve the competitive concerns
presented by this massive merger without litigation.
The Commission also
required divestitures in the merger between BP and Amoco,9 and in a joint
venture combining the refining and marketing businesses of Shell, Texaco and
Star Enterprises to create at the time the largest refining and marketing
company in the United States. 10
The Commission challenged potentially
anticompetitive mergers in other energy industries as well. Three recent matters
served to protect emerging competition in electric power generation. Two of
these cases were so-called "convergence mergers," where an electric power
company proposed to acquire a key supplier of fuel used to generate electricity.
One involved PacifiCorp's proposed acquisition of The Energy Group PLC and its
subsidiary, Peabody Coal.
PacifiCorp's control of certain Peabody coal
mines allegedly would have enabled it to raise the fuel costs of its rival
generating companies and raise the wholesale price of electricity during certain
peak demand periods. The Commission secured a consent agreement to divest the
coal mines, but the transaction was later abandoned by the parties. 11 In
another case, Dominion Resources, an electric utility that accounted for more
than 70% of the electric power generation capacity in the Commonwealth of
Virginia, proposed to acquire Consolidated Natural Gas ("CNG"), the primary
distributor of natural gas in southeastern Virginia and the only likely supplier
to any new gas-fueled electricity generating plants in that region. Dominion
allegedly could have raised the cost of entry and power generation for new
electricity competitors. Working closely with Commonwealth officials, the
Commission required the divestiture of Virginia Natural Gas, a subsidiary of
CNG. 12 In a third matter, the Commission challenged CMS Energy Corporation's
proposed acquisition of two natural gas pipelines. 13 CMS itself was a
transporter of natural gas, whose customers could purchase the gas from other
suppliers, either for their own use or to generate electricity. The Commission
alleged that the acquisition would have enabled CMS to raise the cost of
transportation for its gas and electric generation customers. This case did not
require divestitures, but the Commission's consent order assures that CMS cannot
restrict access to its pipeline network, thus allowing new entry that should
maintain a competitive market.
Another highlight from the past two years
is the Commission's successful challenge to the proposed mergers of the nation's
four largest drug wholesalers into two films. McKesson Corp. proposed to acquire
AmeriSource Health Corp., and Cardinal Health, Inc. proposed to acquire Bergen
Brunswig Corp. The two surviving firms would have controlled over 80% of the
prescription drugs sold through wholesalers. These mergers allegedly would have
increased costs to these wholesalers' customers - thousands of pharmacies and
hospitals. These two cases were among the few that have led to litigation in
recent years (although many more had to be prepared for trial). The district
court granted a preliminary injunction against both mergers, and the
transactions were later abandoned? Another significant aspect of these two cases
is that the district court's thoughtful and well- articulated opinion helped to
update merger case law in several respects, including market definition and
analysis of entry conditions, competitive effects, and efficiencies. This helps
make antitrust law more transparent, and provides more guidance to the business
community. The court's analysis is consistent with the Commission's analytical
approach under the 1992 Horizontal Merger Guidelines, issued jointly by the
Commission and the U.S. Department of Justice?
Food retailing is another
sector that is experiencing a period of consolidation. The number of supermarket
mergers has increased dramatically just in the last three years. While the
Commission has not challenged geographic expansion mergers, many mergers among
direct local competitors have raised competitive concerns. The Commission has
taken enforcement action where appropriate. Last June, for example, the
Commission took steps to prevent undue market concentration resulting from
Albertson's acquisition of American Stores - combining the second and fourth
largest supermarket chains in the United States. 16 In Albertson's the
Commission required the divestiture of over 140 stores in California, Nevada and
Arizona - at the time, the largest retail divestiture in Commission history (but
now surpassed by the Exxon/Mobil divestiture). In the last four years alone the
Commission has brought more than 10 enforcement actions involving supermarket
mergers, requiring divestiture of nearly 300 stores in order to maintain
competition in local markets across the United States.
