In the last few decades the Neo-Brandeisian movement has emerged as a new and alternative approach to antitrust legislation. Breaking from the Chicago school of thought which prioritized consumer surplus, efficiency, and the short-term effects of mergers on consumer prices, this new movement is fundamentally concerned with competitive markets and, thus, monopolies. One initiative which the Neo-Brandeisian movement has reinvigorated is the essential facilities doctrine. Under the essential facilities doctrine, if a monopolist is found to have control of a facility that is deemed essential to other competitors, they are required to provide access to the use of the facility on “fair terms.” The doctrine is concerned with anti-competitive behavior where a firm with market power uses a “bottleneck” as a means of denying entry into the market. When applied appropriately, the essential facilities doctrine allows for more competition and less market concentration while also maintaining monopoly incentive through the extraction of rent. Conversely, the imprecise language of the essential facilities doctrine allows for misuse and abusive application particularly with respect to intellectual property. I suggest that clearly defining the terms "essential" and "exclusionary practices" which are integral to the application of the essential facilities doctrine will limit its abuse, and allow the doctrine to address competition concerns without discouraging innovation.
Debates over the right to access essential facilities have long pervaded and proved controversial within antitrust law in the United States.[1] In its most basic sense, if the facility is truly essential, then exclusive access to that facility exempts a monopolist from competition. The effect of the essential facilities doctrine is that, when applied correctly and successfully, competition in the related industry increases, prices decrease, and consumers are ultimately better off. That being said, antitrust law which advocates for government appropriation and reallocation of private property certainly precipitates ideological outrage. Furthermore, there is the definitional question of what constitutes as "essential," as well as the consequences which arise with respect to innovation and maintaining monopoly incentive. Before, addressing these integral questions regarding the application of the doctrine, let's first consider its inception and application legislatively.
The inception of the essential facilities doctrine can be traced back to United States v. Railroad Association 224 U.S. 383 (1912). The primary concern of the case hinged on rail points of access to St. Louis for both passenger as well as cargo railway transportation. The Terminal Railroad Association of St. Louis, a railroad conglomerate, acquired three facilities, one on each side of the Mississippi river and an additional terminal system on the Merchants' Bridge, a railroad bridge over the Mississippi River at St. Louis. As Justice Lurton stated in his opinion of the court, "the result of the geographical and topographical situation is that it is, as a practical matter, impossible for any railroad company to pass through, or even enter St. Louis, so as to be within reach of its industries or commerce, without using the facilities entirely controlled by the Terminal Company."[2] The case, brought about by the United States government, alleged that the Association's monopoly on these essential systems of transport disadvantaged non-Association member railroads by imposing "discriminatory and extortionate" rates and special charges.[3]
Bridge Across the Mississippi River controlled by the Terminal Company
The Supreme Court stopped short of adhering to the government's wish to dissolve the Association. Rather, recognizing the "public advantages" of a unified system, the Court instead imposed seven conditions on the Association for the benefit of non-members. While many of these conditions — banning exclusive dealing and unfair billing practices — were specific to the case, the first condition proved essential for future cases addressing the anti-competitive implications of an essential facility. The Court ordered that the Association provide
for the admission of any existing or future railroad to joint ownership and control of the combined terminal properties, upon such just and reasonable terms as shall place such applying company upon a plane of equality in respect of benefits and burdens with the present proprietary companies."[4] The effect of this decision was increased access for competitors to the means of transportation through St. Louis. Additionally, with increased competition, the cost of transit for travelers or for the importation of goods decreased, benefiting consumers.
While United States v. Railroad Association laid the bedrock for the doctrine, the classic formulation of the Essential Facilities Doctrine comes from an appellate court in MCI v AT&T, 709 F.2d 1081, 1132-33 (7th Cir. 1983), cert denied, 464 U.S. 891 (1983). Citing the doctrine by name, the appellate court stated that "case law sets forth four elements necessary to establish liability under the essential facilities doctrine: (1) control of the essential facility by a monopolist; (2) a competitor's inability practically or reasonably to duplicate the essential facility; (3) the denial of the use of the facility to a competitor; and (4) the feasibility of providing the facility."[5] The appellate court's declaration proved integral for future applications of the doctrine, though, over time, applications have deviated from the cornerstones laid out in the case.
