TradeComet’s antitrust suit against Google has been dismissed by the S.D.N.Y. Court in which the case was being heard.  The opinion is available here.

The holding:

Google has now moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(1) and 12(b)(3) for improper venue based on a forum selection clause in the parties’ advertising contracts. Because TradeComet’s claims fall within the scope of the relevant forum selection clause that requires that this action be brought in California, and because enforcing that clause would be neither unreasonable nor unjust, Google’s motion to dismiss is granted.

Of course this does nothing to the substantive claims, but it does require that they be brought–if they are brought again at all–in Santa Clara County, CA (as the forum selection clause dictates).

Of more interest to law . . talking . . guys may be the following:

TradeComet contends that the forum selection clause is unconscionable because—it claims—Google enforces it selectively, it is found within a contract of adhesion, and it would force TradeComet to litigate its claims in Google’s “backyard.”

To me these claims are meritless on their face.  The court also had no trouble dismissing them and here–citations omitted–is the court’s complete response to the claims:

However, TradeComet offers neither evidence to support its allegation of selective prosecution nor legal authority indicating that such behavior—if true—would make a forum selection clause unconscionable and thus unenforceable. Additionally, the fact that the August 2006 Agreement may or may not be a contract of adhesion does not invalidate its forum selection provision.  Finally, although litigating these claims in California rather than New York likely will be more burdensome for TradeComet, which has its principal place of business in New York, there is no suggestion that it would be so difficult as to deprive TradeComet of a fair opportunity to litigate its claims.

I only wish the court had pointed out that Google enters into an incredible number of these agreements.  Whatever burden ex post it places on each of Google’s counterparties that the terms be identical between the contracts and that they specify Google’s “backyard” as the venue for any litigation, the magnitude of the burden it would impose on Google to separately negotiate and track terms for each advertiser and to litigate each agreement in a different court is several orders of magnitude larger.  I can see no reason whatever that a court should ever entertain an argument to invalidate such terms.  The unconscionability argument is, well, unconscionable.

UPDATE:  Aruna Viswanatha at Main Justice is also on the case, as it were.

Antitrust & Competition Policy Blog is hosting a symposium on Competition in Agriculture.  Mike’s post from yesterday is available here.   So far in the symposium there are also posts by Ron Cass (BU Law), Jeff Harrison (Florida Law), Peter Carstensen (Wisconsin Law), and Kyle Stiegert (Wisconsin Applied Econ).  Additional posts should be forthcoming from Christina Bohannan (Iowa Law), Andrew Novakovic (Cornell Applied Economics), and the great George Priest (Yale Law), who I hope gets the blogging bug.

Josh, Scott Kieff and I have posted a short comment based on our submission to the DOJ/USDA Workshops on Agricultural Competition, co-authored by us and Mike. The comment should be available for download from the DOJ webpage when the public comments are posted (someday . . . ).  A copy is also available here (www.laweconcenter.org), and comments are most welcome at gmanne@laweconcenter.org Please leave comments on this post over at the A&CP Blog.

Regarding firm size and integration, it must be kept in mind that the agriculture industry in the U.S. has, for good reasons, moved beyond the historic, pastoral image of small family farms operating in quiet isolation, devoid of big business and modern technologies. The genetic traits that give modern seeds their value—traits that confer resistance to herbicide and high yields, for example—are often developed through processes that are technologically-advanced, time- and money-intensive, risky investments, and subject to various layers of regulation. It doesn’t take expertise in industrial organization to imagine why at least for some participants in this market these processes are likely to be more efficiently and effectively conducted within large agribusiness companies having enormous research and development budgets and significant expertise in managing complex business and legal operations, than they are by the somber couple depicted in the famous 1930 Grant Wood painting, “American Gothic.” Nor is such expertise required to imagine why complex contracting across firms, of any size, is likely to be of significant help in supporting the specialization and division of labor that is useful in allowing some businesses (even a small family farm is a business) to be good at planting and harvesting while others are good at inventing, investing, managing, developing, testing, manufacturing, marketing, and distributing the next wave of innovative crop technologies. This requires on the one hand that the government give reliable enforcement to contracts and property rights whether tangible or intangible (extremely important in this industry are patents, trade secrets, and even trademarks), while on the other hand it allows firms wide flexibility to decide for themselves which of these contracts and property rights they would like to enter into or obtain pursuant to the applicable bodies of contract and property law.

When courts and regulatory agencies like the DOJ Antitrust Division adopt special approaches to the body of antitrust law to address concerns that may arise from these property rights and contracts, they run the risk of crafting doctrines that inappropriately override well-established bodies of law that are informed by longstanding judicial and scholarly thought and consideration of each area, and creating the potential to reduce innovation and economic growth. A central countervailing concern is that the putative antitrust injuries that might arise are rooted in stylized economic models that are heavily dependent on a narrow set of assumptions, leaving significant room for erroneous antitrust enforcement. A modest but fundamental safeguard to protect against this concern of “false positives,” is an approach to antitrust that requires a strong demonstration of actual anticompetitive effect as a precondition for a monopolization violation.

Not only are patents not presumptive proof of market power in any static sense, but patents can also meaningfully improve both competition and access to patented technologies over time, in the dynamic sense. From the public record it appears that the driver of much of today’s antitrust enforcement in the agricultural industry boils down to intervention into business disputes between large and sophisticated parties. The inherent uncertainty regarding the economic consequences of specific conduct, coupled with competitors’ poor incentives and the huge costs of error, counsel strongly against antitrust intervention without strong empirical evidence that the conduct has reduced competition and harmed consumers in the form of higher prices, lower quality, or reduced innovation.

The Amazon vs. Macmillan controversy has been beaten to a pulp in the blogosphere.  See Megan McArdle, John Scalzi, Joshua Gans, Virginia Postrel, Lynne Kiesling, Lynne Kielsing and Lynne Kiesling, among others.  Pulp or no (get it? It’s a book/e-book pun), I haven’t seen anyone hit squarely on what I think is the crux of the issue: control rights.

