Ben Sperry is Associate Director of Legal Research at International Center for Law and Economics. Ben was a summer fellow at Washington Legal Foundation in 2010 while pursuing his law degree at George Mason University Law School. He is a frequent contributor to the Truth on the Market blog.
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Despite technology’s clear role in improving social welfare, some in academia and government prefer to believe something sinister is afoot with the prominence of large tech platforms. A lot of the focus of the recent Congressional investigation of Big Tech has been on whether antitrust law has failed or needs updating in order to take on these so-called modern-day “robber barons.” Among this new class of reformers, there is a longing to return to a supposed golden age of antitrust law when enforcers and courts sought to ensure smaller competitors could thrive against bigger ones, even if that meant sacrificing consumer welfare.
In fact, the majority House Judiciary Committee Report has called for nothing less than the repeal of modern antitrust law. One of most drastic changes called for is the revival of the essential facilities doctrine in order to deal with perceived harms from Big Tech platforms:
To put it simply, companies that once were scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons… As a charter of economic liberty, the antitrust laws are the backbone of open and fair markets. When confronted by powerful monopolies over the past century—be it the railroad tycoons and oil barons or Ma Bell and Microsoft—Congress has acted to ensure that no dominant firm captures and holds undue control over our economy or our democracy.
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To address this concern, the Subcommittee recommends that Congress consider revitalizing the “essential facilities” doctrine, the legal requirement that dominant firms provide access to their infrastructural services or facilities on a nondiscriminatory basis. To clarify the law, Congress should consider overriding judicial decisions that have treated unfavorably essential facilities- and refusal to deal-based theories of harm.
The basic premise of applying the essential facilities doctrine in this context is that Big Tech platforms like Amazon’s marketplace, Google’s search results, Facebook’s social network, and Google Play and Apple’s App Store are “essential” for businesses to reach consumers. This has special importance when platform operators are vertically integrated and also compete with third-parties on the platforms they operate.
The History of Essential Facilities Doctrine
The essential facilities doctrine traces its lineage back to the railroad days. While the Supreme Court has never officially recognized the doctrine, its genesis can be found in United States v. Terminal Railroad Association, 224 U.S. 383 (1912). At issue in that case was access points to St. Louis for both passenger and cargo transportation by rail. Terminal Railroad Association, a group of railroad companies that had acquired three facilities that controlled access to St. Louis, were alleged to disadvantage non-member railroads by manipulating rates and adding special charges. The government asked for the Court to dissolve the Association, but recognizing the “public advantages of a unified system” the Court instead imposed a series of conditions on the Association to benefit non-members. The Court required the Association to allow non-owner railroad companies the option to become owners on equal terms to current owners and that non-owners would have access to the facilities on “just and reasonable” terms. The Court also banned exclusive dealing and unfair billing practices. The Court retained the right to divest the Association if it failed to live up to the imposed behavioral remedies. Scholars who have called for a revival of the essential facilities doctrine and its application to Big Tech platforms have made much of this case.
Despite its importance, Terminal Railroad Association doesn’t call itself an essential facility case. Later jurisprudence would identify this doctrine in cases like Hecht v. Pro-Football, Inc., 570 F.2d 982 (D.C. Cir. 1977). There, the D.C. Circuit first described the antitrust principle of an essential facility, applying it to RFK Stadium and holding that the lower court failed to give an instruction on essential facilities when a potential American Football Team filed an antitrust lawsuit challenging a restrictive covenant the Washington Redskins had with the Department of the Interior.
The classic formulation of the essential facilities doctrine actually comes from another appellate court in MCI v. AT&T, 709 F.2d 1081, 1132-33 (7th Cir. 1983), cert. denied, 464 U.S. 891 (1983), stating that exclusionary conduct by a monopolist is illegal under Sherman Act Section 2 when:
- The monopolist controls access to an essential facility;
- The facility cannot be duplicated practicably by a competitor;
- The monopolist has denied access to the competitor; and
- It was feasible for the monopolist to grant such access.