While United States v. Railroad Association and MCI v. AT&T proved to be momentous cases for the application of the doctrine, both the Supreme Court and lower courts consistently have applied the essential facilities doctrine throughout the past century in appropriate, but limited, circumstances.[6] While United States' courts have reiterated that there is no obligation for firms to deal with their competitors, this refusal to deal is not absolute and is subject to certain exceptions. As noted in two separate court case, while in most circumstances antitrust law "does not require one competitor to give another a break just because failing to do so offends notions of fair play,"[7] the Supreme Court has recognized that "the high value that we have placed on the right to refuse to deal with other firms does not mean that the right is unqualified."[8] In this sense, the application of the essential facilities doctrine falls under "refusal to deal" cases which attempt to limit a monopolist's ability to exclude.[9]
Perhaps most clearly elucidating the anti-competitive "refusal to deal" undergirding the essential facilities doctrine can be seen in the opinion by the Ninth Circuit in Alaska Airlines, Inc. v. United Airlines, Inc. The court stated that the "essential facilities doctrine imposes liability when one firm, which controls an essential facility, denies a second firm reasonable access to a product or service that the second firm must obtain in order to compete with the first."[10] As all of these cases demonstrate, the essential facilities doctrine views any attempt to unilaterally refuse to deal as a monopolization violation of Section 2 of the Sherman Act. Importantly, the essential facilities doctrine is "not an independent cause of action, but rather a type of monopolization claim."[11]
With the Neo-Brandeisian movement rising to prominence in antitrust legislation, the essential facilities doctrine seems more relevant than ever. In a majority staff report, the FTC noted that "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.”[12] Specifically, the FTC Subcommittee cited the Supreme Court case Pacific Bell Telephone Co. v. LinkLine Communications, Inc, a case involving intellectual property, as an example of where the essential facilities doctrine might be applied.[13] Applying the essential facilities doctrine to intellectual activity would drastically expand the scope of the doctrine, but also would potentially undermine existing intellectual property rights, and the just and reasonable terms incentives they offer for innovation. Regardless of the benefits to competition, if innovation were to be negatively affected, consumers would be worse off.
Intellectual property rights can be understood as the legal rights which arise from human intellectual activity. Without legal protection, there is a risk of "free riding," the idea that others might replicate or otherwise take advantage of an individual's intellectual activity. For this reason, a lack of legal protection has the potential to disincentivize innovation and investment. Patents and copyrights are the two primary ways by which intellectual creations are protected. Copyrights protect the specific form of expressing an idea, whereas patents protect the idea itself, excluding others from making, using, offering for sale, or selling the idea. Additionally, these rights are not indefinite, with a patent typically lasting 20 years and a copyright lasting for 70 years following the death of the inventor or author.
Intellectual property rights grant creators of intellectual activity exclusive right by law to monetize their creation as well as to hinder others from doing so. The question that emerges, then, is how intellectual property rights relates to the essential facilities doctrine. Is there a difference between tangible assets and intellectual assets, or, if deemed essential, might the essential facilities doctrine be applied to intellectual assets?
While not unilaterally held, recent cases have indicated that the essential facilities doctrine applies to intellectual property no less than tangible assets. Consider the case of BellSouth Advertising & Pub. Corp. v. Donnelley Information Pub. in which a district court which considered an application of the essential facilities doctrine to telephone directory listings which BellSouth, a local telephone company and publisher of telephone directories, claimed copyright protection. Vitally, the court endorsed the application of the essential facilities doctrine to intellectual properties. As the court noted in their opinion, "although the doctrine of essential facilities has been applied predominantly to tangible assets, there is no reason why it could not apply, as in this case, to information wrongfully withheld. The effect in both situations is the same: a party is prevented from sharing in something essential to compete."[14]
This court decision to view intellectual property under the lens of the essential facilities doctrine isn't an anomaly. In another case, Data General Corp. v. Grumman Systems Support Corp, the court applied the doctrine when considering a claim that a competitor needed access to copyrighted software produced by Data General. Although the claim was ultimately rejected by the court due to the fact that they didn't conclude that the facility was essential, the court still demonstrated their belief that the doctrine was applicable to copyrighted software and thus, intellectual property.[15]
In specific cases, the benefits of the essential facilities doctrine are evident. As in the case of United Statas v. Railroad Association, the Association acquired all of the existing means of transiting through St. Louis, and used their monopoly on the transit facilities to exclude or significantly disadvantage their competitors. The joint purchase monopoly didn't create anything of value, rather, it acquired existing facilities. By applying the essential facilities doctrine, the Supreme Court addressed anti-competitive concerns of market power and monopolization, while, by ordering that the Association grant competitors access to the facilities on just and reasonable terms, also maintained monopoly incentive through the extraction of rent. Furthermore, by addressing the anti-competitive nature of the market, consumers, through the lower cost of transit, were better off. What made this such an effective application of the essential facilities doctrine was the salience of the essential facility — a complete monopoly on transit passage through St. Louis — as well as the clear steps that the Association took in excluding competitors to maintain a monopoly.
While the essential facilities doctrine clearly succeeds in addressing anti-competitive concerns, serious questions about the scope of its application remain. The phrase most often used in cases relating to the doctrine is exclusionary conduct — monopoly power plus exclusionary conduct. What, though, does exclusionary conduct truly mean? The lack of definitional rigor of 'exclusionary conduct' makes the essential facilities doctrine ripe for misuse or overreach. The imprecise language of exclusionary conduct as well as 'refusal to deal' has "profound implications, particularly as it relates to intellectual property and intellectual property rights. Consider the case in which a patent monopolist refuses to allow another competitor from using its patent. If the patent monopolist refused to share its patent with an 'exclusionary' purpose, the essential facilities doctrine, by precedent, asserts that this violates Section 2 of the Sherman Act."[16] It is this right to exclusivity that undergirds intellectual property rights and plays a vital role in incentivizing and protecting the rewards of innovation. Without this protection, there is legitimate reason to assume that innovation will be negatively affected. While the Neo-Brandeisian goal of more competitive markets would be achieved, it would very likely be at the expense of consumers.
