[Senate Hearing 111-993]
[From the U.S. Government Publishing Office]
S. Hrg. 111-993
OVERSIGHT OF THE ENFORCEMENT OF THE ANTITRUST LAWS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
JUNE 9, 2010
__________
Serial No. J-111-97
__________
Printed for the use of the Committee on the Judiciary
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20402-0001
PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin JEFF SESSIONS, Alabama
DIANNE FEINSTEIN, California ORRIN G. HATCH, Utah
RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York JON KYL, Arizona
RICHARD J. DURBIN, Illinois LINDSEY O. GRAHAM, South Carolina
BENJAMIN L. CARDIN, Maryland JOHN CORNYN, Texas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
AMY KLOBUCHAR, Minnesota
EDWARD E. KAUFMAN, Delaware
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
Bruce A. Cohen, Chief Counsel and Staff Director
Matthew S. Miner, Republican Chief Counsel
------
Subcommittee on Antitrust, Competition Policy and Consumer Rights
HERB KOHL, Wisconsin, Chairman
CHARLES E. SCHUMER, New York ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island CHARLES E. GRASSLEY, Iowa
AMY KLOBUCHAR, Minnesota TOM COBURN, Oklahoma
EDWARD E. KAUFMAN, Delaware
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
Caroline Holland, Democratic Chief Counsel/Staff Director
Jace Johnson, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
prepared statement............................................. 98
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 1
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 2
WITNESSES
Leibowitz, Jonathan D., Chairman, Federal Trade Commission,
Washington, DC................................................. 6
Varney, Christine A., Assistant Attorney General, Antitrust
Division, U.S. Department of Justice, Washington, DC........... 4
QUESTIONS AND ANSWERS
Responses of Jonathan D. Leibowitz to questions submitted by
Senator Kohl, Hatch, Feingold, Grassley and Cornyn............. 40
Responses of Christine A. Varney to questions submitted by
Senator Hatch, Cornyn, Kohl, Feingold and Grassley............. 65
SUBMISSIONS FOR THE RECORD
Balto, David, Senior Fellow, Center for American Progress Action
Fund, Washington, DC., statement............................... 88
Leibowitz, Jonathan D., Chairman, Federal Trade Commission,
Washington, DC, statement...................................... 100
National Community Pharmacists Association (NCPA), Alexandria,
Virginia, statement............................................ 117
Varney, Christine A., Assistant Attorney General, Antitrust
Division, U.S. Department of Justice, Washington, DC, statement 123
OVERSIGHT OF THE ENFORCEMENT OF THE ANTITRUST LAWS
----------
WEDNESDAY, JUNE 9, 2010
U.S. Senate,
Subcommittee on Antitrust, Competition Policy,
and Consumer Rights,
Committee on the Judiciary,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 2:04 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
Chairman of the Subcommittee, presiding.
Present: Senators Kohl, Feingold, Specter, Schumer, Durbin,
Klobuchar, Kaufman, Franken, and Hatch.
OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Chairman Kohl. Good afternoon to one and all. Today's
hearing is the Subcommittee's first oversight hearing to
examine the enforcement of our Nation's antitrust laws under
this administration.
No topic could be more central to those who believe in the
vital role played by antitrust policy to protect consumers.
Vigorous and aggressive enforcement of our Nation's antitrust
laws is essential to ensuring that consumers pay the lowest
possible prices and gain the highest quality goods and
services. And it is the Justice Department's Antitrust Division
and the Federal Trade Commission whom we rely on to protect
consumers from the excesses of monopoly, from industry
concentration resulting from mergers, and from other
anticompetitive road blocks to full and fair competition.
Assistant Attorney General Varney and Federal Trade
Commission Chairman Leibowitz, we are pleased to have you both
with us here today so we can fulfill our oversight duties and
discuss the pressing competition issues that have such a
profound impact on consumers' wallets.
Antitrust enforcement was sorely in need of revival, in my
opinion, at the beginning of this administration. At our last
antitrust oversight hearing in March of 2007, we observed sharp
declines in antitrust enforcement at the Justice Department in
both the number of investigations initiated and the number of
merger challenges brought. Mergers among direct competitors in
highly concentrated industries affecting millions of consumers
were approved, and anticompetitive practices went unchallenged.
This hastened the dangerous consolidation trend in many key
industries. And we all saw the consequences of allowing firms
to grow ``too big to fail'' during the financial crisis of 2008
and 2009.
Today we continue to hear calls from certain quarters that
antitrust is not an appropriate tool to ensure competition in
today's high-tech economy and that antitrust enforcement can
chill innovation. While we must be balanced and fair in our
approach, I believe antitrust is as essential to protect
competition with respect to today's Internet and telecom
sectors as it was to the railroad industry of more than a
century ago. Without antitrust enforcement against IBM, would
Microsoft have ever emerged? And without antitrust enforcement
to prevent Microsoft from illegally maintaining its monopoly,
would today's Internet and high-tech giants Goggle and Apple
have thrived in the first place?
Time and again, antitrust enforcement has shown itself to
be essential to breaking up anticompetitive road blocks and
unfetter the marketplace to allow new competitors and new
business models to emerge, all to the benefit of consumers. So
it is my view that the present is not the time for Government
to take a cramped or a limited view of antitrust enforcement.
I see no contradiction between support for antitrust
enforcement and support for our free market capitalist economy.
Indeed, viewed properly, antitrust is a free market alternative
to governmental regulation. In the words of the Supreme Court,
antitrust is ``a charter of economic liberty.''
So we hope that both of you, Ms. Varney and Chairman
Leibowitz, always remember that your positions carry a special
responsibility. Your positions are a public trust to ensure
that competition may flourish and anticompetitive abuses are
prevented. Millions of consumers depend on your efforts and
your judgment to ensure that the economy is sufficiently
vibrant to keep prices low and quality high. You both have
inherited a proud legacy at the Antitrust Division and the FTC,
and it is my sincere hope and full expectation that you will
always strive to uphold this legacy in the years ahead. We are
looking forward to your testimony.
Now I call on the Ranking Member, Senator Hatch, for his
comments.
STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE
OF UTAH
Senator Hatch. Well, thank you, Mr. Chairman. And I welcome
both of you. I have great fondness for both of you and
appreciate the very difficult jobs you have. So I want to thank
you, Mr. Chairman, for holding this hearing. I also want to
thank our distinguished panel for coming to participate in
these proceedings.
Oversight of Federal agencies is one of Congress' most
important responsibilities, and given the state of our economy,
I would say that oversight in these agencies is particularly
important. That being the case, I hope we can have a through
and productive discussion of the relevant issues today.
The Antitrust Division of the Justice Department and the
Federal Trade Commission are charged with protecting
competition in the American marketplace. This is a vital and
important task. It is a fundamental American value that those
who exercise creativity, innovation, hard work, and efficiency
should be rewarded in the marketplace. However, these rewards
can be reduced, stifled, or blocked altogether if there is not
competition in a free and open market. While some of us may
disagree as to how the agencies should go about enforcing our
antitrust and competition laws, I think we would all agree that
competition is essential to maintaining a strong and a vibrant
economy.
There are a number of issues that I hope we will get a
chance to talk about in today's hearing. For example, the FTC
has signaled its intention to pursue more antitrust and
competition enforcement through Section 5 of the FTC Act rather
than the Sherman and Clayton Acts. Quite frankly, I am
concerned about this development. There is a long line of case
law surrounding both the Sherman and the Clayton Acts which has
provided businesses with substantial guidance in their efforts
to comply with the law. Section 5 of the FTC Act, by
comparison, has a much thinner jurisprudential record.
Some have argued that increasing the use of Section 5
particularly to address conduct that has traditionally fallen
under one of the other antitrust statutes has the potential to
create uncertainty, which is harmful to growth and innovation.
It can also lead to abuse if it is not subjected to clear,
specific standards and if the remedies that are sought are not
appropriate to the conduct at issue.
These concerns are even more relevant when we consider that
over the past few years we have been working to ensure that
American businesses are not disadvantaged in foreign markets by
poorly defined competition laws and lack of due process.
I look forward to hearing more about the agencies' efforts
to address the problems of our Nation's businesses, and
especially with regard to overseas markets. And in that same
vein, I hope we can work together to ensure that our antitrust
enforcement practices serve as a model for foreign governments
as well.
I also look forward to hearing more about the efforts of
the Justice Department in the antitrust arena. Since our last
oversight hearing, we have seen a different administration take
the reins. Many on this panel and a number of people who are
now working for the Obama Justice Department had no shortage of
criticism for the efforts of the Bush Justice Department when
it came to antitrust enforcement. In fact, in many circles,
including among some of my colleagues here in the Senate, it
was considered common knowledge that the Bush administration
was too lenient in antitrust enforcement and was too eager to
give big business a pass when it came to anticompetitive
conduct. And while I did not really share this view at the
time, I am interested to learn more about what has changed
since the Antitrust Division came under new management in 2009.
Finally, because I know that many who are present here feel
strongly about this issue, I would like to just mention the
issue of pay-for-delay patent settlements. There is near
universal agreement on the need to eliminate settlements which
are designed to harm consumers by delaying the entry of lower-
priced generic drugs. These so-called pay-for-delay settlements
are anticompetitive and wrong. They do nothing to promote the
best interests of consumers, and they go against the
fundamentals of our patent system and the laws in place to
protect innovation. But I do not believe we should be working
to eliminate beneficial patent statements that bring
competition to the market years before they might otherwise
become available to consumers. Imposing undue hurdles on
settling parties could effectively discourage pro-consumer
statements and create uncertainty among industry participants,
their investors, and the public. And that uncertainty as to the
duration of patent protection, ability to resolve good-faith
disputes, and investment in new applications for existing
medicines will have a significant adverse effect on innovation
and the quality of health care in the United States.
Now, Mr. Chairman, these are just some of the issues that I
hope to be able to discuss today. Once again, I would like to
thank both Chairman Leibowitz and Assistant Attorney General
Varney for being present at today's hearing. I have respect for
both of you and will always show the utmost respect that I can.
And I look forward to an open and honest discussion on these
important matters.
Thank you for holding this hearing.
Chairman Kohl. Thank you very much, Senator Hatch.
I would now like to introduce today's distinguished panel
of witnesses.
Our first witness will be Christine Varney. Ms. Varney was
confirmed as Assistant Attorney General for the Antitrust
Division in April 2009. Prior to her appointment, Ms. Varney
was a partner at the law firm Hogan & Hartson and also served
as a Federal Trade Commissioner from 1994 to 1997. Before
becoming a Federal Trade Commissioner, Ms. Varney served as
Assistant to the President and Secretary to the Cabinet during
the Clinton administration.
Next we will hear from Jon Leibowitz. Mr. Leibowitz has
served as Chairman of the Federal Trade Commission since March
of 2009 and as a Commissioner since 2004. Before joining the
Commission, he was Vice President for Congressional Affairs for
the Motion Picture Association of America. Mr. Leibowitz was my
chief counsel from 1989 through 2000 and the Democratic counsel
and staff director of the Antitrust Subcommittee from 1997
through 2000.
We thank you both for appearing here, and we are looking
forward to taking your testimony. Ms. Varney, we will hear from
you first.
STATEMENT OF HON. CHRISTINE A. VARNEY, ASSISTANT ATTORNEY
GENERAL, ANTITRUST DIVISION, U.S. DEPARTMENT OF JUSTICE,
WASHINGTON, D.C.
Ms. Varney. Good afternoon, Chairman Kohl and members of
the Subcommittee. It is a pleasure to be here today with my
colleague and friend, Chairman Leibowitz, whom I think has the
home court advantage. And I am delighted that we are going to
be able to talk to you about our work over the last year.
Competition is a cornerstone of our Nation's economic
foundation. At the Antitrust Division, we use sound competition
principles and antitrust precedent to evaluate each matter
carefully, thoroughly, and in light of its particular facts.
Our enforcement helps keep markets competitive, promotes
consumer welfare, and spurs innovation. We appreciate this
Subcommittee's active interest in--and strong support of--our
law enforcement mission. We are particularly thankful that you
and this Committee and Senator Reid, with the support of the
Obama administration, led the effort to eliminate antitrust
immunity for the health insurance industry.
At the DOJ we have two department-wide initiatives that
complement the Antitrust Division's work. The first is the
Intellectual Property Task Force, which is a department-wide
effort focusing on the protection of IP rights. The IP Task
Force works with the White House Office of Intellectual
Property to improve the efficiency and effectiveness of IP
enforcement both here and abroad.