Another major
transaction the agency reviewed last year was Barnes & Noble's attempted
acquisition of Ingram Book Group. Barnes & Noble was the largest book
retailing chain in the United States, and Ingram was by far the largest
wholesaler of books in the United States. Thus, it was largely a vertical
transaction. While many vertical transactions are likely to be
efficiency-enhancing, and therefore few are challenged, the Commission staff saw
the Barnes & Noble/Ingram transaction as a serious competitive threat to
thousands of independent book retailers. The acquisition of an important
upstream supplier such as Ingram might have enabled Barnes & Noble to raise
the costs of its bookselling rivals by foreclosing access to Ingram's services,
or denying access on competitive terms. 17 If rivals became less able to
compete, Barnes & Noble could have increased its profits at the retail level
or prevented its profits from being eroded by competition from new business
forms such as Internet retailing. The Commission did not take formal action on
this merger, because the parties abandoned the transaction before the staff made
a final recommendation.
We have also challenged a number of other large
mergers involving products and services that are highly important to consumers,
including pharmaceutical products, 18 medical devices,19 household products, 20
and insurance services. 21 In each of these cases, our goal has been to protect
consumers from the potential exercise of market power by the merged firm, either
unilaterally or in combination with others. Under the methodology we use to
determine consumer savings pursuant to the Government Performance and Results
Act, we estimate that the Commission's merger enforcement actions in fiscal year
1999 saved consumers from paying $1.2 billion in higher prices?
In contrast, the Commission's budget for the competition mission in fiscal 1999
was only $55.7 million.
We have taken steps to ensure
that these consumer savings are in fact realized, by implementing changes that
result in better remedies. Last year, the staff completed a major study of
merger remedies based on the Commission's merger cases in the early 1990s? The
study found that while most of the cases settled through divestitures resulted
in the establishment of a new competitor to replace the one lost through the
merger, there were some ways in which merger remedies could be improved to avoid
potential problems.
One of the steps we have taken is to require, in a
greater number of cases, that the merging parties bring us qualified purchasers
for the divestiture assets before the transaction may be consummated. This
procedure, referred to as the "up-front buyer" requirement, requires the merging
parties to find a suitable purchaser before the Commission accepts a settlement
agreement. This procedure has several benefits for consumers: we know before
accepting a divestiture settlement that a suitable buyer exists and that the
divestiture package is an appropriate one, and we can restore the lost
competition more quickly and with greater confidence that the divestiture will
succeed. It also reduces the burden of uncertainty on the merging parties,
because they know up front that they have an acceptable candidate, and they can
then devote their full attention to their newly merged business.
While
we are on the subject of mergers, we would like to offer a few observations
about Senate bill S. 1854, which seeks to amend various provisions concerning
the Hart-Scott-Rodino (HSR) process. First, the Commission supports efforts to
raise the size-of-transaction threshold for HSR reporting from
$15 million to $35 million. Although the
threshold would be higher, however, the fee structure proposed in the bill is
unlikely to meet the funding needs of the Commission in future years, and
therefore it would need adjustment to account for future funding needs. Second,
while the Commission agrees with the burden- reduction goals of S. 1854, we have
serious concerns about the procedures contemplated by the bill. We believe they
are impractical, would themselves cause substantial delay in the process, and
would seriously hinder our efforts to protect consumers from anticompetitive
mergers.