Amazon is an interesting hybrid, sometimes acting as a platform, sometimes acting as a direct merchant.  In its capacity as a platform, Amazon facilitates sales of goods from other merchants to Amazon’s customers through its website.  Amazon itself doesn’t actually sell these goods (because it never actually owns them), although it operates the system that enables these sales and takes a cut.  In its capacity as a merchant, Amazon purchases goods from suppliers and sells them directly to its customers.

The Kindle makes the merchant/platform distinction even more muddled for Amazon, and the distinction is at the core of the issue.

Basically, the difference between a merchant and a platform, as suggested above, is in the degree of control an intermediary exerts over pricing and other terms of sale, and the extent to which it bears risk.  The more control, the more merchant-like; the less control, the more platform-like (Thus the Gap is a merchant; eBay is a platform).  Background economic conditions determine which model (or where on the continuum between them) is more efficient for a given intermediary or market.  As these conditions change, the optimal degree of control may change, as well.  At the same time, suppliers or intermediaries may choose to assert or deny control in response to changing economic conditions–and this choice may not be optimal.  To my thinking, this is what is going on in the book/e-book market.

Steven Pearlstein in the WaPo hints at the issue:

While markets have their flaws, over the long run they are good at executing these technological transformations. My guess is that in the not-so-distant future, best-selling authors such as John Grisham and Malcolm Gladwell — along with unknown authors peddling their first books — will publish their own works, contracting with independent editors and marketers and selling directly to consumers as much as possible. Other authors will turn to smaller, more specialized publishing houses that will offer smaller advances but bigger royalties and will be built, as they once were, around great editors. Publishers will sell their books through competing online distributors and traditional hard-copy bookstores, the latter of which will continue to exist not only as places to browse and socialize, but also as places to have printed on demand. Backlists will be infinite, pricing will be dynamic, and more copies of more books will be read and sold.

From Amazon’s point of view, this possible future is probably a quite likely one (in part because it can help to hasten its arrival), and one which does not necessarily bode well for its merchant-like business model (on which see, e.g., Charlie Martin).  But this future is a goldmine for its platform model, particularly to the extent that Amazon’s Kindle offers a widespread and attractive platform to readers and authors alike.

When it comes to selling physical books directly, Amazon has, and is used to, full control over the terms of sale.  When it comes to selling e-books, however, Amazon is not really a merchant–but it’s not (yet) exactly a platform, either.  Most obviously, there is no physical inventory for Amazon to purchase with e-books, and whether it actually purchases e-books at the time of sale to resell in each transaction (even at a predetermined price) or simply facilitates a transaction between publisher and purchaser at the time of sale, Amazon bears the same extent of inventory risk: zero. Very platform-like.  But the terms of contracts with publishers complicate matters.  Under the Amazon-negotiated pricing scheme, Amazon does, indeed, buy the e-book and re-sell it.  Although this entails no inventory risk, it does mean that Amazon bears “pricing risk” (if that’s a term) just as a merchant does, and it is stuck with the price it negotiated with publishers, no matter the price at which it actually sells its e-books.

There are other nuances.  Important among these, use of e-books purchased through Amazon requires that buyers own a Kindle (just as use of Xbox video games generally requires owners to have purchased an Xbox).  If not enough buyers own Kindles, there is little value (and some cost) to publishers in participating in the e-book market through Amazon; likewise, if not enough publishers sell e-books through Amazon, there is little value to consumers in buying a Kindle.  Again, very platform-like.  But books will be written, published and marketed regardless (or maybe almost regardless) of the number of Kindle owners, and book buyers will buy the same books (or maybe almost the same books) whether they own Kindles or not–and some Kindle owners will buy physical books even though they own Kindles.  The point is that the indirect network effects (or economies of scale–a debate for another day) that one expects in platform markets and that one sees in, say, the video game market (the more Xbox owners, the more Xbox game developers there will be and thus the more Xbox owners there will be) are severely attenuated in the e-book market currently because of the overwhelming demand for physical versions of the same books.

Now, both of these points are discussed in different ways by many of the commentators I pointed to on this issue.  Obviously the nature of the contracts between Amazon and publishers is central to the story (in fact, it is the story), and everyone has discussed the issue.  Several folks have also pointed out that e-books compete with physical books, usually to mention that publishers are interested in price discrimination (on which Kiesling and Postrel are particularly good).

But I think viewed in the light of the choice of business model it is clear that the issue is control.  The question is the extent to which Amazon should act more like a platform or more like a merchant, and this distinction is determined by the amount of control it has.  As a merchant, Amazon expects–and everyone benefits from it having–a lot of control, with both its attendant costs and benefits, over the terms of sale of its products.  As a platform, Amazon is willing to cede control over the terms of sale and just manage the platform.

When publishers assert that they want more control over e-book prices they are pushing Amazon toward a platform model for e-books.  The problem is that because book publishers do not internalize the benefits conferred on other publishers from a wider use of Amazon’s platform, their pricing incentives may be inefficient.  As others have noted, publishers probably want to engage in pricing and price discrimination that will maximize their revenue.  But this control may not be optimal for the platform at this nascent stage.

And that’s really the twist.  Amazon is not ready to be a platform in this business.  The economic conditions are not yet right and it is clearly making a lot of money selling physical books directly to its users.  The Kindle is not ubiquitous and demand for electronic versions of books is not very significant–and thus Amazon does not want to take on the full platform development and distribution risk.  Where seller control over price usually entails a distribution of inventory risk away from suppliers and toward sellers, supplier control over price correspondingly distributes platform development risk toward sellers.  Under the old system Amazon was able to encourage the distribution of the platform (the Kindle) through loss-leader pricing on e-books, ensuring that publishers shared somewhat in the costs of platform distribution (from selling correspondingly fewer physical books) and allowing Amazon to subsidize Kindle sales in a way that helped to encourage consumer familiarity with e-books.  Under the new system it does not have that ability and can only subsidize Kindle use by reducing the price of Kindles–which impedes Amazon from engaging in effective price discrimination for the Kindle, does not tie the subsidy to increased use, and will make widespread distribution of the device more expensive and more risky for Amazon.