The second effort is the Financial Fraud Enforcement Task
Force, an interagency group led by the Justice Department with
active participation from the SEC, Treasury, and HUD on the
Steering Committee and the FTC as a very active partner.
Established by Executive Order, the Financial Fraud Task Force
seeks to strengthen the Government's efforts to combat
financial crime.
Merger enforcement continues to be a core priority for the
Division. We are committed to blocking mergers that will
substantially reduce competition. For instance, we are
litigating a case involving the Nation's largest dairy
processor, seeking to restore competition so that schools,
grocery stores, and consumers in Illinois, Michigan, and
Wisconsin will pay lower prices for milk.
Our intent to challenge in Michigan Blue Cross/Blue
Shield's acquisition of Physicians Health Plan led the parties
to abandon that deal. If consummated, their proposed merger
would have resulted in Blue Cross controlling 90 percent of
commercial health insurance in Lansing. In both matters, we
coordinated closely and successfully with the State Attorneys
General.
We have also settled cases when our competitive concerns
can be addressed. In the Ticketmaster settlement, the merged
company will divest more ticketing assets than it gained
through the merger and subject itself to tough antiretaliation
and anticompetitive bundling restrictions. At the same time, I
want to underscore that we are committed to quickly closing
investigations of mergers that do not threaten consumer harm,
such as Oracle's acquisition of Sun and Microsoft's joint
venture with Yahoo.
In our criminal program, we continue to uncover and
prosecute a number of cartels that inflict significant
competitive harm. These efforts were recently enhanced by
Congress' extension of the Antitrust Criminal Penalty
Enhancement and Reform Act. Again, we thank you for leading the
effort to extend that program through a 10-year
reauthorization.
Our recent prosecutions have resulted in significant fines
and jail time. In 2009, the Division obtained more than $1
billion in criminal fines.
Our civil non-merger program remains active as well. In
addition to our ongoing investigations, which I cannot discuss,
let me mention just two matters that we have settled. The first
concerns the largest seller of electricity capacity in New York
City. In that case, we alleged that Keyspan engaged in
anticompetitive swap transactions that likely increased
electricity prices. That settlement, now pending, includes a
$12 million disgorgement payment.
The second case, which is also pending, enjoins a group of
Idaho surgeons who organized a boycott of Idaho's workers'
compensation system, essentially refusing to treat injured
workers.
The Division has stepped up its efforts to strengthen
markets and preserve economic freedom and fairness. Promoting
competition principles through broad advocacy efforts and
regulatory outreach is one of our highest priorities. As a
result of our enforcement efforts, the Antitrust Division has
gained enormous insight into the competitive dynamics of many
industries. The Division works actively with a broad range of
Federal and State agencies to promote competition across a
number of vitally important industries in our economy,
including transportation, energy, telecommunications,
agriculture, and finance.
Mr. Chairman and members of the Subcommittee, my first year
in the Department has been remarkable. Working with the Justice
Department on Attorney General Holder's team and closely with
the dedicated men and women of the Division, we are doing all
we can to ensure that the competitive playing field is open and
fair, giving consumers more and better choices. I look forward
to year two and continuing what we have started.
That concludes my remarks. I have also provided a written
statement that describes some of our matters in more detail. I
am grateful to have the opportunity to speak with you, and I
look forward to answering your questions.
[The prepared statement of Ms. Varney appears as a
submission for the record.]
Chairman Kohl. Thank you very much,
Ms. Varney.
Chairman Leibowitz.
STATEMENT OF HON. JONATHAN D. LEIBOWITZ, CHAIRMAN, FEDERAL
TRADE COMMISSION, WASHINGTON, DC
Mr. Leibowitz. Thank you, Chairman Kohl and Ranking Member
Hatch and Senators Specter and Franken, for inviting me to
testify today. As you already have my written statement, let me
spend my allotted time talking about just a few of the
interesting issues that we are focusing on right now.
As a starting point, let me note that after a several-year
losing streak, we have won a handful of merger cases in a row.
These deals include the proposed Thoratec acquisition of
HeartWare, which would have combined the only two producers of
critical heart devices used by patients waiting for a heart
transplant. By challenging this transaction--it was abandoned
by the parties after we challenged it--we ensured that patients
would have more choices, prices would be reduced, and
innovation increased.
We have been aggressive when we find mergers that we think
will decrease competition. But just as important, we are not
afraid to hold off when we think that a major deal is not going
to cause consumer harm. A recent example of this is Google/
Admob, which we investigated thoroughly but unanimously decided
not to challenge. We are not perfect, of course, but I do
believe we are striking a pretty reasonable balance to protect
consumers, yet still allow businesses latitude to combine, when
appropriate.
Right now the top competition priority at the Commission is
to stop pay-for-delay agreements between brand name and generic
drug makers. We estimate that these sweetheart deals cost
consumers $3.5 billion each and every year. And by now you are
familiar with the story. Brand name drug companies sue generic
companies claiming that the generic is violative of their
patent, and then they turn right around and they settle these
cases by paying off the generic not to compete. It is win-win-
lose: win for the brand companies because they continue to get
monopoly pricing; win for the generic companies because they
collect a big fat paycheck from the brand; and a loss for the
consumers because they keep paying high prices for their
medicines. On all counts, it is a bad outcome. Since a few
misguided court decisions in 2005, the problem has only gotten
worse. Because of our enforcement efforts, there was not a
single pay-for-delay agreement in 2004. Before those decisions,
there were plenty of settlements. But last year, because of
those decisions, there were 19 suspect settlements, as you can
see from that chart.
Every single FTC Commissioner going back through the Bush
and to the Clinton administrations has supported stopping these
unconscionable agreements, and more and more others are coming
around to our view. Under Assistant Attorney General Varney,
the Department of Justice position has evolved considerably,
and it now agrees that pay-for-delay settlements are
presumptively anticompetitive. The Second Circuit recently
encouraged plaintiffs in a pay-for-delay case to request en
banc review of a previous ruling that would allow these deals.
As members of this Committee know, circuit courts do this only
rarely, and it is often a sign that they are ready to reverse a
previous position. We will know that soon enough. But we also
know litigation can take a long time, and it would be much
faster and more direct to enact legislation to end this
extortionate practice. We greatly appreciate the leadership of
the Judiciary Committee to support this legislation, and I
appreciate your remarks, Senator Hatch, because I know you are
struggling with this, and you were one of the leaders of the
Medicare Modernization Act provision in 2003 that gave us these
deals to review.
Let me also discuss the Commission's increasing use of our
Section 5 unfair methods of competition authority, which allows
us to go beyond the ambit of the antitrust laws to protect
consumers. Congress granted us this authority in 1914, and it
balanced it by limiting the remedies available under Section 5.
In recent years, Section 5 has been used sparingly since lower
courts in the late 1970s rejected some applications of Section
5 when the antitrust laws were viewed much more broadly and I
would say in some ways too broadly.
But since that time, the courts have restricted the range
of antitrust to some extent as a result of the Chicago School,
which, to its credit, has emphasized rigorous economic analysis
as well as efficiencies, and to some extent in reaction to the
costs of class actions and private treble damage litigation.
But for whatever the reason, the result of these changes has
been to limit Federal enforcement agencies, which have no
treble damage authority, in our efforts to protect American
consumers.
Section 5, carefully applied--and it needs to be--is
practically tailor-made for this situation. It can effectively
protect consumers, but it is not an antitrust law so it does
not by its own terms create treble damage liability. So we have
broad bipartisan support within the Commission to use Section 5
in appropriate circumstances, and we are going out and re-using
it.
For example, just today, the Commission filed a Section 5
case and reached a settlement with U-Haul in an invitation-to-
collude case where a U-Haul executive asked Budget, its
competitor, to fix prices on rental trucks, something that
would affect everyday consumers directly and meaningfully. When
the Commission sees conduct like this, we are going to go after
it aggressively, and Section 5 is going to be an important tool
in our arsenal, and our vote today was 5-0. It was unanimous
and bipartisan.
I would also like to talk very quickly about another issue
that we spend a lot of time on, and that is gasoline prices.
When the price of gasoline hit $4 a gallon in mid-2008, every
household in the country felt the impact. Everyone in this room
did. And we realize how important it is for American consumers
that petroleum markets are competitive. Unfortunately, as the
members of this Committee know all too well, much of the price
of gas is driven by the price of crude oil, which means that
OPEC has a lot of control and there is not much we can do about
it. But we have added to our arsenal by adopting a rule in the
last year that prohibits the manipulation of wholesale
petroleum markets and allows us to find violators.
Finally, very quickly, let me mention the revision of the
horizontal merger guidelines. It is a very significant project.
We work very closely with Assistant Attorney General Varney,
who did a terrific job, to issue--and we just issued draft
guidelines. It was a very transparent process, and we hope to
issue final guidelines fairly soon.
From my perspective, the changes reflect common sense,
smart economics, and solid antitrust policy. The Commission is
doing a lot of other important work that I would be glad to
discuss, including an initiative on the future of news. But at
this point I think I will stop, and I am happy to answer any
questions. Thank you.
[The prepared statement of Mr. Leibowitz appears as a
submission for the record.]
Chairman Kohl. Thank you very much, Commissioner Leibowitz.
We will now have rounds of questions of 8 minutes.
Ms. Varney, one matter which disappointed some advocates of
strong antitrust enforcement was the Justice Department's
decision to approve the Ticketmaster/Live Nation merger subject
to conditions rather than to challenge the deal in court. Your
critics note that this deal combined the Nation's dominant
live-concert ticket seller with the Nation's leading owner of
concert venues which had recently launched a competing ticket
business. They contend that the combination of these two
companies will make it very difficult for any new national
ticket competitor to emerge. So the question is: Given that
great concern, which I think was fairly legitimate, why did you
approve the merger?
Ms. Varney. Senator, we were equally concerned about that
transaction, and we were absolutely prepared to litigate the
transaction because we thought it did present potential
anticompetitive concerns. The parties were aware fully of our
intent to block the transactions and continually worked to
address our concerns.
As you may be aware, there are essentially three
components--and I would not say we approved the merger. I would
say we were prepared to challenge and went ahead and settled on
terms that dramatically altered the terms of the transaction.
First, Ticketmaster had to divest a very large ticketing
asset. That is the Paciolan ticketing platform that will be
going to a very large competitor that can and most likely, we
hope, will enter the ticketing market.
Second, Ticketmaster had to divest its technology--not
divest but license its technology in ticketing to create
platforms for others to compete on ticketing.
And, finally, when it came to the venues and promoters, we
were quite concerned that Ticketmaster might engage in
anticompetitive bundling or retaliatory activity. When the
parties came forward with what I believe are very tough
divestitures, licensing, and remedies that we believed
addressed our concerns and protected consumers, we believed the
right thing to do was to settle the case based on what our
concerns were.
I hope--I think--we got a good deal for American consumers.
We would like to see a lot of competition in that ticketing
space.
Chairman Kohl. All right. Ms. Varney, the Justice
Department and the USDA have been conducting a series of
workshops examining antitrust enforcement in agriculture, as
you know. The next one is slated for Madison, Wisconsin, later
this month to discuss the dairy industry, which I hope to
attend if the Senate schedule permits. We are pleased about the
emphasis you are placing on this issue. It is my view that we
need increased focus on competition in agriculture to ensure
that our farmers and our ranchers get fair prices for their
products.
What have you learned from the workshops so far? Is there a
lack of free and fair competition in agriculture? And if so,
what can the antitrust enforcers at the Justice Department do
about it?
Ms. Varney. Well, Senator, as you recall, this was a matter
of great concern to many members of the Subcommittee during my
confirmation hearing, and I committed to you that I would take
a hard and careful and close look at that. And we have been
doing that.
I went to Vermont with Senator Leahy and Senator Sanders
and looked at some of the dairy issues in Vermont. I have been
to upstate New York with Senator Schumer to look at some of the
issues there. I would be happy to go to any of your States with
you should that be appropriate. We will be coming out--we have
done a very large workshop in Iowa with Senator Grassley and
looked at some of the issues confronting the grain and seed
industry there. We were recently in Normal, Alabama, where we
spent the day with poultry farmers. And we are learning a lot.
