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New Investigations of Large Tech Firms Reflect Continuing Influence of New Brandeisian Ideas

Public discourse about antitrust law has been expanded to include a wider range of ideas about the purpose of antitrust law.  “New Brandeisians” believe that the consumer welfare standard, which prioritizes end-user prices over most other considerations, does not account for all the harms caused by a lack of competitive markets.  They contend that this standard is particularly ill-suited for policing the large technology companies that dominate their markets.  As previously discussed here and here and here, certain American regulators, legislators, and presidential candidates appear to be listening.

The most concrete achievement of this new school of thought may be the flurry of investigations that have been launched against large technology companies.  Apple, Facebook, Amazon, and Google are under particular scrutiny.  A few months ago, the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) decided to split up the investigations; the FTC would investigate Amazon and Facebook and the DOJ would investigate Apple and Google.  But both sides acknowledged at a Congressional hearing in September that their investigations are likely going beyond this scrutiny of specific companies, and the DOJ announced that it is examining “whether dominant online platforms in general are unlawfully stifling competition,” an inquiry that seems to encompass Facebook and Amazon and perhaps others.  Based on recent statements, the DOJ and FTC may end up simultaneously investigating some of the same companies.  State attorneys general are also getting in on the act; a coalition of forty-eight states announced an antitrust investigation of Google, and a bipartisan group of nine state attorneys general stated it was looking at Facebook.  On top of all that, the House Judiciary Committee’s Subcommittee on Antitrust, Commercial and Administrative Law—which includes prominent New Brandeisian thinker Lina Khan as a staff member—is also investigating all four companies, and has sent extensive information requests to each (and to their competitors).

While the specifics of the probes vary, most share a central question: have these companies used anticompetitive means to maintain or extend their monopolies?  For example, has Google used its dominance in search to unfairly put its thumb on the scale in favor of its own products?  And has Facebook bought potential competitors, like Instagram and WhatsApp, before they had a chance to challenge its social media market share? 

The pending investigations echo the last major monopoly case the federal government filed, which coincidentally also targeted a technology company: U.S. v. Microsoft.   The opinion rendered by the D.C. Circuit Court of Appeals in Microsoft—though nearly twenty years old—may be the best guide to how regulators might frame any future actions, and how courts would interpret them. 

In Microsoft, the DOJ and twenty state attorneys general sued Microsoft for violating Section 2 of the Sherman Act.  The plaintiffs alleged that Microsoft illegally maintained a monopoly over the market for “licensing of all Intel-compatible PC operating systems worldwide,” and they focused on Microsoft’s efforts to quash “middleware” to maintain that monopoly.  Operating systems contain application programming interfaces (“APIs”) that perform functions; these APIs can be used by software developers to develop programs.  “Middleware” are software products that “expose” their own APIs.  If software developers wrote programs using middleware APIs, as compared to operating system APIs, those programs could be run on the middleware regardless of the computer’s underlying operating system.  Two of the middleware products at issue in Microsoft were Netscape’s Navigator, an internet browser, and Sun Microsystems’s Java.

After a 76-day bench trial, the district court found that Microsoft had a monopoly in the market of “licensing of all Intel-compatible PC operating systems worldwide” and unlawfully maintained it through several anticompetitive practices, including licensing restrictions with PC manufacturers and the way it integrated its own internet browser, Internet Explorer, into its Windows operating system.  On appeal, Microsoft challenged, among other things, the district court’s definition of the relevant market and its conclusion that Microsoft possessed market power.  Of particular relevance here, Microsoft argued that (1) it was contradictory for the district court to exclude middleware from its market definition, given that middleware was the alleged competitive threat Microsoft was trying to protect itself against, (2) market power should be measured differently in “dynamic technology markets characterized by network effects” because firms in such markets compete for temporary dominance of an entire field instead of simultaneous competing within a field, and (3) proof of a large market share was not proof of market power; Microsoft’s large market share was the result of the platform’s popularity. 

The appellate court rejected all three arguments.  First, it found that the district court correctly excluded middleware from the market definition because no middleware product was developed enough to “expose enough APIs to serve as a platform for popular applications, much less take over all operating system functions,” and the “test of reasonable interchangeability” requires courts to only consider “substitutes that constrain pricing in the reasonably foreseeable future, and only products that can enter the market in a relatively short time can perform this function.”  The “purported contradiction” cited by Microsoft was not a contradiction because middleware’s threat to Microsoft was “nascent,” and “[n]othing in Section 2 of the Sherman Act limits its prohibition to actions taken against threats that are already well-developed enough to serve as present substitutes.” 

Second, the court refused to alter “current monopolization doctrine . . . to account for competition in technologically dynamic markets characterized by network effects.”  It noted that there was no consensus about how monopolies should be treated in such a market, with some commentators arguing that more durable network monopolies can encourage innovation and investment and others suggesting the opposite.  In short, the court was not persuaded that so-called “old economy” Section 2 monopolization doctrines were inadequate to analyze these new markets. 

Third, the court held that Windows may have initially gained its large market share through “superior foresight or quality,” but that this case was about maintenance of this share, not its acquisition.  And while market share alone is not sufficient for market power, there was also an “applications barrier to entry.”  This barrier stems from a “chicken-and-egg” situation: (1) consumers prefer operating systems for which a large number of applications have already been written; and (2) developers want to write applications for operating systems that have a large consumer base.  This applications barrier was a structural barrier that worked to preserve Microsoft’s future position and gave it market power. 

The Microsoft opinion thus has elements that would benefit both sides; the D.C. Circuit walked a middle ground in which it stuck to traditional antitrust principles (and refused to implement new rules specific to technology), but was also willing to carefully apply those traditional principles in new settings.  It remains to be seen whether New Brandeisian ideas would now lead to a shift in courts’ thinking about these issues, but either way, we expect this area to be one of importance in the coming years.