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Extended Excerpts from Speech and Answers to Questions by Susan DeSanti.
Re: Electronic business to business marketplaces and antitrust enforcement.
Address to the U.S. Chamber of Commerce, Legal Affairs Council.
Date: September 14, 2000.

Editor's Notes:
  Tech Law Journal transcribed from its audio recording of Susan DeSanti's address and answers to questions.
  Copyright Tech Law Journal. All rights reserved.

DeSanti stated that the issues "... that B2Bs raise are not new to antitrust analysis."

"The facts are new. The context is new. But the questions that arise are very familiar ones to antitrust practitioners. And, as a general matter, the antitrust issues that arise are soluble through practical solutions. Now, does that mean that everybody can go, "Whew, I don't have to think about antitrust ever again?" No. Quite the contrary. What this does mean is that B2Bs are most likely to be able achieve their efficiencies and avoid antitrust risks by considering antitrust issues at the front end, when they are assessing the markets in which to operate, developing operating rules and bylaws, considering what activities to undertake, determining other matters, such as who will participate, and under what terms.

Editor's Note: Rick Rule, of law firm of Covington and Burling, spoke following DeSanti.

I am just going to briefly touch on a couple of issues that should be considered by anyone putting together a B2B or overseeing its ongoing operation. And I am going to leave to Rick a more detailed discussion of issues, because he has a more practical experience and knowledge that I do in how to address and resolve them.

First, on information exchange, a very obvious issue that comes up. Let me give you some questions, which B2Bs should think about in terms of information sharing among the B2B participants. First, let me note, as always, information sharing among competitors sometimes is procompetitive. In the right circumstances, it can facilitate price transparency that will foster competition. In other circumstances, however, it may increase the likelihood of collusion, for example, by enhancing the ability to predict a competitor's prices from knowledge of its costs, or to project or monitor a competitor's output level.

So, in assessing whether an information exchange may raise competitive issues a B2B should consider matters such as:

Are the markets at issue otherwise susceptible to collusion?

Could the specific information divulged facilitate collusion?

What firewalls, or other devices, might be employed to limit the exchange of competitively sensitive information without interfering with the efficient functioning of the marketplace?

And as one added dimension to this issue -- something that also came out at the workshop -- is that sometimes B2Bs need to think about the information that is going to the Board of Directors, and whether a member of the Board of Directors might get competitively sensitive information about its rivals simply because of its position on the Board?

My own sense on this, based on limited learning, and I defer to those who are out there, doing this on a daily basis, but, you know, from what's, the available information that I have seen, and what we learned at the workshop, my own sense is that, if there is a careful assessment at the start, and good planning, it is likely that a B2B will be able to find the right mechanisms, such as firewalls, to protect against an inappropriate exchange of competitively sensitive information.

And what we also heard at the workshop was, that, that's likely to be very consistent with business interests of a B2B that wants to persuade participants that it is a neutral marketplace, in which they can transact business, and also a place where their sensitive information is going to be protected.

OK. Exclusivity -- another issue to think about. Exclusivity is about rules that keep insiders in the marketplace: rules that say for example, "I want you to participate only in my B2B, and not any other B2B," or perhaps more likely, "I want you to commit to send the vast majority of your volume of transactions through this B2B, and I am willing to give you financial incentives to do that." Now it is easy to see why a B2B would want to attract participants to itself, and keep them there. B2Bs need enough trading volume to cover their costs, and buyers, generally, want to trade on an exchange that allows them to reach the most sellers on a market, and vice versa. And in many circumstances, exclusivity practices may be perfectly fine from an antitrust perspective, especially for a B2B that is just starting up in marketplace.

But before deciding on those, there should be an antitrust assessment that takes a look at, among other things, whether there will be sufficient volume for competing marketplaces to continue operating, or to enter into the relevant market for B2B marketplaces. In other words, in an extreme case, if you use exclusivity tactics to tie up almost all available volume on your B2B, rather than competing on the merits to attract that volume, may raise significant antitrust concerns.

These are only a couple of the issues that should be considered, but they give you a flavor of the type of antitrust concerns that may arise.

And before I move to my final point, and brief discussion of Covisint, let me note that just one more thing. Antitrust compliance for B2Bs is not going to be just a one time thing. This is not a case where you can set up all of the operating the bylaws and the other procedures in a correct manner, and then sit back and never have to think about it again. B2Bs are going to need to make sure that the actual implementation of the B2B follows the rules that have been set up. And, B2Bs, like any other joint venture are going to have to pay attention to market circumstances, to see whether any of their rules may end up having different competitive effects later on, than they do at the beginning. For example, exclusivity practices that may look fine as a means to get a B2B up and running, may look different from an antitrust perspective four years down the road if it turns out that the B2B has become dominant in its relevant market. Now, none of that is new or specific to B2Bs. These are just general rules of the road for any joint ventures among competitors.