There is a lot of consolidation in what we think of as the
middle of the market between the farmer and the consumer. A lot
of that has occurred over the last decade. Some of it has
brought tremendous efficiencies to the market. At the same
time, it may have reduced competition at the input level, at
the production level.
So we are continuing these workshops. We will go wherever
they lead us. I have not reached any conclusions whatsoever
about what may or may not be anticompetitive in a particular
industry.
However, as you know, we have challenged the Dean Food
acquisition, and we believe that that was anticompetitive, and
we will continue to challenge those practices or those
acquisitions that we believe are anticompetitive.
Chairman Kohl. With respect to milk, is that Dean Foods
challenge your response to my question about dairy farmers and
whether they are getting a fair price for their product?
Ms. Varney. The Dean Foods is a challenge where we believe
that the acquisition created an anticompetitive effect because
there was too much concentration. Our view is always the more
competition there is for farmers to deliver their milk, the
better the pricing situation will be. So, yes, we will continue
to challenge those either acquisitions or circumstances that we
believe are anticompetitive.
Chairman Kohl. Chairman Leibowitz, for nearly a century, it
was a basic rule of antitrust law that a manufacturer could not
set a minimum price for a retailer to sell its product. This
rule allowed discounting to flourish and greatly enhance
competition for dozens of consumer products on everything from
electronics to clothes. But in 2007, a 5-4 decision of the
Supreme Court, the Leegin case, overturned this rule and held
that vertical price fixing was no longer banned in every case.
I believe this decision is very dangerous to consumers'
ability to purchase products at discount prices and it is
harmful to retail competition. I have introduced legislation to
overturn the Leegin case and restore the ban on vertical price
fixing. We have ten cosponsors, and it passed the Judiciary
Committee several weeks ago.
Do you agree with me on the principle that manufacturers'
setting retail prices should be banned? Do you support our
Discount Pricing Consumer Protection Act?
Mr. Leibowitz. Well, there are a range of views on the
Commission, but I certainly support overturning Leegin. I
thought that the four-person minority had the more persuasive
view and that Dr. Miles should not have been overturned. It had
been the law for close to 100 years, so I do support
overturning Leegin.
The place where we do have consensus at the FTC is that
there is still room for RPM enforcement. We had an RPM
investigation last year. It did not pan out. But we do support
a higher standard, and we want to work with you going forward.
Chairman Kohl. In your case, at your confirmation hearing
you said that there was room under existing law that the
Justice Department pursue retail price maintenance cases. Do
you still feel that way? Are you intent on moving forward on
this? Where are you on this?
Ms. Varney. Absolutely, Senator. I believe retail price
maintenance can be anticompetitive, and we work closely with
the FTC, who generally takes the lead on these issues. We
provide any support that we can to them. We work with the
States on this. We think that absolutely RPM should continue to
be enforced and prosecuted, and we will continue to devote the
resources to do so.
Chairman Kohl. Is it fair to say that you are not a fan of
the Leegin decision?
Ms. Varney. I tend to agree with the Chairman that I think
the dissent was the stronger of the two positions.
Chairman Kohl. Thank you so much.
We turn now to Senator Hatch.
Senator Hatch. Well, thank you, Mr. Chairman.
Let me start with you, Mr. Leibowitz, Chairman Leibowitz.
You mentioned in your testimony that you are actively pursuing
two cases which you assert are pay-for-delay cases. Court
papers recently filed by Watson Pharmaceutical's CEO--Paul
Bisaro is his name, I believe--alleged that the FTC threatened
to initiate an investigation of Watson if the company did not
waive its exclusivity rights to a generic version of Provigil
so that a foreign competitor could enter the market.
Now, the court brief includes the following allegations:
``That the FTC obtained confidential information from the FDA
and shared that information with Watson and Apotex.''
The next paragraph, ``That the FTC obtained confidential
information from Watson and apparently shared it with Watson's
competitor, Apotex.''
And then one more: ``That Markus Meier, Assistant Director
of the FTC Bureau of Competition's Health Care Division,
asserted that FTC's `front office' would open an investigation
of Watson if Watson did not relinquish its potential
exclusivity rights.''
Now, Chairman Leibowitz, what concerns me is that the FTC
apparently did not deny any of these allegations. Were you
aware of Mr. Meier's actions in this matter? And can you look
into these allegations and provide me with more information
about what happened?
Mr. Leibowitz. We would be happy to do that, and the reason
we have not responded to this yet is because that was a filing
by a company, Watson, in the AndroGel case, and it is a filing
in response to our insistence that we allow--that the CEO be
subpoenaed. So it is one thing for a company to disagree with
our case. You have a right to say this is not a pay-for-delay
or a reverse payment case, and that is fine. It is another
thing, as I understand it, not to even be deposed.
So we are going to respond in court papers. We are going to
take a look at this. I am going to get back to you. Markus
Meier is a very, very good and experienced litigator. He runs
our health care practice, and I do not believe that he would
ever breach a confidentiality. But we are going to take a look
at that because I think that is important.
Senator Hatch. Well, I think you ought to take a look at
it.
Mr. Leibowitz. We will, absolutely, Senator.
Senator Hatch. I do not know what the case is.
Let me ask you, Assistant Attorney General Varney, as you
know, many U.S. corporations have faced difficulty as they have
interacted with foreign competition and enforcement and
regulatory agencies. Many of these companies have expressed
concern that the foreign agencies have used their authority
specifically to disadvantage American businesses. And there
have been questions as to whether the foreign agencies have
provided adequate due process to American companies and whether
they have applied sound antitrust principles in their
investigations and enforcement proceedings.
Now, you have spoken about the need for greater convergence
and transparency in the international antitrust enforcement.
What problems do you see on the horizon resulting from the
diverse and often disparate antitrust approaches throughout the
world? And do you believe the concerns that some companies have
had regarding due process with overseas agencies are
legitimate?
Finally, can you tell this Subcommittee what specific steps
the Department of Justice has taken in this area and whether
there is a role for any other agencies in helping you to
address these concerns?
Ms. Varney. Certainly, Senator. I have heard the same
concerns that you have from many global corporations
headquartered here in the United States that do business around
the world, and obviously it is a great disadvantage to business
to not have certainty, predictability, and transparency as they
are doing business around the world.
It is something that, as you mentioned, I have spoken out
about now quite frequently. In two international forums--the
International Competition Network and the OECD in Paris--we,
the United States, are leading an effort to inform
jurisdictions around the world to create a dialog on what is
due process, what is transparency, what is procedural fairness,
what are the best practices so that we can create
predictability and stability in an increasingly global world.
I believe it has to be an administration-wide effort. We
are coordinating with the Federal Trade Commission, obviously,
with the State Department, with the Department of Commerce, and
with the USTR as we continue to push forward in our dialogue
with our international colleagues.
As a matter of fact, Senator, at the Department of Justice
we have, in an unprecedented move, hired a European lawyer to
help us at the DOJ go not only to Europe but to other
jurisdictions and work on these issues, and I think we have
made tremendous progress in that effort. But we have a lot more
to do.
Senator Hatch. OK. Thank you.
Mr. Leibowitz. If I can just add, Christine, Assistant
Attorney General Varney, is doing a wonderful job here leading
our effort, and we have worked together also with the business
community in different countries, too, to try to ensure
procedural due process, because it is obviously very, very
important to American companies. It is very, very important to
any company.
Senator Hatch. Thank you. Let me go back to you, Mr.
Chairman. As I mentioned in my opening statement, I have
serious concerns about the FTC's decision to bring what are
essentially antitrust cases under Section 5 of the FTC Act
rather than under the Sherman Act. Now, you have answered that
to a degree. You touch on this issue in your written statement
as well.
My concern is that there is a breadth of case law under the
Sherman Act that gives businesses clear guidance as to what
types of conduct are lawful or unlawful. So given the proper
legal guidance, a company is able to operate its business with
general assurance that its conduct is lawful under the
antitrust laws.
However, it does seem to me that with the FTC's decision to
start bringing cases under Section 5 of the FTC Act, these
companies may find themselves facing FTC complaints for conduct
that they had good reason to believe was allowable under the
law. Now, this is mostly due to the fact that Section 5 has an
extraordinarily thin record of jurisprudence, giving the FTC
extraordinary leeway to bring cases and to find on its own what
types of competitive conduct are illegal.
Now, is this a legitimate concern? And should we not be
concerned----
Mr. Leibowitz. Well, I think----
Senator Hatch. Let me just finish the rest of it. Should we
not be concerned that the uncertainty inherent in the FTC's use
of Section 5 will prevent businesses from competing
aggressively?
Mr. Leibowitz. Well, I think it is a legitimate discussion
for debate, and I am glad you raised it.
If you go back and you look at Supreme Court cases--and the
last two times the Supreme Court has opined on unfair methods
of competition--in the Sperry & Hutchinson case in 1972 in
which the FTC was a party, and in Indiana Federation of
Dentists--they recognized the breadth of unfair methods of
competition, that it is a penumbra around the antitrust laws,
at the same time with limited remedies. And I went back and I
pulled--I only wish Senator Grassley was here, because I pulled
a quote from Senator Cummins, who was a Republican of Iowa and
was the lead author of the FTC Act. This is from the debate--
and then he became the Chairman of the Judiciary Committee. And
this is from the debate in 1914, and he said, ``What is the
concept of unfair methods of competition? ''
Well, unfair methods of competition--and I quote, and I
will put this in the record with a cleaner copy--``seeks to go
further and make some things offenses that are not now
condemned by the antitrust law. That is the only purpose of
Section 5--to make some things punishable, to prevent some
things, that can not [sic] be punished or prevented under the
antitrust law.'' \1\ Because at that time I think the Congress
was very concerned about the enforcement of the antitrust laws
by the courts, and they wanted to give a new agency expanded
jurisdiction, but, again, limited remedies.
---------------------------------------------------------------------------
\1\ 51 Cong. Rec. 11,236 (1914) (statement of Senator Cummins).
---------------------------------------------------------------------------
I agree with you, though, that you need to have standards.
You do not want--I mean, we have talked, and when I was on this
Committee, we talked many times about the need for business
certainty. So I think the conduct has to be unfair. It has to
be something like deceptive conduct. There has to be harm to
the competitive process.
In cases like the U-Haul case we brought today, I think
everyone agrees it is an important gap filler. You do not want
invitations to collude where one company invites another
company to fix prices.
In cases involving other uses of unfair methods of
competition, it can be a little dicey. I do not want to talk
about any pending cases, of course, but we used the unfair
methods of competition authority a couple of years ago in a
case involving N-Data. Now, this involved a standard-setting
case for ethernet ports. We all use ethernets when we are
traveling and plug in our computers to go on the Internet. And
one company had said to every company, ``You can use our
standard or our patent and''--``You can use our patent, and we
will not charge you any royalties.'' And everyone wrote to that
standard. It was the new standard. They then sold the patent
rights to another company, which then sold it to another
company, which then said, ``Pay us money.'' And at this point
there had already been lock-in.
And so from our perspective, what we want to do is stop
anticompetitive behavior. In this instance, there was not a
monopolization claim because the monopoly power came long
before the reneging on the commitment. And so, you know, we are
taking this very carefully as we go forward. We have held a
series of workshops. We are going to be writing a report on
this issue. And we are going to use it carefully because we
know that Congress can take away any authority it gives us. So
we are going to try to use it judiciously. But we can keep on
having this discussion, I think, and I look forward to it.
Senator Hatch. Let me just mention three things I am
concerned about. Should we not be concerned that the
uncertainty inherent in the FTC's use of Section 5 will prevent
businesses from competing aggressively? Also, in your opinion,
does the FTC have the authority under Section 5 to unilaterally
establish new competitive norms? And what are the outer limits
of Section 5, and who ultimately decides what those limits are?
Mr. Leibowitz. Well, of course, ultimately it will be the
courts that decide, because if we bring a case within the FTC,
there is an appellate court that the case will ultimately go
to. And if we bring a Section 5 case outside of the Federal
Trade Commission and in court, it will be the district court
and then an appellate court that will make that determination.
But, again, you know, we have----
Senator Hatch. Let me just interrupt you.
Mr. Leibowitz. Sure.
Senator Hatch. Are you basically saying that the parties
charged under Section 5 will have to go through a trial and
appeal just to find out what the law is?
Mr. Leibowitz. No, no, no. I do not think anyone--I just
want to say this, and I know that there is some concern about
our use of Section 5, and anyone has a right to raise that, and
of course, when you were laying the groundwork for the
Microsoft case, I think people were very concerned about what
the Judiciary Committee was doing, and they had a right to do
that, too.