Many of the commentators (see especially Scalzi and Kiesling) are angered by Amazon’s conduct in the affair, and see in it reason to shift their loyalty from Amazon to its competitors (or at least they did before Amazon capitulated).  I see it quite differently.  To me the affair was a dispute over control rights allocated by contract.  Amazon is willing to pay more for control–to act, in other words, like a merchant re-selling publishers’ books.  It wants this control because it wants to sell e-books at a lower price than publishers want in an effort to sell more Kindles and encourage e-book use (and, incidentally, sell fewer physical books).  At this stage in this market what is needed is not more incentive for publishers to develop more inventory, but more incentive for Amazon to develop its platform.  To the extent that Amazon must now bear more of the risk and cost associated with the transition to e-books, the transition will likely occur more slowly.  Amazon’s effort to maintain pricing control by playing hardball with Macmillan in the physical book market was appropriate and gutsy.  And we would have been better off if it had succeeded.

I don’t think there’s anything to be “done” about the state of affairs other than for Amazon and publishers including Macmillan to continue negotiating.  But I will note one thing (seconding Joshua Gans):  It is almost certainly the case that Amazon capitulated in its dispute with Macmillan because of fear of drawing antitrust litigation.  If so, I think this would be most unfortunate, and it would represent antitrust enforcement placing an inefficient thumb on the bargaining power scale.  Perhaps we shouldn’t be so quick to reject the idea of false positives . . . .

Important Hat Tip.  When I started writing this post I hadn’t yet seen this article by Andrei Hagiu (Hagiu, Andrei (2007) “Merchant or Two-Sided Platform?,” Review of Network Economics: Vol. 6: Iss. 2, Article 3) (embarrassingly enough, as it was published in 2007).  But my thinking here maps significantly onto Andrei’s and I re-wrote some of the post, particularly reflecting some of his terminology, once I did read it in the middle of drafting the post.  It strikes me as an extremely important article in the two-sided markets literature, and I highly recommend it to everyone interested in the topic.  To the extent that I say what he says, he says it better; and to the extent that we diverge, he is probably correct and I am probably wrong.

I’m sure it’s an honor just to be nominated.

A recent opinion from Judge Posner cites our very own Josh Wright (Joshua D. Wright & Todd J. Zywicki, “Three Problematic Truths About the Consumer Financial Protection Agency Act of 2009,” Lombard Street, Sept. 14, 2009, available here) (by the way, the essay has drawn a few comments, my favorite of which is definitely the one titled, “are you stupid or scumbags[?]“).

The opinion is vaguely interesting touching as it does on the propriety of short-term, high-interest loans, but the holding rests on an analysis of the commerce clause so is pretty well beyond my ken.

At issue is an Indiana statute that purports to apply Indiana’s restrictive usury laws to consumer contracts executed outside the state, but with creditors that have advertised or solicited sales within Indiana.  The Indiana usury statute at issue constrains consumer loan interest to terms under which “the ceiling is the lower of 21 percent of the entire unpaid balance, or 36 percent on the first $300 of unpaid principal, 21 percent on the next $700, and 15 percent on the remainder,” with an exception for payday loans.  Such terms would preclude payday loans if they weren’t excepted under the statute and does preclude car title loans of the sort at issue in the case.  The court rules that the restriction on out-of-state transactions is impermissible under the constitution and strikes down the Indiana law.

The interesting part (to me) of the case, and the part where Josh (and Todd) are cited, is where Posner discusses the law and economics and related scholarship of car title and payday loans.  He doesn’t really come down on one side or another in this debate except to aver that Indiana has a colorable interest in protecting its citizens from “predatory lending,” if it so chooses.  It seems to me that he gives too much credit to the behavioral-economics-based arguments on the “predatory lending is, well, predatory” side of the debate, but he really doesn’t wade into the debate.  Nevertheless, Josh and Todd get their mention (Todd actually gets a couple of mentions) in this section, and kudos to them (and to FinReg21, where their essay appears) for drawing Posner’s attention.

As regular readers know, we’ve been following with (critical) interest the antitrust issues surrounding the seed industry in general and Monsanto in particular.  See, for example posts by me or Mike here, here and here.

As you may not know, Monsanto and Pioneer (a DuPont subsidiary) have been engaged in a heated contract and patent dispute rooted in Monsanto’s claim that Pioneer breached a patent license it obtained from Monsanto by stacking (that is, combining in one seed product) Monsanto’s Roundup Ready trait (which makes plants resistant to glyphosate herbicides like Monsanto’s Roundup) with its own glyphosate-tolerant trait in some of its genetically-modified soybean and corn seeds.  Pioneer has counterclaimed, including with a number of antitrust claims.  Arguably the major impetus for the antitrust accusations swirling around Monsanto in this area is Pioneer’s fomenting of such claims, and Pioneer seems to have been “cooperating with” the DOJ in its ongoing investigation.

Although we have been most interested in the antitrust aspects of the case, Monsanto won an important victory in the underlying licensing case last week.  Article here; the court’s (Eastern District of Missouri) decision is available in pdf here.

The basic summary of the case is this (from the decision):

This matter comes before the Court on Plaintiffs’ Motion for Partial Judgment on the Pleadings and Defendants’ Motion to Dismiss Count II of Plaintiffs’ Complaint.

* * *

Monsanto brought the present action for breach of contract, patent infringement, inducement to infringe, and unjust enrichment, alleging that Pioneer violated Monsanto’s contractual and patent rights by producing [] stacked seed products.  Pioneer counterclaims for a declaratory judgment that the license agreements permit it to stack [].  Pioneer also asserts a number of antitrust counterclaims, alleging that Monsanto has abused its patent monopolies, has inserted anticompetitive restrictions into its license agreements with seed producers, and is attempting to employ an anticompetitive “switching strategy” by using new licensing agreements to shift independent seed companies from the current RR trait seed lines to Roundup Ready 2 Yield®, in order to prevent generic entry into the market and extend Monsanto’ patent protection through 2020.

* * *

Monsanto moves for partial judgment on the pleadings that: (1) the license agreements do not permit stacking of any non-RR glyphosate-tolerant traits with Monsanto’s [RR] traits; (2) Pioneer breached those agreements by [so] stacking; and (3) it is entitled to judgment in its favor on Pioneer’s counterclaim for a declaratory judgment that the license agreements permit this type of stacking. . . . Pioneer argues that the license agreements do permit [such] stacking.

