Extended Excerpts from Speech and Answers to Questions by Rick Rule.
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 Rick Rule's address and answers to questions.
 • Copyright Tech Law Journal. All rights reserved.

"B2Bs are an exciting opportunity. They are made possible, if you will, by the development and evolution of the so-called new economy. There are issues that come up, that at least in terms of the mix of issues, may be unique. But having said that, this is not an area, at least from my perspective, of where antitrust, antitrust enforcers, antitrust counselors, are necessarily at sea, without any guidance. As Susan mentioned, and as I think others have mentioned, various Commissioners have mentioned, this is really is a fairly, as a general matter, a fairly familiar area to antitrust lawyers. It is a joint venture analysis at bottom. The classic statement, albeit not very helpful statement, of the rule of reason in Supreme Court jurisprudence is the Chicago Board of Trade case, which you could argue at least, was the, was a ____ type of exchange, or at least a B2C exchange. So, they have been around for a while."

. . .

"One of the things that strikes me is that it would not be a very good idea to try to have guidelines, because, and this is probably something that you ought to talk about in the future, but there are some that are up and running. If you take the chemical industry, I don't know if, there may be six or seven different exchanges, and they are all going at the problem in different ways. And if you had one sort of sense of, of guidelines, the fact is you might be pushing a lot of square pegs into rounds holes that don't quite work. You might be denying you clients your clients the ability to really take advantage of certain efficiencies that are out there."

...

Rule recounted that the Department of Justice wrote three quidelines while he was there.

"I still think they were worthwhile, but they were in areas, one was in an area where guidelines make sense, and that is merger analysis. And the reason for that is that the Department of Justice and the FTC are really kind of the only game in town. If you are going to do a merger of any significance, it is going to have to go through those agencies. And as practical matter, they almost never get to court. And when they do, the courts actually pay some attention to merger guidelines. But, in every other area, the difficulty is that the FTC and Department of Justice see very few of the practices that are out there, and often times they are the least of your worries. You are more concerned about private parties, or other things. And, you, either, the risk you run with guidelines: they either become oratory in terms of trying to encourage courts to go out and be, you know, take a flexible approach, which is what we did, back in the 80s, which are nice kind of think pieces, and people can look at them. And they do provide some help, perhaps, in thinking through problems. But ultimately, you can't really rely on them because you don't know how the courts are going to come out. The alternative is to take a more aggressive enforcement approach, which may not be consistent with the law, and may put greater constraints on companies than the law would. And as a practical matter, probably wouldn't come into play, because the agency sees so few. But, it puts lawyers and business people in a very difficult position, because they feel constrained, as with safe harbors, to stay within the safe harbors, even though the law might give them greater flexibility. So, guidelines I am not sure is a good idea."

...

Rule then began a discussion of two topics which he described at Section 7 formation issues, and Sections 1 and 2 rules of the road issues.

"Formation, Section 7, also the EU MPF, Covisint. myaircraft.com is sort of the -- I won't say guinea pig -- but, it is the one that got prominence in Europe as going through the merger review over there. If you look at both of those, my view is, they actually are going to represent the minority of B2B exchanges that are put together."

...

"I think the real issue under Section 7 ... which is this question of exclusivity, tipping, network effects, and that sort of thing. ... There is going to be a tendency to move towards a single exchange, for a variety of reasons. ... At I think at that point the Commission is going to have to take a long hard look at how it is going to approach what may look like a problematic mergers, but really may be efficiency driven."

...

"Rules of the road, Sections 1 and 2. ... the only way you can effectively monitor antitrust issues over time, is, by monitoring. And, that means, as much as the clients don't particularly like it, you have got to have, you know, there has got to be some oversight, or at least presence, on the part of lawyers. Now, different B2Bs, and probably for a lot of the folks in this room, take the approach that in house counsel can deal with a lot of that, and, groups of in house counsel, committee of in house counsel. And I think that is one way to go that can be effective. I think there is also, you know, a role for us outside counsel occasionally. But, I think this is not that much different from what you are used to in trade associations."

...

Rule then addressed "firewalls and safeguards". He stated that "in information exchanges" ...  "the most important firewall" is "don't use incumbent employees, if you essentially hire staff to do it" However, he added that these people earn more than the companies' CEO's.

...

"... the director issue is also important ... there are industry members, competitors who own it. Obviously, they are going to be involved as directors. There are ways to sort of screen directors. But, it is not as easy as it might first seem to us antitrust lawyers, because we have got to deal with the corporate lawyers who say, 'Well geez, we have got these, you know, Delaware rules, and it says the directors have to have access to the information which they need to carry out their fiduciary responsibilities ..."

...

Rule then went into a long discussion of problems raised by information sharing in the airline industry, and how this relates to electronic B2Bs. He stated that there is a problem if information is shared that has value to competitors, but not to consumers. In this case, it may be used as a signaling device. He concluded: "No future, or no unavailable prices, should be listed on an exchange. They should be current available prices."

...

Rule also addressed the difference between listed prices and actual "confidential transaction prices." He said that "who will get access to it" is a concern. "Exchanges will have to deal with that issue." However, he offered no answers.

Rule next addressed aggregated purchasing and the 35-20 rule. He explained that there is a guidelines for shippers associations, shipping associations, which contains a 35-20 rule: "if the people purchasing the transportation service, or you could generalize it to anything else, accounted for less than 35% of the purchases of that service or commodity, it wasn't a problem. It was in a safe harbor, because the notion was, less than that they would not have unilateral power. As it were. The 20% rule was, as long as the service or commodity represented less than 20% of the final cost of the output, that the joint purchases made, ..., it was OK ... That rule got picked up in the health care guidelines in the early 90s. It was still a 35 20 rule ... It got changed in the collaboration guidelines, so that it is now a 20-20 rule. ..."

...

Rule next addressed disintermediation. "There is a need to, sort of, involve distributors. On the other hand, distributors understand that a lot of these efficiencies are coming at their expense. And they are not real thrilled about it. And what they are worried about is that B2Bs will essentially disintermediate them. People will be able to go around the distributors." airlines and automobile industries are examples. "The question is, well, how do you get distributors get to cooperate -- sometimes you do need their cooperation -- and don't get them to, essentially, try to punish companies who ______ participate by, you know, basically, taking their business elsewhere?... I think one thing you can tell clients that they can't do -- you can't as an industry get together and say 'Listen, don't worry distributors. As an industry we are making a commitment to you we'll are never going to allow disintermediation. If you generally make that kind of a claim, you got a problem. And you probably ought to avoid it."

Finally, Rule addressed "underinclusive v. overinclusive" ... "I hope the agency is sensitive to the fact that network effects are actually a reflection of efficiencies. I mean, if you really understand the argument, the reason that you tend to have a single platform, is because it is more efficient to deal with a single platform than multiple platforms, for a variety of different reasons. And, if you establish rules that prevent efficient single platforms from arising, or somehow, impede that, the problem is you are going to lose a lot of the efficiencies of B2B. And I think that the agencies have to be very attentive to that, and not get caught up in -- some of you may know that I represent Microsoft -- but not get caught up in, sort of, Microsoft fever. And a concern that every time a network effect is identified, you conclude that tipping is possible, and therefore go in and attack it. But then again, have more sensitive approach to this. My answer is allowing interexchange interoperability among exchanges, as opposed to basically trying to force multiple identical exchanges from existing over time. But we will see how that all works."