I do not think any company would be surprised, and I have
yet to meet a company that was surprised, by our application of
unfair methods of competition to the conduct that we believe
violates the FTC Act. And, again, ultimately we are not the
arbiters of this. It is going to be the courts. But we want to
stop anticompetitive conduct that could raise prices, that
could reduce innovation, that could reduce choices. And it is
extraordinarily important, I think, that particularly--and,
again, what the Chicago School did--and I want to go back to
this, because in the 1960s and 1970s, there was no need to use
our unfair methods of competition authority or little reason to
use it because the antitrust laws were read so broadly. Now we
have seen those laws circumscribed, I think for some very good
reasons, and, again, the Chicago School's emphasis on
efficiencies and rigorous economic analysis is a good thing.
But having said that, you want us to stop anticompetitive
conduct that harms consumers. That is what we are trying to do
in an area where antitrust has been limited, particularly
because of treble damages, which we are not able to get. It is
appropriate, I believe, and I think the majority, a bipartisan
majority of the Commission believes for us to use this
authority on occasion. Not always.
Senator Hatch. Thank you.
Chairman Kohl. Thank you, Senator Hatch.
I will now call on Senator Franken.
Senator Franken. Thank you, Mr. Chairman. This is for the
Assistant Attorney General.
Ms. Varney, as you may know, I am very interested and
concerned about the potential merger of Comcast and NBC
Universal, and I know that you cannot discuss the specifics of
the Comcast/NBC Universal merger, but I want to talk to you a
bit about my concerns and ask a few questions about the way the
Department of Justice analyzes antitrust actions certainly in
this field.
I have said this before, but I cannot say it enough. It
matters who runs the media companies. The media are our source
of information. They are the way we learn about the world and
how we understand the world. So it is a problem when the same
company--to me it is--It is a problem when the same company
produces the programs and runs the pipes that bring us those
programs.
Now, I was working at NBC when Fin-Syn, the Financial
Interests and Syndication, Rules were rescinded. Fin-syn had
existed to prevent a conflict of interest. Networks were not
allowed to own more than a very small number of their own
shows.
NBC promised at the time of the hearings about fin-syn that
rescinding fin-syn would not change the way NBC treated other
companies' programming. They said, ``We are not going to choose
our own programming over someone else's programming. Why would
we do that? Our interest is in ratings.''
My first question to you is: Do you know what happened
after fin-syn was rescinded on the networks?
Ms. Varney. They relatively promptly favored their own
programming.
Senator Franken. Relatively promptly, like immediately.
That is exactly right. And I say this as background so that you
understand my inherent distrust of NBC's and Comcast's
promises. It is just too easy for a media company that owns its
own programming to favor that programming. That is a big
problem for consumers who get less information and from fewer
sources.
My experience has been that media consolidation creates
more media consolidation. When fin-syn was abolished, it meant
that these networks could own their own shows, and they started
to. By 1992, over 50 percent of the shows on NBC were owned by
NBC. Well, what that did was the studios just started buying
networks, because now they had a place to put their shows. So
Disney bought ABC. Viacom, which owns Paramount, bought CBS.
NBC and Universal merged. Fox owns Fox. And I am worried that
if the NBC/Comcast merger goes through, AT&T and Verizon are
going to buy their own networks and Hollywood studios. And if
that happens, we are going to have a serious impact on
independent programming.
Now, independent programming is already declining.
According to an analysis done by the Independent Film and
Television Association, the percentage of independently
produced fiction series on the national networks plunged from
approximately 50 percent in 1989--these are independents, not
Disney, not owned by the networks-50 percent in 1989 before
fin-syn was rescinded to just 5 percent in 2008. Independent
programming is critical. It is the way we get access to new
information and new perspectives.
Ms. Varney, what I want to ask you is: What can and will
the Antitrust Division do to ensure that competition is
restored in the entertainment industry and that the barriers to
distributing independent programming are diminished?
Ms. Varney. Well, let me assure you, Senator, we do not
rely on promises. If a transaction is anticompetitive and
violates Clayton 7s prohibition on substantially lessening of
competition, we will block it. We will go to court and we will
block it.
As I understand your concerns--and I have tried to follow--
you have spoken publicly about this, and I understand your
concerns in antitrust parlance to fall into two broad
categories. You are concerned about the vertical integration
that Comcast owning the pipes is going to favor its own
programming and discriminate against other programming. And you
are concerned about the horizontal overlaps in both instances.
Senator Franken. Yes.
Ms. Varney. The way we analyze those type of mergers--and
you are absolutely right, this is a vertical integration with
horizontal overlap--we will use all of the existing tools that
we have to understand what the competitive marketplace will
look like post-transaction. And should we have the evidence
that guides us to the conclusion that this is a transaction
that will meet the standards set by the courts and set by the
law, we will challenge it.
However, if the parties come back to us and adequately
address our concerns that would be actionable, we would explore
with them how those concerns could be addressed. They will not
be addressed in promises. Should we get there--and I have not
prejudged, and I would never speak on a specific investigation.
But in any investigation, when we reach a consent with parties,
those consents are binding orders of the court that we will
enforce, and we will bring actions for violations of those
orders.
The fine for violations can be as high as $10,000 per
occurrence. ``Occurrence'' is defined very narrowly so that you
can have a massive number of occurrences off any particular
transaction. So, in general, that is how we look at these
mergers when they are both vertical and horizontal.
Senator Franken. OK. Thank you for your answer.
One of my other concerns about Comcast/NBC--and this
impacts people in Minnesota and all over the country--is their
cable bills. Now, it seems to me that the combined NBC and
Comcast--and Comcast is the biggest cable carrier.
Ms. Varney. That is right.
Senator Franken. And one of the biggest Internet providers,
too, so that is the future. And NBC owns not just NBC's
programming, but all these other cable networks--Bravo, MSNBC,
et cetera, et cetera, et cetera.
Well, NBC can start charging Comcast twice as much for its
programming, and for Bravo and for MSNBC. And then that means
every other cable station has to pay the same fee. But with
Comcast, it is going from one pocket to the other, with
Comcast/NBC. But for the other cable owners, it creates a
tremendously unfair advantage for Comcast/NBC, and it increases
the cable cost, the cable bills of every American.
So my question is: In a merger transaction involving cable
companies, how do you analyze whether consumers' cable bills
are actually likely to go up? And where does that figure into
this?
Ms. Varney. So, again, without commenting on a specific
transaction, which we cannot do----
Senator Franken. Absolutely.
Ms. Varney. What you do, Senator, is you take all the
documentary evidence, which will include both past pricing,
future plans of pricing. You do econometric analysis. You run a
number of both economic tests and look at direct evidence, and
you attempt to determine whether or not there will be a
significant non-transitory price increase that would be
actionable under the antitrust laws.
If you find that evidence, that is certainly something you
would consider when you try to determine whether or not you
block the merger.
Senator Franken. Thank you.
Thank you very much, Mr. Chairman.
Chairman Kohl. Senator Specter.
Senator Specter. Well, thank you, Mr. Chairman.
Comcast, as it is well known, is a major constituent of
mine in Pennsylvania, and I introduced the Comcast officials
when the hearings were held on a number of occasions. I have
known the Roberts family for decades. They have been very good
corporate citizens, and they have been very fair and equitable
in their dealings.
Senator Franken has posed a number of theoretical
questions, and I understand the propriety of your answers and
the generalizations. You cannot deal with them until you really
know exactly what is going on. And he postulates a concern that
Verizon may make an acquisition, AT&T may make an acquisition,
and I am sure that if that were to occur, the Antitrust
Division and FTC would take a look at what is happening in the
industry overall and would make a judgment if some additional
factors were to occur in the future. But those would not be
matters that you would consider now as to hypothetical
situations which might arise in the future, but you would
naturally await the events of the day, would you not, to
consider what impact that would have on the overall market?
Ms. Varney. Senator, as we discussed, speaking not about a
transaction but speaking about merger analysis generally, you
take the transaction in front of you at the time given the
market conditions at the time. The hypothetical that you
reference that Senator Franken brought up actually has happened
in the past in drug wholesalers, which Jon may recall. There
were a series of consolidations in the drug wholesaling
industry, and if I recollect correctly, Chairman, I think the
first one was allowed and then the second one there was too
much consolidation. And at the time that the second one was
proposed, a third one was simultaneously proposed. Both of
those were declined by the Federal Trade Commission in that
industry at that time based on the facts, and I believe they
were both upheld by the district court.
Senator Specter. So that if that were to occur in the
future, you would have enough power and authority to deal with
it as it did arise.
Ms. Varney. I believe in any industry we have the authority
to examine each transaction in the context of the industry as
it exists, always informed by prior learning, informed by what
has been the result of previous transactions in the industry.
We take everything into account.
Senator Specter. Senator Franken has postulated a
hypothetical of gouging. If NBC raised its prices to Comcast,
then NBC could charge other people the same amount of money
using its market position to use the one-pocket-to-another
analogy. Just speaking having known the Roberts and knowing
Comcast, I do not think that is going to happen, but let us
deal with hypotheticals. That is about all we are dealing with
at the moment.
If that were to happen, there would be authority under the
antitrust laws to move in using that kind of market position in
a flagrant way, as Senator Franken has described it to take
some remedial action at that time, wouldn't there?
Ms. Varney. Well, Senator, under Section 2 of the Sherman
Act, of course, if a company enjoys market power and they are
engaging in predatory acts, it would be actionable. I think it
is important to recognize that there is a difference between
the tests that you apply in a merger which looks at the ability
of the company post-merger to inflict a significant, non-
transitory increase in price, and then perhaps post-merger,
your word, gouging of an enterprise might be something that
would be more actionable under the consumer protection laws
than----
Senator Specter. Well, in considering whether to approve
the merger, you are not going to hypothesize dastardly conduct
on the part of one of the parties so that in the future they
may do something which is untoward. Wouldn't you await those
events and exercise the power you have to deal with that as
that kind of situation arose?
Ms. Varney. Dastardly conduct will be prosecuted, without
regard to whether there is a merger or not a merger, wherever
we find it and our jurisdiction reaches. And I would invite the
Chairman to comment on that. He has slightly broader authority
than I do in that regard.
Senator Specter. Well, it is good to establish the
dastardly conduct doctrine so we----
Mr. Leibowitz. Yes, I think we have established it here
today, but it may not leave this Committee.
I would say this: When we look at an area in the context of
a merger--say, for example, Google/Admob, which we recently
approved--we do not just walk away. You know, we have acquired
some expertise. We think about these marketplaces and we think
about other--and sometimes it leads us to other problems within
the marketplace. So I guess I would add--that is the only
comment I would add to Christine's----
Senator Specter. So what you are saying, Mr. Chairman, is
that if that occurs, you have adequate power to protect
consumers in futurum?
Mr. Leibowitz. We do. Perhaps not under the dastardly
conduct doctrine, but under the antitrust laws, yes.
Ms. Varney. You could combine that with Section 5.
Senator Specter. Moving to another subject, I want to
associate myself with the comments that Senator Hatch has made
about the generic issue and discouraging the settlements.
Chairman Leibowitz, my question is: When a matter is in
litigation and you have a settlement which is proposed and you
have a concern about whether the consumers are being adequately
protected, isn't it sufficient to have that settlement subject
to court approval to see to it that the consumers are protected
without having the FTC intervene?
Mr. Leibowitz. Well, I would say this: You know, we
certainly believe in settlements, and in the period before the
2005 cases that threw this area into some uncertainty, there
were many, many settlements. They just did not involve money
between the parties. And so, you know, at one level, if----
Senator Specter. I only have a minute left. Is it
sufficient to have the court which has jurisdiction of the case
protect the consumers interests in approving or disapproving
the settlement?
Mr. Leibowitz. Well, I think that can happen sometimes, but
here both parties have an interest in making--if there is a
pay-for-delay deal, both parties have an interest in making a
settlement, but the consumers are not at the table. And I think
in the Judge Newman decision--Newman, Parker, and Pooler
decision in the Second Circuit in Cipro just a few weeks ago, I
think that was one of the points they made in calling for an en
banc review in the Second Circuit, is that the----
Senator Specter. Well, can't the court involve the consumer
interests and hear those interests in making a determination as
to whether to approve the settlement?