We can dispense with Pioneer’s last counterclaim off the bat:  Monsanto announced toward the end of last year that it would not force (and, it claims, never planned to force) seed companies to switch to its new Roundup Ready seeds in anticipation of the expiration of the current Roundup Ready patent in 2014:

But in its letters this week, Monsanto said it would now extend all contracts for Roundup Ready 1 until the patent’s expiration date. It also said it would not enforce language in some contracts that would have required seed companies to destroy or return Roundup Ready seed when the patent expired.

Last week’s ruling explicitly did not reach Pioneer’s antitrust claims which are still alive.

But the ruling did support Monsanto in its basic case which centers around the field-of-use restriction described above.  And on this issue the court found in Monsanto’s favor, holding that the license did indeed contain a valid restriction against stacking of glyphosate-tolerant traits and that Monsanto may seek a remedy for violation of the restriction (if the agreements and patents are deemed enforceable, an issue not reached by the court’s decision) in contract.

The ruling is narrow in scope, but it’s an important victory for Monsanto in what is, at its core, a patent infringement/breach of contract case–not an antitrust case.  It is difficult to escape the conclusion, laid out on Monsanto’s web page here, that Pioneer resorted to stacking in an effort not to improve through synergy the overall glyphosate tolerance of its seeds but rather to patch over the relative  ineffectiveness of its own traits.  Monsanto has licensed its technology widely for use in products where its trait is combined with different traits from other companies (including, notably, competitors like Pioneer).  But for very good reasons (mainly protection of its brand), Monsanto imposes field of use restrictions on the coupling of its Roundup Ready trait with other companies’ traits that purport to perform the same function.  The court’s decision paves the way for Monsanto to thus enforce its property rights.  That this sensible restriction also forms the basis of Pioneer’s and others’ allegations of anticompetitive conduct is regrettable, and I hope the court and the DOJ are mindful of the error cost risks inherent in this kind of claim.

At the same time the ruling makes the underlying case harder for Pioneer and thus makes Pioneer’s antitrust counterlcaims more important to its ability to prevail.  I guess that means more fomenting of antitrust animosity against Monsanto is probably in the cards.

Gretchen Morgenson doesn’t want poor people to have access to consumer credit. At least, that’s what I think she’s saying in her rambling NYT column this week.

Congress and federal regulators have recently taken a number of actions that will make it tougher for riskier customers to access consumer credit. First there was the Credit Card Accountability Responsibility and Disclosure Act, which precludes issuers from charging fees for services like telephone payments, requires a number of disclosures and advanced warnings, and makes it harder for issuers to raise interest rates and charge over-limit fees. Then there are the new Fed regulations set to go into effect next month. Those rules, which implement the Credit Card Act, preclude credit card issuers from raising interest rates for the ensuing twelve months after an account is opened, and then only on new charges, not on existing balances. By limiting an issuer’s ability to reprice credit based on changes in a customer’s risk profile, the Credit Card Act and Fed rules will make it harder for risky consumers to access consumer credit.

But all these things aren’t enough for Ms. Morgenson. She’s upset that issuers catering to higher-risk consumers are finding other sources of revenue:

An example is Alliance Data Systems, a big issuer of private-label credit cards like those that specialty stores offer. It has decided to levy a $1 monthly surcharge to customers who choose to receive account statements by mail. Proof, yet again, that if you close the door, they will come in through the window. And if you close the window, they blow through the door.

Ms. Morgenson sees Alliance’s $1 charge for assembling, printing, and mailing a paper bill (as opposed to posting the bill on the Internet) as inconsistent with the thrust of the new Fed regulations and the Credit Card Act, and she calls on regulators to “pursue companies flouting the spirit or the letter of the new rules.” Never mind that the small and seemingly justified charge is consistent with the actual terms (as opposed to the amorphous “spirit”) of the new regulations. Never mind also that those new rules have effectively forced Alliance to impose this slight charge if it wants to continue servicing high-risk consumers without raising interest rates. Indeed, Ms. Morgenson recognizes that Alliance caters to riskier customers and is generally compensated via penalty fees rather than higher interest rates:

William Ryan, an analyst at Portales Partners in New York, said the $1 statement fee wasn’t a surprise, given Alliance’s business model. “A disproportionate part of Alliance Data Systems’ yield comes from penalty fees,” he said, “so by default they would be more proportionately impacted by the Credit Card Act than an American Express that caters to higher-end customers.”

Ms. Morgenson thus seems to acknowledge that if the law is enforced as she’d prefer an issuer like Alliance must either charge higher interest rates or up-front service fees, cater exclusively to higher-end customers (a la American Express), or shut down. (She might say that Alliance could also just reduce its revenues, but doing so would probably drive its capital elsewhere.) All these options would make it harder for poorer and riskier consumers to access consumer credit.

But that doesn’t bother Ms. Morgenson. She admits that she prefers a paternalistic “nanny state” to “the pirate state that brought this economy to its knees.” I wonder if the high-risk consumers she’s trying to protect share her views?

When I first read Josh’s post of antitrust links below, I thought “Drew Brees? Surely not THAT Drew Brees.”  Turns out, it IS that Drew Brees. I was very interested to read the QB’s take on American Needle and his plead for the Supreme Court to reject the NFL’s petition to be deemed “a single entity.”  However, of even more interest to me was Brees’ comment that the NFL is petitioning for a “single entity” designation that would, according to Brees, apply “for pretty much everything the league does.”

I wrote a paper (here) with Ken Lehn several years ago examining the issue of antitrust and franchise relocation in the NFL in the wake of L.A. Memorial Colisuem Commission v. National Football League, et al. (1984), more commonly referred to as the Oakland Raiders case.  This antitrust case resulted from the NFL’s refusal to permit the Oakland Raiders franchise to move from Oakland to LA. The key finding in the Court’s decision against the NFL was that the NFL was not a single entity.  The NFL had argued that it was a single entity and therefore incapable of “conspiracy;” the same logic used by the courts to reject an antitrust claim against the National Hockey League in one of its own franchise relocation disputes (San Francisco Seals, 1974).

