Antitrust Litigation Demands Sophisticated Economic Analysis
Antitrust cases present a number of complex issues involving both liability and damages, and both areas demand comprehensive economic analysis. Proving causation is a particular challenge, requiring more than a positive correlation between the defendant’s alleged misconduct and the plaintiff’s claimed injury. This article gets into the details.
Antitrust litigation demands sophisticated economic analysis
Almost 100 years ago, the Sherman Act was used to break up oil and tobacco monopolies. In the 21st century, courts continue to hear antitrust cases, from claims against corporate behemoths like Microsoft to those against trade associations and privately held companies. The complaints allege monopolization, tying arrangements, collusion and predatory pricing, among other violations.
With its complicated liability and damages issues, antitrust litigation requires comprehensive economic analysis.
- Building an antitrust caseA financial expert can assist with the liability phase of an antitrust case, providing in-depth analysis of:
- Relevant markets
- Industry conditions
- Market definition
- The defendant’s market power
- Barriers to entry in the relevant market
- Misconduct of others in the industry
- Potential business justifications
Parties on both sides of the litigation will require this type of analysis to prevail. The complexity of antitrust issues is evidenced by a discussion in the Federal Judicial Center’s (FJC’s) Reference Manual on Scientific Evidence. The manual emphasizes the vital role of expert economic testimony in antitrust litigation.
For example, let’s look at causation, which is “a particular challenge,” according to the FJC. The plaintiff must show more than a positive correlation between the defendant’s misconduct and its claimed injury. An expert might compare market conditions in the period affected by the misconduct with conditions in unaffected periods and use the price differential as the measure of the resulting price elevation.
The defendant may counter that its misconduct was not the only difference between the two periods, citing factors such as increased costs or demand, general economic indicators (national price level and GDP, for instance) and industry-specific variables. As the manual notes, financial experts can perform regression analysis to adjust for factors other than misconduct, including a company’s accounting policies.
Assessing the damage
The FJC manual describes two types of antitrust damages. When the plaintiff is the defendant’s competitor and claims injury caused by the defendant’s misconduct, the appropriate measure of damages generally is lost profits. If the plaintiff is the defendant’s customer or purchased goods in a market where the defendant’s misconduct elevated prices, damages generally are measured by the excess charges. These damages can exceed the plaintiff’s lost profits if the plaintiff passed on some or all of the price increase to its own customers.
The FJC manual identifies several damages issues that can arise in antitrust cases and call for expert testimony:
Scope of damages. A plaintiff may calculate damages based on all of its business activities, while the defendant will generally consider only the markets likely to be affected adversely by its alleged misconduct. The manual stresses that applicable law may limit the scope of antitrust damages even if it’s possible for economic analysis to measure price elevation in all markets.
But-for conditions. Plaintiffs sometimes calculate antitrust damages based on the assumption that prices in the relevant market would have remained steady but for the defendant’s misconduct. The defendant will likely argue that activities of the plaintiff and other competitors would have driven prices down regardless of its conduct, so that the plaintiff’s damages are overstated. Perhaps the market would have lost some barriers to entry, allowing new competitors to claim a share of the profit pie and decrease the plaintiff’s share.
Tying arrangements. The manual specifically addresses these arrangements, in which the purchaser of a “tying good” also must buy the “tied good.” Purchasers of a manufacturer’s camera, for example, may be forced to use the manufacturer’s photo processing services. A purchaser-plaintiff would calculate its damages based on the price paid for the tied product. A competitor-plaintiff might assert that its sales would have been higher without the tie.
In either situation, the defendant might respond that, absent the tie, the price for the tying good would have been higher. The price for the tied good would drop because elimination of the tie would encourage entry into its market. As the FJC manual notes, a full and factual analysis is needed to determine pricing in the absence of a tie.
The sooner, the better. Given the impact expert economic testimony can have on both the liability and damages components of antitrust litigation, you should engage an expert as early as possible. An expert can help steer discovery and frame the legal issues to correspond with your damages theories.
Proving predatory pricing. Economic experts are particularly valuable in predatory pricing cases, in which liability typically rests on a finding that the defendant’s price has sunk below its average variable cost.
A common starting point is to identify the fixed and variable components of a mixed cost using the “high-low” method. The expert determines the highest and lowest costs, as well as related activity levels for those costs, and uses differentials to reach an estimated variable cost per unit. The expert plugs those figures into an overall cost formula to determine the fixed cost component of the defendant’s price.
The method is straightforward, but it carries some potential pitfalls. Using only two costs makes the method vulnerable to aberrant outliers, which can lead to distorted figures. For example, natural disasters, strikes and equipment breakdowns can skew the results. The method, therefore, is perhaps best applied during the initial stages when only limited data is available. It can provide a roadmap for identifying relevant documents and data and estimating potential damages.
When greater information is gathered, an expert can perform in-depth regression or correlation analyses of the defendant’s costs, including general trends, the nature of its costs, its cost behaviors and the relationships between costs.