Mr. Leibowitz. It is certainly conceivable, but I also
think you want the FTC engaged in this issue so that if, in
fact, there is a settlement that violates the antitrust laws,
we can try to stop them subject to a court's determination----
Senator Specter. Well, I would like to have the FTC
involved if they are needed. But if a court can protect the
interests and has the case--let me move on to another point. I
have just a short amount of time left.
There has been a concern raised by a constituent of mine,
Cephalon, with respect to whether the FTC provided information
to Apotex, which was confidential and impacted on Cephalon's
ability to deal with its sleep drug, Provigil. Is there any
factual basis to that?
Mr. Leibowitz. Well, we know that there is a filing and a
court case to which we will be responding, and Mr. Levitas over
here, a former Committee staffer, is going to be involved in
taking a look at this. But we do not believe there was a
breach. I think that these companies talk amongst themselves
all the time, sometimes, we believe, for dastardly reasons. But
we will get to the bottom of this, and we will be responding in
court very shortly.
Senator Specter. So we will be hearing more about that?
Mr. Leibowitz. You will.
Senator Specter. One last comment. Chairman Kohl has raised
the issue of Dean Foods, and I would like to associate myself
with his questions. The profit margins, as I understand it,
have gone for Dean from some $30 million in 2008 to $72 million
plus in 2009, a time period when farmers experienced record-low
prices for raw milk and consumers saw little or no decline in
retail prices. I would urge you, General Varney, to take a look
at that. That touches a very sore subject with my dairy farm
industry. Thank you very much.
Thank you, Mr. Chairman.
Chairman Kohl. Thank you, Senator Specter.
Senator Schumer.
Senator Schumer. Thank you, Mr. Chairman. I thank both of
you for coming. Attorney General Varney, thank you for coming
to upstate New York, Genesee County, Batavia, where we actually
talked about the issue of Dean Foods, and she heard testimony
from farmers about that problem. I, too, associate myself with
your good questions, Mr. Chairman, and I thank you, Chairman
Leibowitz, for the good work you have done most recently on
subprime lending. Countrywide was excellent work, excellent
settlement, which I have been very interested in.
First I would like to talk to Chairman Leibowitz about
privacy issues and social networking. As you know, a number of
us on this Committee--Senator Franken, myself, as well as
others, Senator Bennett, Senator Begich--have talked about our
concerns about privacy and social networking, and particularly
Facebook sort of changing the rules in midstream. I cannot ask
you to comment on Facebook in particular, but I do want to get
some general concepts and general thoughts out on this issue.
Now, in 2004, the FTC's Director of Criminal Protection
said, ``It is simple. If you collect information and promise
not to share, you cannot share until the consumer agrees. You
can change the rules, but not after the game was played.''
Do you agree with that statement?
Mr. Leibowitz. Without respect to any particular case, I
absolutely do. And, in fact, last year, in 2009----
Senator Schumer. I am just going to write you down as a
``yes'' so I can----
Mr. Leibowitz. Write me down as a ``yes.'' Go ahead.
Senator Schumer. OK. To put it in slightly different terms,
do you agree that when a company changes its terms of use or
privacy policies, it would be best to require consumers to opt
in to any new information sharing?
Mr. Leibowitz. Yes, and that is precisely the public
guidance that we have made as a Commission last year.
Senator Schumer. Good. In what circumstances is consent
necessary before the sharing of information with third parties?
When should consent be necessary?
Mr. Leibowitz. Well, I think the best practice is always to
get consumers' consent, and this is a roiling issue, you know,
in the work that we do. And we have tried to take a two-track
approach here. One track is we prosecute malefactors, people
who engage in unfair or deceptive acts or practices. We had a
major case last year against Sears for data mining. They did
not do anything with the data, but they were taking data
without consumers knowing. And the other thing we were doing is
we set up a process to think through these issues, because
obviously it is a complicated marketplace. We are going to
write a report in the fall, and we will have something to say
there.
Senator Schumer. Good, because that was my next question.
Generally, I guess, then you agree there is currently not
sufficient guidance and regulation about how consumer data
should be protected on social networks. That is a fair thing,
and I guess you are saying you are going to come out with some
guidance maybe in the fall.
Mr. Leibowitz. I mean, there is the guidance in the sense
that you cannot engage in unfair or deceptive acts or
practices, but we have certainly found companies that have gone
beyond what we think is appropriate, and then in this area, we
really do think that there is a lot of uncertainty, and we can
try to help push companies in the right direction. And social
networking is----
Senator Schumer. Right, and you are having these
roundtables now to sort of flesh this out.
Mr. Leibowitz. That is exactly right.
Senator Schumer. But the guidelines that you will issue
will not be binding or enforceable against social networking
sites, they are just guidance. Right?
Mr. Leibowitz. They are just guidance. That is exactly
right.
Senator Schumer. So if these guidelines will not be
enforceable, what tools does the FTC have to pursue social
networking sites that are not adequately protecting their
users' data?
Mr. Leibowitz. Well, I would say that we have the
enforcement authority that Congress has given us----
Senator Schumer. Section 5?
Mr. Leibowitz. Section 5. It is unfair or deceptive acts or
practices, and we will not hesitate to use this. Obviously, we
have your very good letter in the Facebook context. We have a
petition about Facebook. So without confirming an
investigation--we do not do that--we are taking a look at all
of this, both at the micro and macro level.
Senator Schumer. Is Section 5 sufficient or might you need
other authority to deal with this issue, which is a----
Mr. Leibowitz. I think in this issue, in this area, I would
say that our statute is sufficient. I would say this: As you
know, and as I know Senator Durbin knows, and Senator Kohl,
right now in the financial reform legislation, there is a
debate--the House has given us expanded fining authority, which
is something that the bipartisan majority of Commissioners
support and Caspar Weinberger, when he was the Chairman of the
FTC, supported. I do think in cases involving identity theft or
spyware, you know, expanding fining authority would be very,
very helpful. But for this particular area, this discrete area,
I think we have the authority we need.
Senator Schumer. Good. So get to work. You have the
authority, get to work.
Next is on debt settlement, a different issue. Senator
McCaskill and I introduced the Debt Settlement Consumer
Protection Act in April. It is the first comprehensive proposal
introduced in Congress to address these abuses. I am also aware
and commend you for the efforts the FTC has had to combat
deceptive and abusive practices in this industry.
One thing missing, though--the FTC has some proposed rules.
That is good. One thing missing from the FTC's proposed rules,
however, is a cap on fees that debt settlement companies can
charge. I understand that under current law the FTC's hands are
tied. But given your extensive work on this issue, I want to
get your opinion, not criticize you for not putting it out.
Our bill provides a strict cap on fees, 5 percent of the
amount the consumer saves as a result of any settlement
negotiated by a debt settlement provider. They have been just
taking people to the cleaners on this. They come in and say,
``We will settle your debts,'' and then they charge such a
fortune that you wish they had not even helped you some of the
time. And so we also ask that the debt settlement provider can
only collect its fee actually after it settles the debt. They
are busy collecting now ahead of time, and then they do not
settle the debt. And these are poor people often who are preyed
upon.
So the questions are two. First, would you agree that a fee
cap is a vital tool that would help stop dishonest and
predatory debt settlement companies from ripping off consumers?
And do you support prohibiting a debt settlement company from
receiving any debt settlement fee from a consumer until the
company has provided the consumer with documentation that a
debt has, in fact, been settled?
Mr. Leibowitz. So let me answer your second question first,
if I may. We have a pending rulemaking. The proposed rule would
ban advance fees because, as you point out, this is an industry
that is just riddled with deceit, and there are callous
instances--and, of course, this is true, and you have done such
great work in the mortgage area. This is true in the
foreclosure rescue area as well. They take the money, 95
percent of the company is in sales, 3 percent is in re-working
loans, and so obviously loans are not helped. And so I cannot
comment on that except to say, you know, our pending draft
rule, which we are in the process of finalizing, after
consulting with the other members of the Commission, so it is
very closely related to the solution to your second question.
As to the first question, there are some States, as you
know, that have placed caps. It is an idea that has been
proffered in the context of our proposed rulemaking as well, at
least in some of our roundtables earlier on. I want to go back
and talk to our other Commissioners about that, but having said
that, I commend you for your leadership here because this is an
area that is just rife with abuse.
And one more very quick anecdote, which is: I was driving
with my daughter to a soccer game 2 weeks ago. She is 14 years
old. We heard on sports radio someone saying, ``And we are a
Government-approved debt settlement company.'' And so she said,
``Dad, I am going to call them up,'' and she called them up,
and she said, ``I am having problems with''--she probably
should not do this, but she said, ``I am having problems with
my loans. What can you do for me? '' And they said, ``Well, we
can help you out. We have 98-percent effectiveness.'' And she
said, ``Are you Government-approved? '' And they said, ``Yes,
we are Government-approved.'' And she said, ``Well, what does
that mean? '' And the person on the phone said, ``It means we
are approved by the Government,'' which, of course, they are
not.
So we are well aware of these problems, and I think they
permeate even down to teenaged children.
Senator Schumer. It seems like you have a budding junior
commissioner there in your car.
[Laughter.]
Senator Schumer. So we will put you down as in favor of--at
least personally, in favor of----
Mr. Leibowitz. Strongly supporting looking at that idea.
Senator Schumer. Yes. I was going to say in favor of not
collecting the fee before they actually solve the problem, and
in terms of a cap, interest in checking with your
Commissioners.
Mr. Leibowitz. I would say on the first one, strongly in
favor of moving through a very strong rule. You will see the
rule very shortly, in the next month or two.
Senator Schumer. Great.
Thanks, Mr. Chairman.
Chairman Kohl. Thank you, Senator Schumer.
Senator Feingold.
Senator Feingold. Thank you, Mr. Chairman.
Over the past 2 years, we have seen what happens when the
Government turns a blind eye to risky and self-serving
activities on Wall Street. The small businesses on Main Street
and ordinary citizens are left holding the bag. And while much
attention has been paid to the consequences of this approach in
the banking and the financial sectors, the hands-off regulatory
ideology was also pervasive in other areas during the previous
administration, such as the enforcement of antitrust laws. In
fact, in September 2008, a majority of the FTC, including the
current Chairman, whom I welcome here today, sightly blasted a
DOJ antitrust report as ``a blueprint for radically weakened
enforcement of Section 2 of the Sherman Act.''
The FTC Commissioners further described the DOJ report as
being ``chiefly concerned with firms that enjoy monopoly or
near-monopoly power and prescribes a legal regime that places
these firms' interests ahead of the interests of consumers. At
almost every turn, the Department would place a thumb on the
scales in favor of firms with monopoly or near-monopoly power
and against other equally significant stakeholders.''
Fortunately, as I urged, the current administration
withdrew this flawed report. I have been impressed by the
change in approach that properly makes farmers, other small
businesses, and consumers the focus of antitrust protections,
and I am going to focus today on competition in Agriculture,
and especially dairy. But I want to note that I think this
change has been seen across the board. It is particularly
heartening that after years of hearing concerns from dairy
farmers in my listening sessions and pressing for scrutiny of
anticompetitive practices and enforcement of antitrust laws in
Washington, there is finally a serious collaboration between
the Justice Department and the Department of Agriculture as is
shown by the upcoming joint USDA-DOJ workshop in Madison,
Wisconsin, on June 25th. This is a great start, but the farmers
and consumers I talk to remind me that this good policy and
interagency cooperation needs to translate into fair
competition and strong enforcement on the ground as well.
So I am glad to have this opportunity to talk to both of
you, and, Assistant Attorney General Varney, let me first take
a moment to talk about this upcoming workshop on dairy in
Madison. I know Senator Kohl mentioned it. I was very pleased
when this workshop was announced, both because of the important
topic and because you chose to hold this in our home State of
Wisconsin. As I mentioned, at these town meetings in all 72
counties, this is the type of feedback we get along these lines
of encouraging public participation. I recently suggested that
the workshop have additional sessions for public comment
throughout the day instead of just at the end of the day,
similar to what was done at the poultry workshop in Alabama.
Can you confirm the Department is planning on having two
public comment sessions?
Ms. Varney. I can confirm that if they were not, they are
now.
Senator Feingold. All right. That is good to hear. One of
the best things about these workshops is they are an
opportunity for the Department to hear the unvarnished comments
of farmers and cheese makers and other Wisconsinites who think
we should be doing more to protect family farms and restore
competition in the dairy industry. And I think it is
frustrating sometimes for people to come from long distances
and then just hear all of our wonderful political speeches, but
I think you need to hear from the farmers. I think you know
that.