The extent of burdens on the parties needs to put into an
appropriate perspective. The vast majority of merger filings are cleared within
20 days. Fewer than 3% of reported transactions receive a request for additional
information (the so-called "second request"). The issuance of a second request
is not undertaken lightly, and the care we take in choosing when to issue them
is illustrated by the fact that a large majority of those transactions that
receive second requests result in some form of enforcement action. In addition,
most second request investigations are resolved without major document
production. Over 60% of the investigations result in productions of fewer than
20 boxes of responsive documents, and over 85% of the second request
investigations are resolved without the parties' having to complete their
document production (i.e., "substantially comply" with the second request).24
Nevertheless, we believe that there can be significant improvements in this
process. Thus, we are engaged in a dialogue with members of the private
antitrust bar, business representatives, and Members of Congress on how to
reduce burdens by streamlining the process. We believe this can be done without
legislation. Both the antitrust agencies and the private bar have a long history
of cooperating in this fashion. Cooperation will lead to effective reforms that
will meet the worthy goals sought by the proposed legislation, without the
delays and impediments to thorough investigation that could result from the
procedures contemplated by the legislation. Indeed, the FTC has already
undertaken a number of internal reforms to expedite merger investigations and to
provide parties with more complete information on the issues that give rise to
an investigation. In addition, today we are announcing a new appeal procedure to
allow independent review of second request disputes by our General Counsel. We
will continue our efforts to make the process as efficient as possible and work
with the business community to address their concerns.
In sum, we can
all agree that the process can be improved, and we acknowledge the concerns of
Senators Hatch, DeWine and Kohl that are reflected in the proposed legislation.
Over the past several months we have been working with Congress, the business
community and members of the private bar to find common ground for improving the
process. We continue to believe that the issues can and should be resolved
without legislation.
Collaborations Among Competitors
Let us now
shift gears and briefly discuss conduct in which competitors do not merge, but
instead collaborate with each other. In today's markets, competitive forces are
driving firms toward complex collaborations to achieve goals such as expanding
into foreign markets, funding expensive innovation efforts, and lowering
production and other costs. Most of these collaborations are procompetitive
business arrangements that will benefit consumers; some, however, are not. Last
October, the Federal Trade Commission and the Antitrust Division of the
Department of Justice jointly issued draft "Competitor Collaboration
Guidelines," which describe an analytical framework to assist businesses in
assessing the likelihood of an antitrust challenge to a collaboration among two
or more competitors. The draft Guidelines were placed on the public record for
comment, and they have received praise from sources as diverse as the Chamber of
Commerce; 25 antitrust's leading treatise author, Professor Herbert Hovenkamp;
26 and practitioners, who found that "(b)y synthesizing the existing cases into
an analytical framework, the Federal Trade Commission and the Department of
Justice will have made antitrust analysis vastly more accessible to smaller law
firms and their clients."27 At the same time, useful suggestions have been made
for clarifications and other changes to the Guidelines. The agencies are now
considering those suggestions before issuing final Guidelines.
Retailing
As a result of global and innovation-based changes, consumers are becoming aware
that a "retail revolution" is underway. To remain competitive, retailers -
whether brick-and-mortar or online - are seeking new ways to market new and old
products. This dynamic is leading to much pro-consumer innovation in retailing.
For example, the Internet has changed traditional sales and distribution
patterns for products of all types, providing faster, cheaper, and more
efficient ways to deliver goods and services. A market study by Jupiter
Communications estimates that annual consumer sales on the Internet will explode
from $15 billion in 1999 to $78 billion by
2003. There appears to be tremendous demand for Internet-based services.
However, whenever there is great upheaval in the marketplace,
traditional retailers sometimes respond by trying to forestall new forms of
competition. Some of those actions may be legitimate defensive maneuvers, but
when conduct steps over the lines of the antitrust laws, enforcement action is
needed to ensure that anticompetitive practices do not deter development of
procompetitive innovations? In 1998, for example, the FTC charged 25 Chrysler
dealers with an illegal boycott designed to limit sales by a car dealer that
marketed on the Internet. These brick-and-mortar dealers allegedly had planned
to boycott Chrysler if it did not change its distribution of vehicles in ways
that would disadvantage Internet retailers. The competitive danger of such a
tactic is obvious: a successful boycott could have limited the use of the
Internet to promote price competition and reduced consumers' ability to shop
from dealers serving a wider geographic area via the Internet. An FTC consent
order prohibits the dealers from engaging in such boycotts in the future?
The Internet is not the only place where we have seen popular new forms
of retailing. Another example involves the Commission enforcement action against
Toys "R" Us, the nation's largest toy retailer, alleging abuse of market power.