OK. My third, and final point: future market development. Having said all of that, I need to point out that workshop participants also noted some possible antitrust issues for the future that could pose more difficult problems, such as whether B2B markets may have a tendency to tip toward one or two dominant B2Bs, and what that could mean for assessing how B2Bs operate in those circumstances. The potential for tipping could cause a greater scrutiny for such issues as whether a particular B2B has exclusivity practices. That is, restraints, as I was discussing before, restraints that are designed to keep insiders in; whether it has exclusivity practices that could exacerbate network effects, and encourage tipping; or, on the other hand, whether there were exclusion policies, that is, was it restraints designed to keep outsiders out, that significantly raise the cost of competitors excluded from the B2B, and that it has thus ended up harming competition in the downstream market. And it is here that I want to make an emphasis on "and thus end up harming competition in the downstream market." This is just the old familiar reminder that antitrust is not about protecting competitors -- it is about protecting competition. There needs to be -- there would need to be an effect on competition in the downstream market in order to assess that there was an exclusion, matter that, that raised a significant antitrust problem.

Of course, and I will go back and say this again, exclusivity and exclusion can be procompetitive in the right circumstances. But they both have the potential to warrant increased antitrust attention in the presence of network effects. Now, the caveat here is, how these issues play out remains to be seen. We heard a variety of predictions at the workshop on whether B2B markets are likely to tip, with some predicting only a few dominant players, and others predicting a greater range for effective competition. And until B2B marketplaces have developed to a greater extent, I think that it is going to be difficult in most cases to assess the likely significance of these issues.

OK. Final point on Covisint. The Commission did announce this week that it had informed the founders of the proposed Covisint B2B that the Commission has closed its investigation of whether the formation of Covisant violated Section 7 of the Clayton Act. Basically, Covisint is the first B2B venture to be reviewed by the Commission.

Steve Bollerjack is here. He can stand up and correct me if I go to far off of the reservation on any of these points. What the press release explains is that it is a proposed joint venture that plans to operate an Internet based business to business exchange providing services to firms in the automotive industry supply chain. And the venture's core offerings will include services to assist in product design, supply chain management and procurement functions performed by automotive manufacturers and the direct and indirect suppliers, and the firms who are intending to form Covisint are five automotive manufacturers -- Ford, GM, Daimler Chrysler, Renault, and Nissan, and two information technology firms, CommerceOne and Oracle.

OK. What happened here is that the Commission simply closed the investigation that had been begun under the Hart Scott Rodino Act. What the Commission said in its press release is, and in the closing letter that went to the parties, the Commission noted that, "because Covisint is in the early stages of its development and has not yet adopted bylaws, operating rules, or terms for participant access, because it is not yet operational, and because its founders represent such a large share of the automobile market, the Commission cannot say that implementation of the Covisint venture will no cause competitive concerns. In view of this, the Commission reserves the right to take such further action as the public interest may require."

It is interesting to note that, and also what Chairman Pitofsky said in the context of the press release. He stated: "As we learned at the FTC's workshop in June, B2B electronic marketplaces offer great promise. As means through which significant cost savings can be achieved, business processes can be more efficiently organized, and competition may be enhanced. B2Bs have a great potential to benefit both consumers and businesses through increased productivity and lower prices."

So, I just want to reaffirm the notion that there is a perception of the -- the real potential for efficiencies that are here. He goes on to say, "Of course, as is the case with any joint venture, whether in traditional or new economy, B2Bs should be organized and implemented in ways that maintain competition, and what's more, it is important to note that the antitrust analysis of individual B2B will be specific to its mission, its structure, its particular market circumstances, procedures and rules for organization and operation, and actual operation and market performance." So, I think those are useful points to take into account when you take a look at the press release in Covisant, and seek to understand what the Commission is saying in this area -- so far.

In conclusion, this is a really exiting time. I too am impressed with the, you know, real potential for efficiencies here. I understand that there is hype in the area. But, you can't gainsay the fact that there's, there, you know, it makes sense that there is a significal, significant, potential for efficiencies here. And it seems that if proper attention is paid to antitrust up front, most B2Bs should be able to achieve their promised efficiencies without antitrust risk.

Thanks a lot for having me here."

During the followup question and answer session, DeSanti had this to say:

"On the topic of whether guidelines are a good idea in this area, having just been through an exercise to come up with the competitor collaboration guidelines that DOJ and the FTC came out with in April of this year, which do have some relevance here, they don't provide all the answers, but a number of practitioners have said that, you know, that they found them useful in the area. I am very skeptical that guidelines are necessary or would be a good idea, for most of the ___ articulated. So, despite the fact that I know that there have been discussions towards this, suggesting that guidelines were coming here, I am pretty skeptical, I can definitely tell you that I will work at MacDonald's before I work on another guidelines ... [interrupted by laughter] It wouldn't involve me if it ever happens."

DeSanti also stated:

"There is a possibility here for a report coming out of the FTC workshop, you know. Just how much guidance might be in it, we will have to see. But that is something that is under consideration."

DeSanti was also asked when? She responded:

"One should hope for the fall."


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