I have been a strong proponent of the need for enhanced
Federal agency collaboration and communication with respect to
dairy competition over the last several years. It is a very
complex industry. It is often unclear which agency has
jurisdiction and who should be taking the lead to resolve
competition problems. For example, when I was a State Senator,
I had a chart on my wall that showed the farmers' share of
retail spending on dairy products and how the farmers' share
had been shrinking over time. This trend seemed to roughly
correspond to consolidation at the cooperative processor and
retail levels. Unfortunately, the farmers' share has continued
to shrink, and many farmers and other dairy industry observers
suspect that someone between the farmer and the consumer is
taking a much bigger slice of the pie than they really deserve.
Although the Agriculture portion of the system is regulated by
the Antitrust Division, retail distribution is controlled by
the FTC and price discoveries at the CME, which is prone to
manipulation and is under the jurisdiction of the CFTC.
The bottom line is that I am encouraged by the
collaboration between the USDA and DOJ with these Agriculture
workshops, but I hope it is only the beginning.
So, Ms. Varney, can you tell me what the Department is
doing to increase outreach and collaboration with the other
agencies on these complicated dairy and agriculture antitrust
issues? And, Chairman Leibowitz, how is the FTC pitching in
here? For example, is the FTC planning on being part of the
USDA-DOJ workshop on margins where I hope many of these cross-
agency issues will be discussed? Ms. Varney.
Ms. Varney. First, Senator, let me start with thank you for
all the support that all of you have given us on these
Agriculture issues. You impressed upon me how important it was
to you during my confirmation hearing, and one of the first
things that we did was reach out to USDA, who was extremely
receptive to collaborating in a way that has never been done
before.
As you know, Attorney General Holder and Secretary Vilsack
have both been to all the workshops and will be in your State
next.
It has been an unprecedented collaboration. The first thing
that we have done is we have started up a task force of DOJ
lawyers and USDA lawyers to look exactly at where the overlap
is between our two jurisdictions. As you may know, the USDA
administers the Packers and Stockyard Act, although the
Department of Justice does some of the prosecution under that.
So we have a group of lawyers who are now working very
closely, who are talking to each other daily. We are creating a
centralized office location so they can physically sit together
and trade information as we are vigorously pursuing
investigations that may have been dormant for several years.
The next thing that we are doing is reaching across
agencies and consulting with our colleagues at the CFTC. I
would hope that the FTC will weigh in on our margins workshop.
They have a lot of expertise there. So we are continuing to try
and pull the Government effort together.
At the same time, we are trying to gather as much evidence
as we can in the field. To my knowledge, that has not been done
before. I cannot tell you how much I learned when I went to
Vermont and upstate New York, when I was in Normal, Alabama,
the other day, when we were in Iowa, and I am looking forward
to the same thing in Wisconsin.
When you talk to the individuals who are the farmers on the
ground and they can tell you what is happening to them on a
day-to-day basis, you come away with an entirely different
understanding of how the industry works, which I think makes us
more rigorous in our analysis of what the intersection is
between agriculture and competition policy.
I have not prejudged anything. We have not reached any
conclusions or any results. We are going to continue this and
take it to wherever its logical conclusion is.
Senator Feingold. Thank you.
Mr. Leibowitz.
Mr. Leibowitz. Yes, just following up, Senator Feingold, I
am always, as you know, delighted to find any excuse to go out
to Madison, Wisconsin, particularly during the summer. So I am
sure that, if invited, we will be glad to have a presence
there, and if I can do it, I absolutely will.
You know, one of the reasons that we get along so well is
that we work with each other and we also defer on expertise. So
here we are happy to help out with your initiative and play a
role. And, again, on the pay-for-delay settlement issue--and I
apologize because now that I look at it, it does look like a
large wheel of cheese when we say $3.5 billion a year, but
which we do believe is costing consumers $3.5 billion. We took
the lead on this in a brief we wrote to the Second Circuit. We
did it jointly and collaborate together. So we will be glad to
collaborate with you in this area as well.
Senator Feingold. When the competition workshops were first
announced, several farmer cooperatives expressed concern that
the process would somehow try to demonstrate that cooperatives
are anticompetitive. I do not think this was the intent of the
workshops, and I have been a strong supporter of cooperatives.
I believe they often help small farmers to negotiate better
prices with large suppliers, middlemen, and processors. I
realize that all cooperatives are not perfect, but, Ms. Varney,
do you generally agree that cooperatives can have a positive
balancing influence on agricultural markets?
Ms. Varney. Absolutely.
Senator Feingold. I thank you and I thank the Chair.
Chairman Kohl. Thank you very much, and I will give Senator
Hatch a chance to ask a question.
Senator Hatch. I just have one further question. Then I
have to go to the floor. I think most everybody is aware of my
concerns about the Bowl Championship Series in college
football. I believe that the BCS system is patently
anticompetitive, and I believe that there are serious questions
as to whether it is legal under the antitrust laws.
Now, I have taken some criticism from people who believe
that the college sports are simply too trivial to be receiving
Government attention. Yet with just the BCS, we are talking
about hundreds of millions of dollars every year, billions over
time. All told, college athletics yearly is a multi-billion-
dollar enterprise for the schools, for the conferences, for
television networks, and others. It affects students, athletes,
and consumers throughout the country. Now, it is my
understanding that the Justice Department is looking into the
BCS matter, and I will not ask you to comment substantively on
that inquiry.
It is also my understanding that the Department is looking
into the NCAA's rules regarding athletic scholarships. We are
also hearing news reports about conference expansion and even
consolidation among the bigger conferences, which could have
enormous impact on the competitive and commercial landscape of
college sports and could have a negative impact on the schools
that are left out of the shuffle. Now, I would expect at the
very least major movement in this area would get the
Department's attention.
Now, my question to you, General Varney: Do you believe
that college sports are too trivial for the Antitrust
Division's attention. To put that another way, would the fact
that these issues revolve around college sports keep the
Justice Department from bringing a case if the conduct was
found to be anticompetitive? Then I would appreciate hearing
your view on those two questions, too, Mr. Leibowitz.
Ms. Varney. Senator, my view is that sports are business.
They are a big business, whether they are in college or out of
college. And so far as I know, the only enterprise that enjoys
antitrust immunity is baseball. Other than that, all of these
enterprises are subject to the antitrust laws.
Senator Hatch. Right.
Ms. Varney. We will obviously investigate, thoroughly
pursue, and bring the appropriate action against any
enterprise, whether it is sporting or otherwise, that is in
violation of the antitrust laws.
Mr. Leibowitz. I guess I would just add to this that when
Senator DeWine and Senator Kohl took over the Antitrust
Subcommittee in, I think, 1997 and I was one of the staff
directors, the first hearing we did was on the BCS, the Bowl
Alliance. And, you know, at that time it seemed to us--and you
know this--that it was a bunch of big, large competitors who
got together--they were universities--and excluded some of the
little guys.
Now, my understanding is that the rules have changed a
little bit, I think in part thanks to prodding from this
Committee----
Senator Hatch. Not much. Not much.
Mr. Leibowitz. Not much? But I know that this issue is ably
being looked at by our sister agency.
Senator Hatch. Well, I appreciate it because, you know,
this is a nutty thing to me. This is very, very important, and
what I call the preferred conferences have tremendous
advantages in all ways over the unprivileged conferences. And
that is just not fair in this country. And so I would
appreciate your really giving that every thought.
Thank you, Mr. Chairman. I thank my colleagues for letting
me ask one more question.
Chairman Kohl. Thank you, Senator Hatch.
Senator Kaufman.
Senator Kaufman. Thank you, Mr. Chairman, and thank you for
holding this hearing. And I want to thank the two witnesses for
their long and good service to us all. We are very much
advantaged by your service.
Ms. Varney, I am concerned about the language in the Senate
financial regulatory reform bill that could eliminate in-depth
antitrust review of certain large financial mergers. Are you
aware of the problem? And if so, do you share my concern?
Ms. Varney. Senator, the administration is working closely
with the conferees as they are going into conference, and I
believe the administration is largely committed to making sure
that all laws are consistent with antitrust principles and
application of the laws.
Senator Kaufman. Can you give me any kind of formal
assurance that the administration supports this fix? The
conference starts next Tuesday.
Ms. Varney. I can check for you, Senator. I do not know
that the administration has a position on any of the specifics
as they are going into conference.
Senator Kaufman. OK. Could you get back to me on that?
Ms. Varney. I will. I will report back to you. Yes, I will.
[The information appears as a submission for the record.]
Senator Kaufman. I am also concerned in the same bill of
the increased concentration in the financial industry along
with bailouts and other subsidies for banks that are too big to
fail undermines competition by making it tougher for smaller,
more conservative institutions to compete. What is your feeling
about that?
Ms. Varney. I think, Senator, that we are keenly aware of
bottlenecks in competition in any industry, including in
financial industries. So as we continue to look at the
competitive forces in the industry, we will be shining a
spotlight on barriers to competition. If there are enterprises
that have market power that are imposing barriers to
competition, we will certainly vigorously enforce our laws.
Senator Kaufman. Great. The Patient Protection and
Affordable Care Act, the health care bill, calls for the
creation of insurance exchanges to help individuals purchase
affordable health insurance. What role do you see for the
Federal antitrust laws and competition policy in making sure
that there is adequate competition among these exchanges?
Ms. Varney. A very vigorous role, Senator. We are working
with the administration, with HHS right now, giving our input
into how we ensure the exchanges are designed in a way that is
as competitive as possible.
As you may know, we, I want to say, forced the abandonment
of a transaction in Michigan where Blue Cross/Blue Shield was
trying to acquire another enterprise that would have left them
with a significant market share. And we are aware around the
country of the significant concentration that can exist, so we
are committed to ensuring that the exchanges foster and promote
competition in insurance in order to expand coverage and get
lower costs for everybody.
Mr. Leibowitz. If I could just----
Senator Kaufman. I was interested in your comments.
Mr. Leibowitz. Yes, if I could just add that I agree with
everything that the Assistant Attorney General said. You know,
I would also say that, at least from my perspective, I am
supportive of modification of McCarran-Ferguson.
Senator Kaufman. Great.
Mr. Leibowitz. And then due to a 1980 law--we like to think
it is antiquated and someday it will be changed--we cannot even
write a report--and we have a terrific Public Policy Office. We
cannot even write a report on health insurers without the
permission--I think we will get it ultimately--of the majority
of members of the Commerce Committee. So we used to have the
authority to write reports. Apparently, some people did not
like--I can tell you I suspect we know who did not like some of
the reports we wrote in the 1970s, and we no longer have that
authority. We would love to have it back someday.
Senator Kaufman. Great. I think that is----
Mr. Leibowitz. And we are also working, obviously, with all
of the entities and stakeholders to try to ensure that health
care reform works for everybody.
Senator Kaufman. Yes, this is really key, and I think
competition is key, and I think what happens in the exchanges
is key. So both of you being involved, that would really be
helpful.
Ms. Varney, I believe that generic competition is vital to
many of our markets, and this includes the market for crop
seed. Some people charge that some leading seed manufacturers
manage evergreen or extend the patents on their products by
asserting dubious patent claims designed to thwart generic
competition. Is that a problem you are aware of? And if so,
what can we do about it?
Ms. Varney. Senator, we have confirmed publicly that we
have an investigation into the seed industry, and we are very
aware of your concern. Certainly any practice like that that
was anticompetitive would be something that we would be
interested in.
Senator Kaufman. Chairman Leibowitz, have you run into this
evergreening problem?
Mr. Leibowitz. We see it to some extent in the
pharmaceutical area where, for example, in the quintessential
case--I do not know that this has ever happened--would be if
you changed a pill to a tablet to extend your monopoly or your
patent longer because you would have a patent on the new way
to--you would not have a patent on the core substance of the
medicine, but you would have it on the way in which it is
disseminated into the human body. So we have some concern about
evergreening. I think the State Attorneys General had a case
several years ago involving evergreening of patents and got a
settlement, and we are going to keep an eye out for this.
Senator Kaufman. Good, and I would like to yield my time
back to the diligent Assistant Majority Leader.
Chairman Kohl. Senator Durbin.
Senator Durbin. Let me thank the Senator from Delaware. I
appreciate that. I tried to shame him into a good work.
[Laughter.]