Furthermore, there is the question of whether or not there is legal justification for the essential facilities doctrine to be applied to intellectual property. In most cases, it seems dubious that Section 2 of the Sherman Act even would apply to intellectual property. Section 2, focuses on the means by which a firm acquires, expands, or maintains monopoly power. "It is no violation of Section 2 for a monopolist to charge a monopoly price. If the monopoly was not improperly obtained or maintained, then exploiting the monopoly — to charge whatever monopoly price the market will bear — does not violate the statute."[17] Assuming intellectual activity was fairly conducted and, having met the criteria, a patent on that intellectual activity was granted, there seems to be no justification within Section 2 of the Sherman Act to apply the essential facilities doctrine.
When applied correctly, the essential facilities doctrine is a great tool of antitrust enforcement, addressing anticompetitive concerns to the benefit of consumers while not undermining monopoly incentives. The issue facing the doctrine, though, is its overuse. To avoid abuse of the essential facilities doctrine, I suggest better defining two terms integral to justifying its application: essential facility, and exclusionary conduct. An essential facility should be more rigorously defined to describe a facility which is necessary to competition in the marketplace. More specifically, a facility is only essential if and only if there is no other duplicate or alternative and, without access to the facility, firms in the market can't compete. Applying the doctrine in this scenario would benefit producers and competition, while also lowering prices for consumers. Similar to essential facility, exclusionary conduct also necessitates more precise defining. In the case of physical facilities, perhaps there is little to squabble over semantically. In United Statas v. Railroad Association, the Association, exclusively controlling the means of passage through St. Louis, used its monopoly to exclude or disadvantage its competitors. In the case of intellectual property, exclusionary conduct and its application under the essential facilities doctrine seems to be fundamentally at odds with intellectual property rights. As mentioned previously, intellectual property rights grant creators of intellectual activity exclusive right by law to monetize their creation as well as to hinder others from doing so. It is the right of exclusivity and the dividends that come with that right that motivate or play a significant role in precipitating innovation. Not only would the application of the essential facilities doctrine to intellectual property undermine existing intellectual property rights, but forced disclosure of one's intellectual property would disincentivize innovation. In this case, a Neo-Brandeisian concern with anti-competitiveness might diminish innovation and subsequently shrink consumer surplus.
The essential facilities doctrine epitomizes the larger debate regarding antitrust enforcement between the Chicago school and the Neo-Brandeisian movement. Should antitrust administering prioritize consumer surplus and efficiency, or should it be concerned with competitive markets and, thus, issues of monopolization and market power? When applied appropriately, the essential facilities doctrine satisfies both schools of thought, increasing consumer surplus while also addressing anticompetitive concerns. Ultimately, when applied as a Neo-Brandeisian tool for addressing monopolization for the sake of competitive markets, as shown with respect to intellectual property rights, the outcome potentially could harm consumers. If innovation incentives decrease, consumers are negatively affected in the long run, as technological progress and the benefits which it provides diminish. Thus, for both the application of the doctrine as well as in the case of antitrust enforcement more generally, market power and monopolization should only be regulated insofar as its regulation benefits consumers.
[1] Robert Pitofsky, Donna Patterson, and Jonathan Hooks, “The Essential Facilities Doctrine under U.S. Antitrust Law,” Dominance and Monopolization, 2017, 357–76, https://doi.org/10.4324/9781315257433-13, 357.
[2] United Statas v. Railroad Association 224 U.S. 383 (1912)
[3] ibid
[4] ibid
[5] MCI v AT&T, 709 F.2d 1081, 1132-33 (7th Cir. 1983), cert denied, 464 U.S. 891 (1983)
[6] Robert Pitofsky, Donna Patterson, and Jonathan Hooks. 359.
[7] Twin Labs., Inc. v. Weider Health 8c Fitness, 900 F.2d 566, 568 (2d Cir. 1990).
[8] Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 601 (1985);
[9] Robert Pitofsky, Donna Patterson, and Jonathan Hooks. 360
[10] Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536, 542 (9th Cir. 1991)
[11] Robert Pitofsky, Donna Patterson, and Jonathan Hooks. 360
[12] Majority Staff Report and Recommendations of the Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, Investigation on Competition in Digital Markets, (2020), 397-398
[13] ibid
[14] BellSouth Adver. & Publ'g Corp. v. Donnelley Info. Publ'g, Inc., 719 F. Supp. 1551, 1566 (S.D. Fla. 1988)
[15] Data General Corp. v. Grumman Systems Support Corp., 761 F. Supp. 185 (D. Mass. 1991)
[16] Phillip Areeda, “Essential Facilities: An Epithet In Need of Limiting Principles,” Antitrust Law Journal 58, no. 3 (1989): 841–53, https://doi.org/http://www.jstor.org/stable/40843140, 849.
[17] ibid, 847
Interesting, as always. I think applying “essential facilities” to intellectual property is a bad idea because of the impact on innovation and creativity, as your article points out. Any such impact is an arrow through my capitalist, entreprenuerial heart!