Ken and I took issue with both the Raiders finding concerning the single entity argument and the court’s understanding (or misunderstanding) of the consumer welfare effects of the NFL’s territorial restrictions.  Drawing on the organizational economics literature concerning incentives and franchises, we made several arguments concerning the important incentives such territorial restrictions provide when revenues are shared but (local) costs are not. We then provided empirical evidence to demonstrate that both the Raiders and the LA Rams did in fact seem to underinvest in quality of their respective franchises after the Raiders moved to LA, ultimately resulting in no NFL team in one of the largest media markets in the US.

So I would have to suggest that, at least for franchise relocation decisions, the NFL should in fact be considered a single entity and some of its other restraining practices are actually pro-competitive (or certainly welfare enhancing). As for American Needle, I haven’t yet read all the facts, but I suspect there are compelling economic reasons for a single-entity decision there as well, particularly given the revenue sharing rules that govern the NFL.

Regardless, I would suggest Mr. Brees use a little more caution in his arguments. Something about pots calling kettles black, and all that. Having reviewed at least one (publicly available) licensing agreement in the CORI K-Base between the National Football League Players Association and one of the popular sports memorabilia companies, a good case could be made using Mr. Brees’ reasoning that the NFLPA is violating antitrust law both in its Group Licensing Rights program and its restrictions against licensees negotiating contracts with any NFL players, or even potential NFL players, who are not (yet) part of the NFLPA’s group license.  I don’t know how far the NFLPA’s antitrust immunity as a labor union may extend beyond the labor market for football players.

I’ve been grading Contracts exams for the last week or so. This is where I earn my pay. It’s an awful job. The students take only one exam for the entire semester, so I really have to be careful to make sure I’m evaluating everyone fairly. Painstakingly reading and effectively ranking 75 three-hour essay exams is tedious beyond belief.

Adding to the tedium is the severe frustration I feel when students make the same basic mistake over and over. The one that really drives me nuts — especially because we went over the rule ad nauseum and I repeatedly warned the class not to make this mistake — is when a student says that a particular transaction is governed by the Uniform Commercial Code (UCC) because the parties to the deal are merchants. Even worse is when they tell me the UCC doesn’t govern because one or both of the parties is not a merchant.

Ugh! I honestly don’t know how I could make it any clearer that Article 2 of the UCC (the part we study in the basic Contracts course) governs all contracts for the sale of goods, even non-merchant sales. Every year, I increase the number of times I make this point in class. I’m now approaching 500 or so repetitions. (OK…That’s an exaggeration. But I really do emphasize this rule!)

I suppose students make this mistake with such frequency because one of the UCC’s most notorious provisions — Section 2-207 — makes merchant status relevant for one matter (the question of whether additional terms in a written acceptance or confirmation become part of a contract). We spend quite a bit of time on 2-207’s intricacies, so this must be the genesis of the confusion. In any event, it’s maddening! (Though not as maddening as losing your students’ exams on an international flight….)

Do other Contracts teachers have the same problem? And how about other common mistakes in other subjects? Let’s commiserate!

If you live outside the farm belt (or you’re not an antitrust junkie) you might have missed what is shaping up to be one of the biggest antitrust stories of the coming year:  The set of antitrust accusations and actions against Monsanto for its alleged anticompetitive conduct in the biotech seed market.

The AP reports:

Confidential contracts detailing Monsanto Co.’s business practices reveal how the world’s biggest seed developer is squeezing competitors, controlling smaller seed companies and protecting its dominance over the multibillion-dollar market for genetically altered crops, an Associated Press investigation has found.

With Monsanto’s patented genes being inserted into roughly 95 percent of all soybeans and 80 percent of all corn grown in the U.S., the company also is using its wide reach to control the ability of new biotech firms to get wide distribution for their products, according to a review of several Monsanto licensing agreements and dozens of interviews with seed industry participants, agriculture and legal experts.

Sounds pretty awful.  Until you read a bit more and if you, you know, know anything about antitrust law and economics.

Let me say at the outset that I don’t know everything one would want to know about Monsanto’s contracts in order to draw a strong conclusion.  But neither does the AP reporter, not that it stopped him from drawing the firm conclusion that Monsanto’s practices are anticompetitive.  The only thing lacking from his story is the usually-obligatory quote from the AAI, although the complete absence of any contrary point of view from any source other than Monsanto itself makes up for this omission.

So let’s see.  The article frets that:

The company has used the agreements to spread its technology — giving some 200 smaller companies the right to insert Monsanto’s genes in their separate strains of corn and soybean plants. But, the AP found, access to Monsanto’s genes comes at a cost, and with plenty of strings attached.

I should hope so.  If Monsanto is giving away its technology and failing to protect its IP it is in serious trouble with its shareholders, among others.  And never mind (and the AP reporter doesn’t) that Monsanto apparently licenses its technology broadly (I assume that 200 companies is broad in this market) rather than keeping it locked up for itself (the usual complaint about firms exercising their IP rights).  Isn’t this how technology markets are supposed to work?

The article goes on to quote an economist complaining that big is bad (”This level [90%] of control is almost unbelievable”), note that the DOJ is investigating, and note that a suit against Monsanto was “settled with an agreement” (I think with the implication that only the guilty settle cases, but I could just be reading that in . . .).

Moreover, the stakes are huge:

At issue is how much power one company can have over seeds, the foundation of the world’s food supply. Without stiff competition, Monsanto could raise its seed prices at will, which in turn could raise the cost of everything from animal feed to wheat bread and cookies.

Never mind that even without Monsanto’s seed traits we’d still have soybeans and corn.  Even this article goes on to explain that “the benefit of Monsanto’s technology for farmers has been undeniable (followed by a “but . . .”)–and that these robust seeds wouldn’t exist at all were it not for Monsanto’s investment in the R&D that created them–a massive investment and effective licensing effort that, according to the article, propelled Monsanto from being a non-entity to being a giant player in the industry in only a few years:

First came the science, when Monsanto in 1996 introduced the world’s first commercial strain of genetically engineered soybeans. The Roundup Ready plants were resistant to the herbicide, allowing farmers to spray Roundup whenever they wanted rather than wait until the soybeans had grown enough to withstand the chemical.