Senator Kaufman. Half worked.
Senator Durbin. Half worked. Thank you very much. And, Mr.
Chairman, thanks for having this hearing, and because the
Federal Trade Commission is in the loving arms of the Financial
Services Subcommittee of Appropriations, which I chair, and we
recently held a hearing--I am going to spare Mr. Leibowitz
today from questions, but I would just like to direct a few to
Ms. Varney, who is here. Thank you very much for joining us.
Let me first ask you a hypothetical question. You remember
these from the highly regarded Georgetown Law Center.
Ms. Varney. I do.
Senator Durbin. If Coca-Cola said in one of their stores
that was selling Coke, ``You cannot offer a discount for the
sale of Pepsi in this store,'' and Pepsi said the same thing
about Coke, would that be a restraint of trade?
Ms. Varney. Hypothetically speaking, Senator, if that
existed, we would almost certainly investigate it to determine
whether or not there was a restraint of trade that violated the
Sherman Act; and if there were, we would prosecute.
Senator Durbin. So right now, beyond the hypothetical into
another area, Visa and MasterCard each sets of operating rules
that they impose on everyone who accepts their cards for
payment. Visa has a rule that says if a merchant accepts Visa
cards, the merchant cannot offer a discount to encourage a
customer to use a competing network, MasterCard. MasterCard, lo
and behold, has a similar rule. The card companies penalize
merchants who offer a discount in violation of these rules.
Now, a few years back, in 1998, the Justice Department
brought a lawsuit against Visa and MasterCard charging they had
conspired to restrain trade by prohibiting member banks from
issuing American Express and Discover cards. The court found
that Visa's and MasterCard's rules were a substantial restraint
on competition in violation of the Sherman Act. In that
litigation, the trial court found, and the Second Circuit
agreed, that Visa and MasterCard had market power within the
card network services market. ``Market power'' has been defined
by the Supreme Court to mean the power to control prices or
exclude competition.
In general, when companies have market power, do they
deserve extra scrutiny to ensure they are not acting to
diminish competition?
Ms. Varney. In general, when companies have market power,
they have an obligation to obey the law as laid down by the
Supreme Court in Lorain Journal, Microsoft, Aspen Skiing, and
any predatory acts they engage in will be investigated.
Senator Durbin. For the record, the Visa/MasterCard duopoly
controls about 80 percent of the credit card market. I have
been concerned about their market dominance and the existence
of competition within their marketplace. And I have addressed
the interchange fee system that they have created.
Visa and MasterCard set the interchange fee rates that
merchants ultimately pay to card-issuing banks whenever a card
is used or swiped. Every bank in the network receives the same
fee rate under the system. This means that banks do not compete
with one another to lower their fees by managing their costs
more efficiently. It also means that merchants cannot negotiate
with banks or comparison shop to reduce their fees.
Now, it troubles me that we have a system where Visa fixes
the price for a fee that a merchant must pay to a bank. You can
see how the banks would have incentive to collude within the
card networks to keep the fees high.
It also troubles me that Visa and MasterCard can use their
market power to prohibit merchants from offering certain types
of discounts to their customers. I tell the story of going out
to the Washington National Airport, and the lady in front of me
at the cash register put a package of chewing gum on the
counter and handed over a credit card. And I said, as she left,
to the cashier, ``Now, is that the lowest amount you ever put
on a credit card? '' She said, no, 35 cents was the lowest
amount that she could remember.
It goes without saying that most merchants will lose money
on that transaction after they have paid the basic swipe fee
and interchange fees and obviously for the cost of the product.
But they are prohibited currently by the rules established by
both credit card companies, both credit card giants, from
offering discounts for cash, offering discounts for those who
will use debit cards, or favoring one card over another, which
I mentioned earlier.
It has been reported in the press, Ms. Varney, that the
Justice Department is conducting an investigation of the credit
card networks, including Visa, to see if they are engaging in
anticompetitive practices. Can you confirm the Justice
Department is indeed conducting such an investigation?
Ms. Varney. Senator, we have publicly confirmed that we
have an open investigation into the credit card industry.
Senator Durbin. Well, I understand your limits in speaking
about that investigation, and I respect them very much. I might
also tell you that in the course of having passed this
amendment, much to the surprise and chagrin of the credit card
companies, there is now a full-court press to try to change it,
which is their right. But it appears to be a very coordinated
campaign. These two great competitors coordinate in many, many
ways. I have written to them and said that I think that it is
permissible for companies to work together in advocacy. I was
concerned that the advocacy is leading to conduct, and
specifically my concern is this: Under the amendment, which
passed the House of Representatives in financial reform, we
provide that the interchange fees that are charged for debit
card transactions will be judged by the Federal Reserve as to
whether or not they are reasonable and proportional. And we
draw a line, and the line is a financial institution issuing a
card with assets less than $10 billion. It does not apply to
hometown banks, smaller-city banks, or credit unions with
assets less than $10 billion, any provision of what I am
suggesting. And that would mean that literally three credit
unions in the United States would be affected by my amendment
and about 80 or 90 banks. And so now we are being told from
reliable sources that many of these credit unions and banks are
being warned that if the Durbin amendment is not rejected in
conference, whatever hit they take on the interchange fees from
the largest banks, they are going to pass along to the smaller
banks that are not covered by the amendment. They have that
market power. They can just do it almost unilaterally.
This to me is way beyond free market and competition, and I
am not going to go any further or ask you to comment because
you have said that this matter is under investigation. But it
is the reason I wanted to take the time, wait my turn, and come
today so that it is a matter of record for my colleagues and
also for these two major credit card giants that their activity
is such that it should be carefully scrutinized considering
their market positions.
Thank you for being here today.
Ms. Varney. Thank you, Senator.
Senator Durbin. Thank you, Mr. Chairman.
Chairman Kohl. Thank you very much, Senator Durbin.
We now turn to Senator Klobuchar.
Senator Klobuchar. Thank you very much, Mr. Chairman. Thank
you, both of you. We had a Commerce hearing, and I just came
over from there. We got some good work done in marking up some
bills.
I first wanted to start, Mr. Leibowitz, with a case that I
have asked you about before, and this really came out of a
hearing, a Commerce hearing, when I brought to your attention a
drug that is used to treat children's hearts, that went
suddenly from $36 per vial to $500 per vial, and I wanted to
talk to you about the status of that case with Ovation. I know
that closing arguments were heard. I brought it to your
attention. The FTC brought a lawsuit, and this came to my
attention from doctors, children's doctors, and patients'
families all over Minnesota. And I want to thank you again for
taking on that case, and I wondered what the status of it is.
Mr. Leibowitz. I think--and let me just check with my
staff. We are awaiting decision on that, right? Yes, I think
that we are awaiting a decision, and I have to say this was one
of the most--I thank you for your work on this because it was
one of the most important cases we have brought in the last
year. For those of you who do not know about it, it involved a
company, Ovation, that manufactured a drug, one of only two
drugs used for infants born with premature heart conditions,
heart defects. And then they bought--under the Hart-Scott-
Rodino threshold, they bought the only competing drug, and then
they raised prices exactly in the manner you describe, from--we
used a different calculus, but we can use yours. It is the
same. From, we would say, $100 to $1,500 per use or per
treatment, but the same at 36 to 500.
And so we went to trial. They would not settle, and we are
hoping to get money back to all of the people--and the
insurers, quite frankly, but not always insurers--who paid
skyrocketing prices. And, again, you know, the only two drugs
used--it tells you what happens when a company has monopoly
control over a vital product. We think it violates the Clayton
Act, that it substantially lessens competition, and we hope
that the judge will agree.
Senator Klobuchar. Well, very good, and I had actually in
another health care area asked you a question or wrote you a
letter about this in the past, and it is the issue of pharmacy
benefit managers and their relationships with large pharmacies.
As you know, PBMs are involved in the reimbursement of most
prescription drug claims, and in 2007, CVS and Caremark merged.
Since the merger, consumers have reported difficulty accessing
their drugs as a result of restrictive plans that steer them
away from their local pharmacists to CVS, which may be miles
away in another town. Consumers and non-CVS pharmacies have
also complained that the merger has imposed harsh and unfair
administrative requirements on the non-CVS pharmacies. In some
cases, patients who do not elect to fill prescriptions through
Caremark's mail-order business are charged higher co-pays.
Could you talk about any work being done in this area and
your reaction to this? And if you want to add anything, Ms.
Varney.
Mr. Leibowitz. Yes, I would be happy to. I can say this
because the company has already acknowledged it. We have an
open investigation of CVS/Caremark. It is one of those rare
investigations--hopefully, it will be less rare in the future--
where we have people from both our Bureau of Competition and
our Bureau of Consumer Protection working on this. I do not
think I can say much more other than that we have--I have
personally met with CVS/Caremark as well as a number of family
pharmacists or local pharmacists, and we are in the process of
receiving documents. We are going to work through this. Thank
you.
Senator Klobuchar. Thank you.
Do you want to add anything, Ms. Varney.
Ms. Varney. Ongoing investigation. I will leave it at that.
Senator Klobuchar. Very good. Pay-for-delay, I know Senator
Kohl has mentioned this, and I want to thank him for his
leadership--I am a cosponsor--that would make these pay-for-
delay agreements between pharmaceutical companies and generic
companies to get generic drugs to staff the market rather than
offer low-cost alternatives that would make them presumptively
illegal. It is a step in the right direction.
Do you think that this will--will this be enough to halt
these types of settlements, or is there more work to be done?
Mr. Leibowitz. Well, if we pass the legislation that
Senator Kohl introduced with Senator Grassley and that you are
a cosponsor of, I think that would go a very long way to
stopping the worst abuses. As you can see, in 2005, when there
were a couple of decisions that allowed these--very permissive
decisions that allowed these deals, the number went from zero
in the previous year, and it has only continued to be the way--
not for every pharmaceutical company because some of them frown
on this behavior, but the way that some pharmaceutical
companies have been doing business. And, of course, it is win-
win for the companies; it is lose-lose for consumers. And you
can see that the number has gone up from zero in 2004 to three
right after the tamoxifen insuring decisions to 19.
Obviously, we are hopeful that Congress can pass a
legislative solution. The President supports it. It was part of
his health care bill. The House has passed legislation. The
Judiciary Committee has reported out legislation.
And then the only other point I would make is that in a
major decision in the Second Circuit that our agencies worked
on together, along with the Solicitor General's office, the
Second Circuit, which had a very permissive rule, just about 6
weeks ago called for an en banc--said that they disagreed in an
en banc--in a per curiam decision said that they disagreed with
the previous standard enunciated by the Second Circuit and
called for an en banc review. So we are hopeful that the tide
is turning not only in Congress but also in the courts, and,
again, for us this is a huge issue, $3.5 billion a year back to
consumers' pockets.
Senator Klobuchar. Ms. Varney.
Ms. Varney. As the Chairman mentioned, that is the Cipro
case in the Second Circuit where the United States has filed in
favor of a presumption, a rebuttable presumption but a
presumption, against such payments. We are anxiously awaiting
to see if it will go en banc, and it would require the Second
Circuit to overturn Tamoxifen, which we believe is the right
result, but it remains to be seen whether en banc review will
be granted and what the en banc court will do.
Senator Klobuchar. OK. Very good. I was frustrated--I know
many of us were--that this should have been part of the health
care bill also. Obviously, I would have liked to have seen the
reimportation as well as allowance for negotiating under
Medicare Part D, and we are just going to have to keep pushing
for that independently. I think all of those things would help
with the pricing of pharmaceuticals.
The last thing I just wanted to mention was just I have
been working a lot on innovation--it is the Subcommittee I head
up--and I really believe it is the key to bringing ourselves
out of this economic rut and exporting. And I know that the FTC
is involved in a lot of investigations in the high-tech area,
and I just would like to know how you balance that with your
mission to protect customers and consumers and the need to
allow for innovation in our country, and then also to prevent
anticompetitive conduct.
And I guess I would also add to that, if a company is
taking, even outside of the high-tech field, if they are taking
steps to address problems that some competitors may feel are
anticompetitive, do you take these measures into account when
determining whether to investigate a company that is even
beyond the high-tech area? Mr. Leibowitz.
Mr. Leibowitz. So usually our antitrust enforcement and our
support of innovation are complementary because one of the best
ways to ensure innovation is to have competition. So there is
not usually a tension. And just going back to the pay-for-delay
issue, what we have found and what we strongly believe is that
the companies that are most likely to pay off--the brands that
are most likely to pay off the generic competitors are the ones
who have the weakest patents. And so it really does discourage
innovation if you have these payoffs that prevent people from
innovating around patents.