As alleged by the Commission, Toys "R" Us used its market power to try to stop
warehouse clubs, such as Costco, from selling popular toys such as Barbie dolls
in ways that allowed consumers to make comparisons to the prices charged by Toys
"R" Us. Warehouse clubs, as you know, are a relatively new retailing format that
has grown significantly in the past decade. Toys "R" Us's concern was that
warehouse clubs were selling some toys at lower prices and beginning to take
market share away from traditional toy retailers. In response, Toys "R" Us
allegedly pressured toy manufacturers to deny popular toys to warehouse clubs,
or to sell them on less favorable terms. The FTC issued an administrative order
to stop these practices, and the matter is now on appeal to the U.S. Court of
Appeals for the Seventh Circuit? Although the products were toys, and the
rivalry was between two different kinds of brick-and-mortar firms, the
enforcement principles underlying the Commission's action apply with equal - and
perhaps even greater- force to the new world of online retailing.
Of
course, even more traditional retailing practices can raise competitive
concerns. Earlier this month the FTC and the Attorneys General from 56 U.S.
states, territories, commonwealths, and possessions settled charges that Nine
West, one of the country's largest suppliers of women's shoes, engaged in resale
price maintenance, resulting in higher prices for many popular lines of shoes.
To settle the charges with the states, Nine West agreed to pay
$34 million, which will be used to fund women's health,
vocational, educational, and safety programs.
Slotting allowances are
another retailing-related topic of current interest at the Commission. The term
"slotting allowance" typically refers to a lump-sum, up-front payment that a
supplier, such as a food manufacturer, might pay to a retailer, such as a
supermarket, for access to its shelves? These allowances can amount to tens or
hundreds of thousands of dollars.
Slotting allowances can be either
beneficial or harmful. They can be beneficial if they fairly reimburse retailers
for the costs and risks of taking on an unproven new product, or when they
result in lower prices to consumers. On the other hand, slotting allowances can
be harmful if they permit one manufacturer to acquire a degree of exclusivity,
across many retail outlets, sufficient to prevent other firms from becoming
effective competitors. Still other situations fall in an intermediate grey area.
To sharpen our understanding of the circumstances under which slotting
allowances can be beneficial or harmful to competition and to consumers, the
Commission will hold a two-day workshop on May 31 and June 1. This session will
bring together people from manufacturing, retailing, economics, and other
relevant disciplines to discuss the issues involved in this very complex
subject.
The Commission recently examined charges of price
discrimination in a related retailing context. By majority vote, the Commission
charged McCormick & Company, the world's largest spice company and by far
the leading supplier in the United States, with engaging in unlawful price
discrimination in the sale of spice and seasoning products. Some retailers
allegedly were charged substantially higher net prices than were others, and
discounts to favored chains allegedly were conditioned on an agreement to devote
all or a substantial portion of shelf space to McCormick products. McCormick
agreed to settle the charges by accepting an order that would prohibit the
selling of spices at different prices to different retailers, except when
permitted by the Robinson-Patman Act.
Health Care
Health care is
an increasing part of overall consumer expenditures, and the significant rise in
health care costs is felt by all consumers. For many years, the Commission has
been at the forefront in bringing enforcement actions to protect the competitive
process in all types of health care markets, including services provided by
hospitals and health care professionals as well as products provided by the
pharmaceutical and medical equipment industries. In the past two years alone,
the Commission has brought more than a dozen enforcement actions involving
health care, pharmaceuticals, and medical devices.