The company soon released other genetically altered crops, such as corn plants that produced a natural pesticide to ward off bugs. While Monsanto had blockbuster products, it didn’t yet have a big foothold in a seed industry made up of hundreds of companies that supplied farmers.

That’s where the legal innovations came in, as Monsanto became among the first to widely patent its genes and gain the right to strictly control how they were used. That control let it spread its technology through licensing agreements, while shaping the marketplace around them.

It’s a perfect example of Scott Kieff’s “commercializing innovation” story.  Yes, intellectual property is helpful for providing the incentives to innovate.  But IP is at least as important in facilitating the commercialization–and the spread–of technology even after it’s been created.

Meanwhile, other companies (most notably DuPont, the company most active in complaining about Monsanto’s competition) continue to increase biotech seed investment, and continue to gain market share.  Here’s a November 23, 2009 Wall Street Journal report on DuPont’s seed business:

DuPont Co.’s (DD) seed business expects “continued strong growth” in 2010 and anticipates higher market share in soybeans and corn, based on on-farm yield comparisons that suggest a strong crop.

* * *

The company said it expects to extend its soybean market-share leadership and increase its market share of global seed corn by 1 to 2 points in 2010.

In North America, the yield comparisons show that Pioneer Hi-Bred soybeans have a 1.3 bushel-per-acre yield advantage on average against “all competitive varieties.” Pioneer soybeans with the Roundup Ready gene have a 2.7 bushel-per-acre yield advantage against competitors.

* * *Shares of DuPont were up 1.9% to $35.18 in recent trading amid a broad market decline. Seed rival Monsanto Co. (MON) was off 0.6% at $79.58.

And it appears that buyers have some power, too:

Thomas Terral, chief executive officer of Terral Seed in Louisiana, said he recently rejected a Monsanto contract because it put too many restrictions on his business.

Such facts make it difficult to see evidence of foreclosure in the genetically-modified seed market  Nevertheless, the article cites to some specific contract terms that it suggests are anticompetitive:

One of the numerous provisions in the licensing agreements is a ban on mixing genes — or “stacking” in industry lingo — that enhance Monsanto’s power.

Another provision from contracts earlier this decade— regarding rebates — also help explain Monsanto’s rapid growth as it rolled out new products.  One contract gave an independent seed company deep discounts if the company ensured that Monsanto’s products would make up 70 percent of its total corn seed inventory.

I look forward to learning more about these contracts and discussing their competitive implications.  As has been well-explored on this blog, loyalty rebates are hardly necessarily anticompetitive, and, as in other industries, rebates are common in this industry.  On the stacking term, there are  pro-competitive technological and business reasons to “tie-out” competitors from licensee’s products, particularly when the licensor expects to develop and attempt to market subsequent technologies that might substitute for the combined product and when it may be hard to tell which company’s technology is having what effect in a combined product.  Not since the (now repudiated) “Nine No-Nos” from the DOJ in the 1970s, has anyone operated on a presumption that licensing restrictions were anticompetitive.

There is much more to this story, and much more to the article.  As Mike noted recently, the DOJ and USDA will be holding hearings throughout next year on agriculture industry antitrust, and these biotech seed issues will be at the forefront.  I only hope the enforcers think about the error costs, and avoid an antitrust disaster.

The Searle Center Civil Justice Institute has announced the release of its preliminary report on State Consumer Protection Acts: An Empirical Investigation of Private Litigation.   You can read the Executive Summary here.  As the Searle Center State Consumer Protection Acts Task Force Chair, I’ve been involved in the data collection, analysis, and drafting of this project over the last couple of years along with the rest of the Task Force  (the Searle Center’s Executive Director Henry Butler, Jason Johnston (Penn), Jeffrey Jarosh, and Samantha Zyontz) and really is the product of a team effort including the Task Force, Searle Center research assistants (Micah Hughes, Jonathan Hillel, Matthew Sibery, Hayley Smith, and Judd Stone) and Research Coordinator Elise Nelson.   I’m incredibly grateful to have worked with such a skilled group.  This preliminary report is the first research project released growing out of a larger research agenda on state consumer protection regulation.  Some exciting projects are to follow.   Stay tuned.  For now, here are a few of the report’s key findings (consult the report for greater detail):

• Litigation under CPAs has increased dramatically since 2000: Between 2000 and 2007 the number of CPA decisions reported in federal district and state appellate courts increased by 119%. This large increase in CPA litigation far exceeds increases in tort litigation as well as overall litigation during the same period.

• Vague statutory definitions of prohibited conduct are a major driver of CPA litigation: Whether a CPA statute has vague language prohibiting some general type of conduct rather than a specific list of illegal actions is an important potential contributor to the level of CPA litigation in the state. States with vague definitions of prohibited conduct have more CPA litigation.

• CPAs are becoming more favorable and generous to consumer litigants: Between 1995 and 2007, the expected value of recovery for potential plaintiffs increased dramatically as measured by CPA requirements to bring a cause of action and available remedies. In 2004, the state CPAs that were the most favorable to plaintiffs were New Hampshire, Massachusetts, and Connecticut. The states with CPAs that were the least favorable to plaintiffs were Colorado, Maryland, and Georgia.

• States with CPAs that are more favorable to consumers have more CPA litigation: The expected value of recovery under a given state’s CPA appears to contribute to the amount of litigation that makes use of the act. States that allow more generous remedies and make it easier for consumers to win in court see more CPA litigation.

• Most CPA claims would not constitute illegal conduct under FTC consumer protection standards. The Searle Shadow FTC found that 78% of a sample of CPA claims would not constitute legally unfair or deceptive conduct under FTC policy statements. While relatively few CPA claims would constitute illegal conduct under the FTC standard (22%), even fewer (12%) would result in FTC enforcement.