While lower courts largely developed this doctrine, the Supreme Court has not endorsed it when given the opportunity. For instance, in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), involved an appeal from a jury verdict in favor of the plaintiff finding, in part, that a multi-day, multi-area ticket for the ski slopes that the defendant offered to the plaintiff and other competitors could be considered an essential facility. The Court declined to consider the essential facilities doctrine because it had sufficient grounds to uphold the jury verdict as a refusal-to-deal case under Section 2 of the Sherman Act. Then, in Verizon Comm. v. Law Offices of Curtis v. Trinko, 540 U.S. 398 (2004), the Court denied ever recognizing the essential facilities doctrine and declined to either “recognize it or repudiate it” there.
Why the Essential Facilities Doctrine is Bad Antitrust Economics and Shouldn’t Apply to Big Tech
Trinko’s refusal to recognize the essential facilities doctrine may have helped to stall its development in the lower courts. The logic of Trinko not only explains why the essential facility doctrine is bad antitrust economics, but it also suggests good reasons why it shouldn’t apply to Big Tech platforms today.
In Trinko, the complaint alleged that Verizon limited rivals’ market entry by denying them telecommunications interconnection services. The Court explained that Section 2 required more than just the possession of monopoly power; it also required “the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” Trinko, 540 U.S. at 407 (citing United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). The Court set out the antitrust economics undergirding this principle:
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.
Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities. Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing—a role for which they are ill-suited. Moreover, compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion. Thus, as a general matter, the Sherman Act “does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.”
Trinko, 540 U.S. at 407-08 (citing United States v. Colgate & Co., 250 U. S. 300, 307 (1919)). In other words, the Court recognized the importance of preserving the incentive to create and the difficulty of enforcing remedies.
Preserving the Incentive to Create
Big Tech platforms have indeed created infrastructure that “renders them uniquely suited to serve their customers.” But forced sharing would reduce the incentive to create those incredibly valuable platforms. In recommending that Congress overturn Trinko, the HJC Report barely recognizes how such an action would reduce incentives to create the platforms in the first place.
An antitrust duty to deal is at the outer boundary of Section 2 liability for a reason: it is extremely difficult for a court or a regulator to achieve the correct balance between ex ante incentives to innovate and ex post incentives to restrict anticompetitive behavior. In cases where conduct is ambiguous as to its anticompetitive effects, the error-cost framework cautions against imposing a duty to deal.
Reviving the much broader essential facilities doctrine and applying it to Big Tech platforms will surely reduce the incentives to build the next Amazon, Google, Facebook, or Apple. While critics believe these monopolies are unassailable without government intervention, the history of the Internet suggests this is far from true: Facebook overtook MySpace, Google overtook Yahoo, Amazon overtook Barnes & Noble and Borders, Apple’s iPhone overtook BlackBerry. Applying the essential facilities doctrine to Big Tech would reduce the incentives of new entrants to undertake the tremendous investment and risk required to create the next big thing.
Difficulty of Enforcing Remedies
Just as importantly, the Trinko Court learned from the difficult history of judicial enforcement of antitrust remedies that courts are ill-suited to act as central planners. In Terminal Railroad Association itself, the Supreme Court struggled to enforce its remedies. As disputes reached the Court three different times over the next twelve years, the Court declined to impose the dissolution remedy and left the regulation of rates and terms of service largely up to the Interstate Commerce Commission. By comparison, as the Trinko Court recognized, the remedy of extending nondiscriminatory admission to non-members to join the club was easy. The remedies for complainants that allege Big Tech platforms are essential facilities would require considerably more judicial oversight of prices, platform rules, the level of first-party competition, and many other issues courts would have a hard time assessing.
If every time the App Store or Google Play rejected a developer became grounds for a lawsuit over the “reasonableness” of the platform’s rules, or if every time Google or Facebook changed its pricing for ads it became a case about the whether the price was “fair,” the courts would be tied up with litigation over enforcement of remedies.
Conclusion
The essential facilities doctrine is a relic which has no place in modern antitrust jurisprudence. Reviving it in order to battle Big Tech platforms is a mistake. It is essential to protect the innovation of the Internet age. The essential facilities doctrine is ill-suited to that end.