In an interview with the New Yorker last year, FTC Chair Lina Khan said, “Antitrust through the nineteen-seventies was Brandeisian.” But what does that mean? What is “Brandeisian” antitrust? In a 2018 article published in the Journal of European Competition Law & Practice, Khan, who was then Director of Legal Policy at the Open Markets Institute, sought to explain the so-called “New Brandeis Movement,” summing up its philosophy in one word: “anti-monopoly.” While she argued “antimonopoly does not mean ‘big is bad’,” she took issue with “[t]he Chicago School focus on ‘consumer welfare.” In her now-famous law review note, Amazon’s Antitrust Paradox, Khan took direct aim at the consumer welfare standard, calling it “misguided.” And last year, as Chair of the FTC, Khan rescinded a 2015 FTC policy that stated, “the Commission will be guided by the public policy underlying the antitrust laws, namely, the promotion of consumer welfare” and acts “will be evaluated under a framework similar to the rule of reason.”
The consumer welfare standard, of course, has been an anchor of antitrust jurisprudence for over 40 years, and arguably, much longer. Business conduct and mergers are evaluated to determine whether they harm consumers in a relevant antitrust market. And the rule of reason analytical framework has an even longer history. This article takes a brief jaunt through that history in an effort to further understand the historical consequences (if any) of recent policy changes in antitrust enforcement, particularly regarding the consumer welfare standard and vertical conduct. It reveals that if Khan and Jonathan Kanter at the DOJ are trying to establish that they are merely following in history’s footsteps, then they picked the wrong horse to ride because Justice Brandeis was not nearly as anti-business or anti-consumer welfare standard as they are.
As a Supreme Court justice (1916-1939), Brandeis recused himself from most monopolization cases that came before the Court. He did, however, engage in collusion cases and penned the now-classic expression of the rule of reason: “The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.” What is that if not a precursor to the modern mantra of antitrust jurisprudence: the “antitrust laws . . . were enacted for ‘the protection of competition, not competitors.’” Even strains of the consumer welfare standard – that is, the Chicago School’s focus on efficiency – can be found in Brandeis’s writings. In his 1914 text, “The Curse of Bigness,” Brandeis wrote: “The establishment of any rule fixing a maximum return on capital would by placing a limit upon the fruits of achievement, tend to lessen efficiency.” Again, that is in line with the antitrust jurisprudence of today:
The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices – at least for a short period – is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.
So too, Brandeis: “size may, at least, become noxious by reason of the means through which it was attained or the uses to which it is put.”
So where does the “New Brandeisean” anti-monopoly stance come from? Perhaps the real reason for the paean to Brandeis is simply the title of Brandeis’s essay: “The Curse of Bigness,” which was later conscripted as the title of a paperback by Tim Wu, antitrust professor and now policy advisor to President Biden. To be sure, Brandeis viewed the trusts of his day as a public menace, and his rhetoric is echoed by the New Brandeiseans. But not without dissonance. Perhaps the area of greatest dissonance between Brandeis himself and the New Brandeiseans is in the area of vertical conduct.
Chair Kahn has argued for an antitrust analysis focused on market structure over market outcomes, focusing in particular on vertical conduct. In a statement accompanying the FTC’s withdrawal of the 2020 vertical merger guidelines, Khan wrote, “the FTC will assess potential market structure-based presumptions for non-horizontal mergers.” She argued, “[t]he 2020 [Guidelines] contravene the text of the statute, devoting a whole section to the discussion of procompetitive effects, or efficiencies, of vertical mergers.” To Khan, vertical and horizontal mergers should not be treated differently because “the statute does not distinguish between ‘horizontal’ and ‘vertical’.” Brandeis might have argued otherwise.
Brandeis was a staunch defender of vertical price restraints, and in particular, resale price maintenance (“RPM”). When the Supreme Court conferred “per se” illegal status to RPM contracts in 1911 – in effect treating vertical price agreements the same as horizontal price agreements – Brandeis was critical of the decision. He argued that treating RPM contracts as per se illegal “failed to draw the distinction between a manufacturer fixing the retail selling-price of an article of his own creation and to which he has imparted his reputation, and the fixing of prices by a monopoly or by a combination tending to a monopoly.” To Brandeis, “to so fix the ultimate selling price in a competitive business is not a restraint of trade in any proper case. On the contrary, it stimulates trade, because it gives an appropriate reward to the man who creates….”
He could have written the Supreme Court’s seminal 2007 Leegin decision. Citing to the just-as-seminal 1977 Sylvania decision, Justice Kennedy noted:
Economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance. . . . Minimum resale price maintenance can stimulate interbrand competition . . . by reducing intrabrand competition. . . . A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers.
The Court had relied on the same economic reasoning in Sylvania in holding that vertical territorial restraints should be analyzed under the rule of reason because such restrictions can enhance interbrand competition. Both decisions are rooted in the consumer welfare standard. Leegin called application of the per se test “foreign to the Sherman Act” and “[d]ivorced from competition and consumer welfare.” And Sylvania noted vertical restrictions, by enhancing interbrand competition, can increase the “availability and quality” of products and services to consumers. Per se treatment was wrong because it relied on “‘formalistic’ legal doctrine rather than ‘demonstrable economic effect.’” Again, Brandeis likely would have agreed: “[T]hat which I create, and the good-will which attends it … that is my specific property; I have made it valuable to myself, and I make it valuable to the consumer because I have endowed that specific property with qualities on which everyone who purchases my goods may rely.”
While the FTC can decide it will not be constrained to the consumer welfare standard in its analyses, and will ignore efficiencies inherent in vertical mergers, there is zero indication that courts, let alone the Supreme Court, would do the same. The per se history of vertical restraints is unlikely to repeat. Indeed, the Sherman Act makes antitrust a forward-looking, common-law-based analysis, not a tribute to history or the economics of the late nineteenth century. As stated in Sylvania and reaffirmed in Leegin, “[T]he state of the common law 400 or even 100 years ago is irrelevant to the issue before us: the effect of the antitrust laws … in the American economy today.” The consumer welfare standard – properly understood as a focus on economic impact on total welfare in the market – is not simply a phenomenon of recent decades but has far deeper roots in antitrust jurisprudence.
That said, deals combining two large competitors, or a dominant competitor with a small upstart, can expect robust pre-merger investigation and perhaps challenge, even where there are a number of other competitors in the market or clear efficiencies to be had. Merging companies should consider approaching the agencies with, not just arguments why the merger will not impact competition or increase prices, but also why it will not harm other stakeholders, including workers, suppliers, contractors, and the like. All of this is garnering increased scrutiny in merger review. But at the end of the day, it still boils down to a single, simple question: does the proposed merger, or the challenged conduct, harm competition in a relevant market? In other words, can it be expected to produce economic effects that harm consumer welfare? If not, antitrust should not care, and Brandeis may not have cared either.
This article was prepared by the Antitrust Law Section's Corporate Counseling Committee.