• Almost 40% of CPA claims where the consumer plaintiff prevailed at trial would not constitute illegal conduct under FTC consumer protection standards: In a sample of CPA claims where the consumer plaintiff prevailed in court, the Searle Shadow FTC found that 38% of these successful claims would not constitute illegal conduct under the FTC standard. Although most of these successful cases would meet the FTC illegality standards, only 23% would likely be enforced by the FTC.

Well, he warned us.  But now that it’s here it sounds so incredible.

Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance [from the various US government bailouts] will have to cut the cash payouts to their 25 best-paid executives by an average of about 90 percent from last year. For many of the executives, the cash they would have received will be replaced by stock that they will be restricted from selling immediately.

And for all executives the total compensation, which includes bonuses, will drop, on average, by about 50 percent.

* * *

And at all of the companies, any executive seeking more than $25,000 in special perks — like country club memberships, private planes, limousines or company issued cars — will have to apply to the government for permission.

I eagerly await David Zaring’s explanation of the actual mechanism for this, assuming anyone knows what it is.  Did the companies sign contracts accepting such oversight and control when they accepted TARP funds, even though I don’t think TARP came with these kinds of compensation restrictions?  Did ARRA effectively alter TARP agreements?  If so, how?

Marc Hodak, as always, is on the compensation issue.

Anyway, have no fear.  Pay Czar Feinberg knows best.  Da, comrade.

Josh and I have just posted a draft of our new article, The Limits of Antitrust in the New Economy. We’ll be presenting it at the Searle Center Research Roundtable on the 25th Anniversary of Frank Easterbrook’s essential article, The Limits of Antitrust, next week.

Here’s the abstract:

This paper offers an opportunity to reflect on Frank Easterbrook’s seminal work on the Limits of Antitrust and to discuss its particular relevance to the problem of antitrust enforcement in the face of innovation. The error-cost framework in antitrust originates with Easterbrook’s analysis, itself built on twin premises: first, that false positives are more costly than false negatives because self-correction mechanisms mitigate the latter but not the former, and second, that errors of both types are inevitable because distinguishing pro-competitive conduct from anti-competitive conduct is an inherently difficult task in a single-firm context.

While economists have applied this framework fruitfully to several business practices that have attracted antitrust scrutiny, our goal in this paper is to harness the power of this framework to take an Easterbrookian, error-cost minimizing approach to antitrust intervention in markets where innovation is a critical part of the competitive landscape. While much has been said about the relationship between innovation and antitrust, often in the way of broad pronouncements that innovation either renders antitrust essential to economic growth or entirely unnecessary, the error-cost framework allows for greater precision in policy prescriptions and a more nuanced approach. Some of the implications are well understood in the current body of literature and others have been frequently ignored or remain entirely unrecognized.

Both product and business innovations involve novel practices, and such practices generally result in monopoly explanations from the economics profession followed by hostility from the courts (though sometimes in reverse order) and then a subsequent, more nuanced economic understanding of the business practice usually recognizing its pro-competitive virtues. This sequence and outcome is exactly what one might expect in a world where economists’ career incentives skew in favor of generating models that demonstrate inefficiencies and debunk the Chicago School status quo, while defendants engaged in business practices that have evolved over time through trial and error have a difficult time articulating a justification that fits one of a court’s checklist of acceptable answers. From an error-cost perspective, the critical point is that antitrust scrutiny of innovation and innovative business practices is likely to be biased in the direction of assigning higher likelihood that a given practice is anticompetitive than the subsequent literature and evidence will ultimately suggest is reasonable or accurate.

Given recent activities in the antitrust enforcement landscape – identifying innovating firms in high-tech markets as likely antitrust targets combined with recent discussions of error costs from leading enforcers, at the Section 2 Hearings and elsewhere – we hope to begin a more rigorous discussion of the relationships between innovation, antitrust error, and optimal liability rules that goes beyond merely selecting economic models that fit regulator’s prior beliefs.

We begin by discussing some principles for application of the error cost framework in the innovation context in Part II before discussing the historical relationship between antitrust error and innovation in Part III. Part IV concludes by challenging the conventional wisdom that the error cost approach implies that the rule of reason should apply to most forms of business conduct rather than per se rules. While we agree that per se rules should not apply to cases involving product or business innovation, broadly defined, we argue that the error cost approach should not require generalist judges to evaluate state of the art economic theory and evidence on a case by case basis. Instead, we favor an approach that is consistent with the spirit of Easterbrook’s original analysis, identifying simple filters aiming to harness the best existing economic knowledge to design simple rules that minimize error costs. We conclude with five such proposals for simple rules based on existing economic theory, empirical evidence, and acknowledgment of the institutional biases toward false positives discussed above.

Get it while it’s hot!

I noted last week that my colleague (and Volokh Conspirator) Todd Zywicki and I had written an essay, published in a Fin Reg 21 Symposium on the Consumer Financial Protection Agency Act of 2009, on “Three Problematic Truths About the Consumer Financial Protection Agency Act of 2009.”  The essay is now available on SSRN for interested readers (link above).  Here is the abstract:

The creation of a new Consumer Financial Protection Agency (“CFPA”) is a very bad idea and should be rejected. The proposal is not salvageable and cannot be improved in substance or in form. The foundational premise of the CFPA is that a failure of consumer protection, and specifically irrational consumer behavior in lending markets, was a meaningful cause of the financial crisis and that the CFPA would have or could have averted the crisis or lessened its effects. To the contrary, there is no evidence that consumer ignorance or irrationality was a substantial cause of the crisis or that the existence of a CFPA could have prevented the problems that occurred. The CFPA is likely to do more harm than good for consumers. In this article, we highlight three fundamentally problematic truths about the CFPA: (1) The CFPA is premised on a flawed understanding of the financial crisis, (2) the CFPA will have significant unintended consequences, including but not limited to reducing competition, consumer choice, and availability of credit to consumers for productive uses; and (3) the CFPA creates a powerful bureaucracy with undefined scope, risking expensive and wasteful regulatory overlap at both the federal and state levels without any evidence of its own expertise in the core areas it is designed to regulate.