In one of these cases
the Commission, jointly with several states, sued Mylan Laboratories, one of the
nation's largest generic pharmaceutical manufacturers, charging Mylan and other
companies with monopolization, attempted monopolization and conspiracy to
eliminate much of Mylan's competition by tying up the key active ingredients for
two widely prescribed drugs, used by millions of patients. 32 The FTC's
complaint charged that Mylan's agreements allowed it to impose enormous price
increases - over 25 times the initial price level for one drag, and more than 30
times for the other. For example, in January 1998, Mylan raised the wholesale
price of clorazepate from $11.36 to approximately
$377.00 per bottle of 500 tablets, and in March 1998, the
wholesale price of lorazepam went from $7.30 for a bottle of
500 tablets to approximately $190.00. In total, the price
increases resulting from Mylan's agreements allegedly cost American consumers
more than $120 million in excess charges. The Commission filed
this case in federal court under Section 13(b) of the FTC Act seeking injunctive
and other equitable relief, including disgorgement of ill-gotten profits. In
July of last year the district court upheld the FTC's authority to seek
disgorgement and restitution for antitrust violations. Trial is set for the
Spring of 2001.
Just last week, the Commission charged four other
companies with entering into anticompetitive agreements that allegedly delayed
the entry of generic drug competition, potentially costing consumers hundreds of
millions of dollars a year. The administrative complaint issued against Hoechst
Marion Roussel (now Aventis) and Andrx Corporation charges that Hoechst, the
maker of Cardizem CD, a widely prescribed drug for treatment of hypertension and
angina, agreed to pay Andrx millions of dollars to delay bringing its competing
generic drug, or any other non-infringing version, to market while Hoechst sued
Andrx for alleged patent infringement.33 Cardizem CD is a form of diltiazem, and
Hoechst accounts for about 70% of the sales of once-a- day diltiazem products in
the United States. Hoechst's Cardizem sales in 1998 exceeded
$700 million (over 12 million prescriptions). The complaint
further alleges that, because the Hatch-Waxman Act 34 grants an
exclusive 180-day marketing right to Andrx, Andrx's agreement not to market its
product was also intended to delay the entry of other generic drug competitors.
The complaint against two other companies, Abbott Laboratories and
Geneva Pharmaceuticals, Inc., which the companies agreed to settle, involved
allegations of similar conduct in connection with a proprietary drug- called
Hytrin - that Abbott manufactures, and a generic version that Geneva prepared to
introduce? Hytrin is used to treat hypertension and benign prostatic hyperplasia
(BPH or enlarged prostate) - chronic conditions that affect millions of
Americans each year, many of them senior citizens. BPH alone afflicts at least
50% of men over age 60. In 1998, Abbott's sales of Hytrin amounted to
$542 million (over 8 million prescriptions) in the United
States. The complaint.alleges that Abbott paid Geneva approximately
$4.5 million per month to keep Geneva's generic version of the
drug off the U.S. market. This agreement also allegedly delayed the entry of
other generic versions of Hytrin because of Geneva's 180-day exclusivity rights
under the Hatch-Waxman Act. Abbott was charged with
monopolization of the market, and both companies were charged with conspiracy to
monopolize. The proposed consent order enjoins such practices.
Another
recent enforcement effort was directed at an anticompetitive patent pool between
Summit Technology, Inc. and VISX, Inc. Summit and VISX compete in the market for
equipment and technology employed in laser vision correction. Most of the
approximately 140 million people in the United States with vision problems
correct their vision with contact lenses or eyeglasses, but an increasing number
are turning to laser techniques. Until recently, VISX and Summit were the only
firms with FDA approval to market the laser equipment used for this surgery. The
complaint charged that the two companies eliminated competition between
themselves by placing their competing patents in a patent pool and agreeing to
charge doctors a uniform $250-per-procedure fee every time a
Summit or VISX laser was used. In essence, this was price- fixing under the
guise of a patent cross-licensing arrangement. After the Commission issued an
administrative complaint charging that the patent pool and related agreements
were unlawful, the companies dissolved the patent pool and settled this portion
of the case in August 1998, with an agreement not to enter into such agreements
in the future? The per-procedure fees charged by VISX and Summit did not
immediately change as a result of the settlement - an example of"stickiness" of
prices in a tight oligopoly- but competition eventually prevailed. Last month,
VISX announced that it would reduce its per-procedure fee from
$250 to $100 per eye, and Summit announced
that it too would reduce its fee for one of its laser products? Had the
Commission not taken action, the millions of consumers using this procedure
likely would still be paying substantially higher fees.