Was the question do we listen to--the second one, do we----
Senator Klobuchar. When companies are clearly trying to do
something about what may be perceived or is anticompetitive
conduct, they are taking measures on their own, do you take
that into account when you decide whether to investigate?
Mr. Leibowitz. I think it might depend on the circumstance,
but the answer is, you know, we always talk to stakeholders. We
always try to survey to determine the market. We listen to
competitors sometimes in the merger context. Sometimes they
have self-interested things to say, and sometimes they have
legitimate things to say, and sometimes it is both. But I would
say just recently, you know, we did a very extensive
investigation of Google's acquisition of Admob, and part of the
determination from the Commission's perspective to let that
deal go forward without challenging is--because we had been
inclined, I think, to challenge it--was the things that Apple
was doing on a different platform and the changes it made in
its terms of service.
So I think under appropriate circumstances we do look to
see what the marketplace is doing. That is part of the way you
determine, for instance, in a merger context, whether a deal
may substantially lessen competition, which is the standard we
apply and the Antitrust Division applies.
Senator Klobuchar. Ms. Varney.
Ms. Varney. So if I understand your question, Senator, do
we take into account if an alleged anticompetitive action has
ceased when we are determining whether to open an
investigation. Generally, every matter is unique, but generally
not in the determination as to whether or not to open. If we
believe that there is anticompetitive action or practices that
are restraining trade or diminishing competition and we have a
credible basis for that belief and it has an effect on the
economy and on consumers, generally we would open an
investigation.
Now, if the company in question, if it was an aberrant
decision, if it was something done in good faith that they did
not realize was----
Senator Klobuchar. My question was specifically about
taking account for measures to address it, if it was something
that they realized they did wrong or would be perceived or have
an effect that they did not----
Ms. Varney. So what we would generally do as a matter of
practice is we would look at every investigation, once we have
opened it, and while we want to give good actors credit for
doing the right thing, we also balance that against what I
would call a recidivist problem. So I think we cannot give an
absolute answer.
Obviously, when you have good corporate citizens that are
trying to do the right thing, that will factor in to what your
ultimate remedy is. At the same time, you want to make sure you
have the right ongoing protections for the American consumers.
So it is always a balancing. It is always on the facts at hand.
Senator Klobuchar. Exactly, and just again the promise with
some of these innovations that we want to promote, I am sure it
is always a balancing act. But I am hoping that you will
consider that. You know, when I look at things like delaying
the entry of generic drugs, that seems to me pretty obvious it
is not a good thing. But some of these things I know are fuzzy
lines, so I appreciate you taking that into account.
Thank you.
Chairman Kohl. Thank you, Senator Klobuchar.
Ms. Varney, railroad antitrust, one of the very few
industries to enjoy an exemption from antitrust is the freight
railroad industry, as you know. Because of this exemption rail
shippers have been victimized by the conduct of dominant
railroads, and they have no antitrust remedies, as you know.
Higher rail shipping costs are passed along to consumers which
result in higher electricity bills, higher food prices, and
higher prices for manufactured goods, as you know. So I have
introduced a bill that abolishes obsolete antitrust exemptions
for railroads. The bill has passed the Judiciary Committee by a
14-0 vote. Companion legislation has passed the House Judiciary
Committee.
At your confirmation hearing, you indicated that you
supported this legislation, and we have repeatedly asked you
for a letter of support, and we have never received one. I
assume you are very busy and you have not chance to read the
letter----
[Laughter.]
Chairman Kohl.--and that we are going to be getting a
letter of support from you very shortly, or do I misunderstand?
Ms. Varney. Senator, I read your mail immediately, so I
think we have corresponded. I am working hard inside the
administration. They are aware of your request for a statement
of administration position on that legislation, and I will
continue to try and get that.
Chairman Kohl. Is it fair to say that you do support repeal
of that exemption and to the extent that you are in a position
as the Assistant Attorney General to do something about it?
Ms. Varney. Well, Senator, as you know, antitrust is
generally allergic to exemptions, and we were very pleased to
work with you and Senator Leahy and others trying to remove the
exemption for insurance companies in McCarran-Ferguson. And it
is with the same vigor that I am pursuing getting a statement
of administration policy on your legislation.
Chairman Kohl. All right. Mr. Leibowitz, the newspaper
industry has been under tremendous pressure. As you well know,
in the digital age, more and more consumers as they abandon
traditional print newspapers in favor of online sources of
news, advertisers have followed. Newspapers ad revenues have
gone into a sharp decline, according to an FTC staff report
released last week that newspaper advertising revenues have
fallen over 45 percent in the last decade, as you know.
Declining fortunes of the newspaper industry is distressing to
all of us who care about newspapers and believe that the in-
depth reporting is so very important in our country.
The Federal Trade Commission has been holding a series of
workshops regarding the problem of the newspaper industry. Some
have argued for, among other things, a relaxation of antitrust
requirements so that newspapers can jointly require consumers
to pay for access on the Internet. And there are other
proposals that have been suggested.
What is your view on this? How important do you think it is
that we find a way, if we can, to allow newspapers to remain
viable?
Mr. Leibowitz. So let me answer the last part of that
question first, which is, as Assistant Attorney General Varney
noted, we have a very strong allergy toward any exemptions from
the antitrust laws. And I would think that that would not be
something that the Commission would endorse.
There have been some other ideas that have been proffered
in our workshops including taxing electronic equipment to
subsidize newspapers. I think that is a terrible idea. But I do
think this is a really important initiative because, you know,
cable news, network news, and newspapers have clearly seen a
dramatic erosion of viewership or readership. And we all know
newspapers are absolutely vital--newspapers and news media are
absolutely vital to our democracy and for a democracy to
thrive.
And so we have been examining how all this change affects
consumers. We are going to do a roundtable next week. We are
going to release a report, and hopefully we will have something
for policymakers to think about in the fall.
I will just make one other comment, which is I was in
Chicago a couple of months ago, and I went and I visited
something called the Chicago News Co-op. It is a startup formed
by former Chicago Tribune reporters. It is the only startup I
have ever visited where the average age is about 65. But it is
a startup, nevertheless, and they are trying to develop a
vibrant news organization. And their idea is to have three
people covering Cook County, three people covering City Hall,
and three people covering the State House in Springfield. If
they do that, they will have more people in each of those
bureaus than the Chicago Tribune will. And that was just an
astonishing fact to me about how things have changed.
I went back and I talked to the Small Business
Administration because I thought here is a great startup, they
are struggling for money, maybe the SBA can help them. And so
it turns out they are ineligible to get SBA loans. It seems to
me that regardless of platform--this happens to be an online
platform. And I am speaking only for myself. We have not made
recommendations from the Commission. You know, people who want
to startup a news organization regardless of platform,
regardless of, you know, their political beliefs, they ought to
be eligible like other small businesses for loans.
So we are looking at this. It is an interesting issue. We
will keep this Committee involved.
Chairman Kohl. Ms. Varney, there have been two major
airline mergers since 2008--first Delta and Northwest and now
the currently pending United/Continental. Merging airlines
argue that these deals are necessary due to the poor economic
conditions and high costs in the industry. We all recognize the
tough times endured by the industry in the last decade,
including things like terrorist attacks, fuel spikes, as well
as the recession.
Some smaller airlines, however, some competitive airlines,
are concerned with their ability to compensate against the
large national legacy carriers because the smaller carriers do
not have the international route structures, huge networks, and
the expansive frequent-flyer programs enjoyed by the legacy
carriers. Smaller airlines are also worried about their access
to airport slots and gets at important airports like New York
La Guardia and Washington Reagan National.
I know you cannot comment on the pending United/Continental
merger, and I am not asking you to, but what are your views on
the state of airline competition generally. Are you concerned
at all about the challenges facing smaller and startup carriers
trying to compete with the larger carriers?
Ms. Varney. Absolutely, Senator, we are concerned about the
airline industry. We are concerned about the competition in the
airline industry which leads to lower prices for consumers
generally.
We have been very active, particularly with the Department
of Transportation. As you know, we have filed twice on
applications for global immunity when it comes to the alliances
that they are putting together. We have been very active in the
proposed slot swap, which is now moving through the system. And
I think our views are fairly well known, and that is, we want
to see competition, and we want to see competition in city
pairs, in airport pairs. We want to see competition for slots.
We want to see competition at the gates.
So any merger that we are looking at, we will use our
traditional tools to examine whether or not the merger is
likely to substantially lessen competition, and we will seek to
block the merger or seek appropriate remedies should the
parties want to remedy any anticompetitive issues as they go
forward in a merger.
If I can comment for 1 second on the newspapers, you may
know that recently the Associated Press came to us and asked
for a business review letter to allow them to set up a
collaboration consistent with the antitrust laws that would
allow a lot of the print newspapers to effectively and
efficiently in a pro-competitive manner license their
copyrighted material to a variety of sources. We have worked
closely with the AP, and we have provided them the guidance and
approval they need. They think it is a very important step for
them and their members to continue to compete in this changed
world.
We have also, under the Newspaper Preservation Act, been
charged with enforcing the law permitting the joint operating
agreements for newspapers around the country, and we have seen
a lot of change in those markets, and we have worked closely
with the enterprises in those markets to try and help them find
solutions that can remain competitive and supportive of the
news function as we move into a new age.
Chairman Kohl. Thank you so much.
Senator Klobuchar, do you have any thoughts or questions?
Senator Klobuchar. Well, just a little follow-up. I was
listening actually to the newspaper issue. I grew up in a
newspaper family, and there is a similar operation in Minnesota
called MinnPost, which is an online newspaper where it has a
lot of retired reporters, including my Dad, Chairman Kohl, who
wrote every Monday after each Viking game in the fall,
reporting on, of course, Brett Favre. A detail that----
Chairman Kohl. I am sorry. What is that?
[Laughter.]
Senator Klobuchar. But in any case, I have grown to
appreciate some of the online newspapers, and also I appreciate
what you said, Ms. Varney, because I do think that paying for
contents, those kinds of things are going to be critical as we
go forward. And I appreciate the Justice Department working on
this.
Another issue that I understand was raised when I was at
the Commerce hearing on your agricultural competition
workshops, so I understand you already answered that we do
invite USDOJ and USDA personnel to come out to Minnesota. We
are the No. 1 turkey producer in the country. You could, like I
did, take a tour of the Jennie-O turkey processing plant, and
half an hour later eat a turkey burrito with the CEO, if you
can do that, if you are ready for Minnesota. But we obviously
would like to help in any way. It is a very important industry
in our State.
And I just wanted to end with one question on something I
care a lot about, and that is the cell phone marketing, Mr.
Leibowitz, and what is going on there. I have a bill, along
with Senators Webb and Feingold and Begich and others, to pro-
rate the early termination fees for cell phones. It has come
out now that in a recent study two out of three Americans have
seriously considered switching cell phone providers but
ultimately decided to stay with their current provider because
of a cancellation fee. Obviously, we are working with the FCC
on that, and they have started to open that up. But I have
found it to be not good for competition, the fact that people
cannot move around, and there are these outrageous fees. They
move somewhere, their cell phone service does not work. But as
far as the FTC involvement, there is still bill shock going on.
People do not understand what is on their bills. And I wondered
if the FTC has involved itself at all with any of the cell
phone advertising issues about service areas and things like
that.
Mr. Leibowitz. Well, it is a great question, and I actually
had lunch with the Chairman of the Federal Communications
Commission yesterday, Julius Genachowski, who is obviously
working very, very hard on this bill shock issue.
Unfortunately, those phones are considered to be common
carrier-regulated, so we do not have jurisdiction over them.
But I can certainly say that any efforts--and Senator Kohl had
a pricing initiative last year on this matter. Any efforts to
move forward on consumer protection and competitive pricing I
think would be really appreciated by the consumers in your
State and consumers in America.
Senator Klobuchar. Thank you very much. I appreciate it.
Chairman Kohl. Well, we thank you so much for being here.
Oversight is an important part of our job, and you have been
very forthcoming today. I think you have shed a lot of light on
important issues, and in that sense, what you have done here is
really important. Thank you.
Ms. Varney. Thank you, Senator.
Mr. Leibowitz. Thank you.
[Whereupon, at 4:03 p.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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