Another colleague and Volokh Conspirator, Ilya Somin argues here that political ignorance and cognitive biases exhibited by voters provide yet more reasons to object to the CFPA.  Ilya’s second point, that political ignorance and voter irrationality make regulatory institutions more susceptible to regulatory capture, is an especially important one in this debate.  Not to mention the frequently discussed problem of irrational regulators and judges.  More generally, Ilya gives another reason to believe that the claim that consumer (and voter) irrationality counsels in favor of more regulation rather than less is both under-theorized and not supported by the existing evidence.

I’m not generally a big fan of blogging to complain about law reviews or the way that my work has been interpreted by others.  I’m generally of the view that the risk of having my work misinterpreted within a reasonable range is my own to bear, and that if it happens, it’s probably due to my own failure to write clearly enough.  I’m not a big fan of either of those things.   With that kind of lead in, you can be pretty sure I’m going to do both in this post.

I recently opened my mail to see a reprint from Professor Alan White at Valparaiso University School of Law from his article, Behavior and Contract, published in the University of Minnesota Journal of Law and Inequality.  Unfortunately, the SSRN link above is not the finally published version to which I will refer in this post.  I read with some interest because Professor White’s article takes on a claim I make in this article that the behavioral law and economics literature has, at least as applied to the world of consumer contracts, overstated its case in terms of its predictive power relative to vanilla neoclassical economics.  My article is essentially a literature review of the real world evidence involving consumer behavior in these markets, evidence both supporting and contradicting claims in the behavioral literature, and concludes that the rational choice models outperform their behavioral counterparts.  The goal of the article was to draw attention to the existing empirical evidence, since proponents of both behavioral and traditional law and economics agree that predictive power of the models is of primary importance.  I attempted to do so carefully and thoroughly.

As I thumbed through the article, I was struck by the following passage in n. 143 referring to my article:

Wright relies on industry-sponsored research to contend that behavioral theories are not sufficiently predictive of credit card consumers’ choices, because a majority of credit card consumers are observed to make the “rational” (i.e., wealth-maximizing) choice based on the given data. See id.

I was really surprised and disappointed to read this.  My article is a literature survey.  As such, I cite and “rely” on dozens of studies in the field.  Professor White is referring to just one of these studies, a well known study in the credit card literature by Tom Brown & Lacey Plache, Paying with Plastic: Maybe Not so Crazy, 73 U. CHI. L. REV. 63 (2006) which uses a unique dataset (the VISA Payment System Panel Study) provided by VISA (Brown is affiliated with Visa, as is made obvious in the paper).   No doubt, the Brown & Plache article is “industry sponsored” in some sense or another.   It should be noted that I cite to, and discuss in detail, the findings of a number of studies.  To my knowledge, the overwhelming majority of these studies do not involve any industry funding.  Nor do I see anywhere else in Professor White’s article where he makes this special designation regarding funding sources for other articles he either critiques or cites.

But that is a bit beside the point, which is that the natural interpretation of the footnote is misleading at best.  White implies that I either (1) relied exclusively on industry funded research to support my conclusion that credit card consumers appear to be acting rationally, or (2) tried to mislead readers of my article by emphasizing industry-sponsored research to the exclusion of “unbiased” studies.   I note, for the record, that Professor White does not address the merits of Brown & Plache in the slightest nor even acknowledge the other studies coming to similar conclusions (and there have been several more since the publication of my paper back in 2007).  The larger point is that I find the first sentence entirely misleading and suggesting something intellectually dishonest about my scholarship.  As such, I wanted to clear the record here.

It is literally true that I cite to Brown & Plache and rely on their empirical findings in supporting my conclusion that the rational choice models maintain predictive superiority in credit card markets.  But the message of the footnote is, in my view, pretty clearly that “one should dismiss Wright’s critique generally because he relies on industry-sponsored research and is biased”; it is NOT that “Wright cites to a bunch of studies and you should ignore one of them because it is co-authored by a VISA employee and uses VISA data.”  As such, I view the reference as misleading and calling for the clarification made here with the request that readers interested in taking a look at the evidence please just read my paper.

Finally, this raises several other tangential but I think interesting points.

One is that I think that, as the title of the post suggests, law review editors should be catching things like this and not letting them slide.  This is something that law review editors can and should be doing.  It does not require special technical skill in statistics or econometrics, just a basic cite check.

A second is that this raises interesting issues about the probative value of industry-sponsored research in law and economics.  Many have written about this.  And I do think it can be rational to apply some discount to funded work in appropriate circumstances.  But the larger point is that I view it as wholly insufficient to simply point to an article with serious empirical analysis (Brown & Plache in this instance) and dismiss it–as well as papers relying on it–simply because it is industry-sponsored and without taking on the methods, the data, results or anything of substance.

Third, there are other quibbles I have with Professor White’s article.  For instance, the rest of n. 143 reads:

On the other hand, he concedes that based on the evidence, consumer behavior is neither 100% rational nor 100% irrational. See id. at 509-10. Wright contends that behavioral economists “assume consistent irrationality,” and thereby set up a straw man. See id. at n.31. Rather than asserting that consumer behavior is always and predictably non-utilitarian, as Wright implies of behavioralists, behavioral economics is better understood as saying that consumer behavior is not entirely predictable by rational choice theory. What behavioralism loses in predictive certainty, it gains in descriptive depth.

White apparently does not understand the behavioral literature he is hoping will inform legal debates involving consumer contracts.   Of course behaviorists and the “new” paternalists assume consistent irrationality!  If errors from cognitive biases were randomly distributed around some central tendency towards rationality then the average consumer would be acting quite rationally despite there being a distribution that included both rational and irrational individuals.  We’d be back to a logical concession that the rational actor model predicted average consumer behavior incredibly well.  To make the claim that the insights of behavioral economics can help us do “better,” it must be the case that (and by the way, Sunstein, Thaler, Jolls and just about every behavioralist that I’ve read proudly claims that behavioral economics can do exactly this …) behavioral law and economics can identify systematic, consistent and predictable deviations from rationality.  The point of the behavioral literature is not simply to say that the rational choice model doesn’t entirely predict consumer behavior.  Its to offer a better alternative.  White’s denial on this point is not only puzzling, but undermines the intellectual basis for his reliance on behavioral economics in the first place.