The Commission
also plays an important role in studying the changing health care marketplace.
Last year the FTC's Bureau of Economics issued a detailed report on the rapidly
evolving pharmaceutical industry. 38 The report found that developments in
information technology, federal legislation, and the emergence of market
institutions such as health maintenance organizations and pharmacy benefit
managers have accelerated change in this industry. The report attempts to
provide a more complete understanding of the competitive dynamics of this market
and discusses possible competitive problems and procompetitive explanations for
pricing strategies and other industry practices. These kinds of studies help
inform regulators, enforcers, and Congress on the important public policy issues
involving health care.
Conclusion
In closing, we believe that
antitrust enforcement by the Commission has demonstrable benefits for consumers
- benefits that far outweigh the resources allocated to our maintaining
competition mission. We are concerned, however, that our growing workload -
largely the result of the continuing merger wave - has outstripped our ability
to keep pace. Over the past decade, the FTC has performed its mission in the
face of a rapidly changing marketplace, with staffing at about half the size it
was in 1979. We have done so primarily by stretching our resources, streamlining
our processes, and simply doing more with less. In no small measure, that is
attributable to our dedicated, hard-working staff. We have also shifted
resources from nonmerger enforcement to mergers as a stop-gap measure. That has
left us understaffed in nonmerger matters, but still not at full strength in
mergers. If we are to keep up with the growing demands that will be imposed by
the 21st Century marketplace, we need significantly more resources. The
President's proposed budget for fiscal year 2001 asks for an additional 69
workyears, over the current fiscal year, for our antitrust enforcement efforts?
We ask the Committee's support for additional resources for this important
mission.
Mr.
Mr.
Chairman and Members of the
Subcommittee, we appreciate this opportunity to provide an overview of the
Commission's efforts to maintain a competitive marketplace for American
businesses and consumers. We would be pleased to respond to any questions you
may have.
FOOTNOTES:
1 See Prepared Statement of the Federal
Trade Commission presented by Robert Pitofsky, Chairman, before the Committee on
the Judiciary, United States House of Representatives, concerning an overview of
FTC antitrust enforcement, Nov. 5, 1997.
2 Sandra Sugawara, Merger Wave
Accelerated in '98: Economy, Internet Driving Acquisition, Wash. Post, Dec. 31,
1999 at El.
3 See Attachment 1.
4 In addition, 19 merger filings
were withdrawn before the Commission's investigation was completed.
5
Telecommunications, especially in the areas of cable and video programming, also
has been, and continues to be, an area of substantial activity. See Prepared
Statement of the Federal Trade Commission, Presented by Robert Pitofsky,
Chairman, Before The Committee on Commerce, Science, and Transportation, United
States Senate, November 8, 1999.
6 Federal Trade Commission v. BPAmoco,
p.l.c., Civ. No. C 000416 (SI) (N.D. Cal. Feb. 4, 2000) (complaint).
7
The complaint also alleges that the combination of BP's and ARCO's pipeline and
oil storage facilities in and around Cushing, Oklahoma, a major crude oil
trading center, would enable the combined firm to manipulate the market for
crude oil futures contracts traded on the New York Mercantile Exchange. Those
contracts involve crude oil designated for delivery in Cushing. The complaint
alleges that the combination of BP's futures trading business and existing
pipeline and terminal facilities with ARCO's pipelines, oil storage
infrastructure, and inline transfer business would increase BP's ability to
manipulate crude oil futures trading by giving it access to information and
control over pipelines and other essential facilities.
8 Exxon Corp.,
FTC File No. 991 0077 (Nov. 30, 1999) (proposed consent order).
9
British Petroleum Company p.l.c., C-3868 (April 19, 1999) (consent order).
BP/Amoco involved very large companies but relatively few significant
competitive overlaps. The Commission ordered divestitures and other relief to
preserve competition in the wholesaling of gasoline in 30 cities or metropolitan
areas in the eastern and southeastern United States, and in the terminaling of
gasoline and other light petroleum products in nine geographic markets.
10 Shell Oil Co., C-3803 (April 21, 1998) (consent order). The
Shell/Texaco transaction raised competitive concerns in markets for gasoline and
other refined petroleum products in the Pacific Northwest (Oregon and
Washington), California, and Hawaii, for crude oil in California, and in the
transportation of refined light petroleum products to several southeastern
states. The Commission required the divestiture of a refinery in Washington, a
terminal on the island of Oahu, Hawaii, retail gasoline stations in Hawaii and
California, and a pipeline interest in the Southeast.
11 PacifiCorp, FTC
File No. 971 0091 (consent order accepted for public comment, Feb. 17, 1998).
This order was withdrawn when the parties abandoned the transaction.
12
Dominion Resources, Inc., C-3901 (Dec. 9, 1999) (consent order).
13 CMS
Energy Corp., C-3877 (June 2, 1999) (consent order).
14 FTC v. Cardinal
Health, Inc., 12 F. Supp.2d 34 (D.D.C. 1998).
15 1992 U.S. Dep't of
Justice and Federal Trade Commission Horizontal Merger Guidelines, reprinted in
4 Trade Reg. Rep. (CCH) Para. 13,104 (April 2, 1992; as amended, April 8, 1997).
16 Albertson's Inc., Inc., FTC File No. 981 0339 (consent agreement
accepted for public comment, June 21, 1999). The Commission has also challenged
a number of other supermarket mergers. E.g., Albertson's, Inc., C-3838 (Dee. 8,
1998) (consent order) (acquisition of Buttrey Food and Drug Store Co.);
Koninklijke AhoM N. K, C-3861 (April 14, 1999) (consent order) (acquisition of
Giant Food, Inc.).
17 The merged firm might have been able to do so in a
number of ways, including strategies short of an outright refusal to sell to the
non- Barnes & Noble bookstores. For example, Barnes & Noble/Ingram could
have chosen to (1) sell to non-Barnes & Noble bookstores at higher prices;
(2) slow down book shipments to rivals; (3) restrict access to hot titles; (4)
restrict access to Ingram's extended inventory of older titles; or (5) price
services higher or discontinue or reduce services.
18 E.g., Hoechst AG,
FTC File 991 0071 (consent agreement accepted for public comment, Dec. 2, 1999)
(acquisition of Rhone-Poulenc S.A.; direct thrombin inhibitor drag); Zeneca
Group PLC, C-3880 (June 7, 1999) (consent order) (acquisition of.Astra AB;
longlasting local anesthetic); Roche Holdings Ltd., C-3809 (May 22, 1998)
(consent order) (acquisition of Corange Ltd.; cardiac thrombolytic agents and
chemical used to detect the presence of illegal substances). The Commission also
took action to prevent competitive harm from a pharmaceutical manufacturer's
acquisition of a company providing services as a pharmacy benefits manager.
Merck & Co., Inc., C-3853 (Feb. 18, 1999) (consent order) (acquisition of
Merck-Medco Managed Care, LLC).
19 SNIA S.p.A., C-3889 (July 28, 1999)
(consent order) [heart and lung machines); Medtronic, Inc., C-3880 (June 3,
1999) (consent order) (non-occlusive arterial pumps); Medtronic, Inc., C-3842
(Dec. 21, 1998) (consent order) (automated external defibrillator).
20
Reckitt & Colman plc, C-3918 (Jan. 18, 2000) (consent order) [household
cleaning products); Nortek, Inc., C-3831 (Oct. 8, 1998) (consent order)
(residential intercoms); S.C. Johnson & Son, Inc. C- 3802 (May 20, 1998)
(consent order) (soil and stain removers); CUC Int'l, C-3805 (May 4, 1998)
(consent order) (timeshare exchange services).
21 Fidelity National
Financial, Inc., C-3929 (Feb. 25, 2000) (consent order) (title information
services); Unum Corp., C-3894 (Sept. 29, 1999) (consent order) (data for
disability insurance); Commonwealth Land Title Insurance Co., C-3834 (Nov. 10,
1998) (consent order) (title insurance); Landamerica Financial Group, Inc,
C-3808 (May 20, 1998) (consent order) (title operations).
22 The figure
includes transactions that were withdrawn before the Commission's investigation
was completed. Under the GPRA methodology, consumer savings estimates are based
on the volume of commerce in the markets adversely affected by a merger, the
percentage increase in price that likely would have resulted from the merger,
and the likely duration of the anticompetitive price increase. In the absence of
case-specific evidence that indicates higher or lower figures, conservative
default parameters are applied to the volume of commerce: a one percent price
increase for two years.
23 Staff of the FTC Bureau of Competition, .4
Study of the Commission 's Divestiture Process (1999).
24 Many companies
indicate a willingness to settle a case before completing their document
production. Other companies work with staff from the Commission or Department of
Justice ("DOJ") to determine some subset of documents that will enable a "quick
look" at certain issues, so that resources can be focused on the topics of
greatest debate.
25 "(The Guidelines) no doubt will make a net positive
contribution as a statement of agency thinking in this complex area of law."
Comments of Chamber of Commerce at 2. 26 "(The Guidelines) are quite good
overall.
" Hovenkamp Comment at 1.
27 Comment of Thomas F.
Purcell, Lindquist & Vennum, St. Paul, Minnesota, at 1.
28 In
addition, on the consumer protection side, we must maintain vigilance to protect
consumers from fraudulent practices by the few unscrupulous providers of such
services. Since the agency's first Internet case in 1994, the FTC, primarily
through its Bureau of Consumer Protection, has brought over 100 Internet-related
cases involving over 300 defendants. The Commission has obtained injunctions
stopping illegal schemes, collected over $20 million in redress
for victims, and obtained orders freezing another $65 million
in cases that are still in litigation. Most of these cases have involved the
migration to the Internet of traditional kinds of fraud, such as business
opportunity schemes, credit repair scares, pyramid schemes, and false claims for
health-related products, to name a few.
29 Fair Allocation System, Inc.,
C-3832 (Oct. 30, 1998) (consent order).
30 Toys "R" Us, Inc., Docket No.
9278 (1998), appeal docketed, No. 98417 (7th Cir. Apr. 16, 1999).
31 See
"Slotting: Fair for Small Businesses and Consumers?" Hearing before the
Committee on Small Business, United States Senate (Sept. 14, 1999).
32
FTC v. Mylan Laboratories, Inc, CV-98-3115 (D.D.C., filed December 22, 1998;
amended complaint filed February 8, 1999). The drugs in question are used for
treatment of anxiety.
33 Hoechst Marion Roussel, Inc., Docket No. 9293
(complaint, March 16, 2000).
34 Under the Hatch-Waxman
Act, the first company to file an Abbreviated New Drug Application (ANDA) with
the FDA for a generic drug (in this case, Andrx) has an exclusive right to
market its generic drug for 180 days. Under the alleged Hoechst-Andrx agreement,
Andrx could not give up that exclusivity right. Thus, by allegedly agreeing not
to market its drug, Andrx prevented the 180-day exclusivity period from
beginning to run, so that other sellers of generic versions of Cardizem CD also
could not enter the market.
35 Abbott Laboratories, FTC File No. 981
0395 (proposed consent order, March 16, 2000); Geneva Pharmaceuticals, Inc., FTC
File No. 981 0395 (proposed consent order, Mareli 16, 2000).
36 Summit
Technology, Inc. and VISX,, Inc., D. 9286 (Feb. 23, 1999) (consent order).
37 CBS Market Watch, Visx gets black eye from price cuts, Feb. 23, 2000
(<http://cbs.marketwatch.com/archive>).
38 FTC Bureau of Economics
Staff Report, The Pharmaceutical Industry: A Discussion of Competitive and
Antitrust Issues in an Environment of Change (March 1999).
39 The
President's proposed budget also includes additional resources for the FTC's
consumer protection mission.
END
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