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Corporate Bribery Just Became Illegal Again
Even as politics gets grim, antitrust enforcers go at the insulin cartel and private equity's takeover of pet care. Meanwhile Congress is passing antitrust legislation and re-regulating shipping.
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This is a weird moment in politics, with obvious dysfunction everywhere. There are mass flight cancellations, shortages of everything from cat food to baby formula to tampons, real wage declines, and an administration that looks out of its depth in so many ways. But in our corner of the world, the political fight to take on monopolies, things are going… well.
I’m going to highlight a bunch of policy actions that happened this week, and how they show that out of the limelight we are slowly turning key parts of the U.S. government around. The most important change is FTC Chair Lina Khan resurrecting an old antitrust law that bars corporate bribery, and using it to attack corrupt middlemen in the insulin market. But while insulin is the immediate target, this law can reach Amazon and a host of other monopolies.
Plus, the Department of Justice Antitrust Division went after the Major League Baseball Antitrust exemption, the Senate passed an important antitrust bill, the big tech antitrust fight stalled, Biden signed a bill regulating the ocean shipping cartel, and there’s a football helmet shortage caused by private equity. Finally, tomorrow or Monday I’ll have a Breaking Points video coming out on the crypto collapse.
‘Once-in-a-Century Inflection Point’
A year ago, Lina Khan became Chair at the Federal Trade Commission, followed a few months later by Jonathan Kanter taking the helm at the Department of Justice’s Antitrust Division. Khan and Kanter are perhaps the most aggressive proponents of antitrust enforcement in decades, returning competition policy to the basic view that when it comes to corporate power, big is usually bad.
This week, three actions will help flesh out what this new enforcement regime looks like practically. First, Jonathan Kanter at the Antitrust Division filed a statement of interest on a court case asking for the narrowing of the antitrust exemption for Major League Baseball. MLB is embroiled in litigation over its choice to eliminate 40 minor league teams, and has been heavily criticized for mistreating minor league players. It was trying to use its antitrust exemption to get the lawsuit dismissed. With this statement of interest, as well as a series of others, Kanter is using his posture as the chief antitrust enforcer at DOJ to shape the law in a more assertive direction.
Second, on Thursday, the FTC voted to resurrect the Robinson-Patman Act, a bill prohibiting corporate bribery and price discrimination by middlemen that hasn’t been meaningfully enforced since the 1970s. I wrote several chapters in my book on the titanic fight in the 1930s to tame chain stores with this law, and the equally vicious conflict in the 1970s to stop enforcing it. The end of RPA enforcement is why chain stores like Walmart and Amazon took over our retail space, and why dominant middlemen control every area of our economy at this point. It’s worth noting that Robert Bork’s most hated statute was the Robinson-Patman Act, and he considered it a tremendous victory that he helped end the enforcement of the law.
So what happened at the FTC? All five commissioners voted on a policy statement saying that the use of rebates by dominant middlemen in the insulin market were a potential violation of different laws under the jurisdiction of the FTC, including the Robinson-Patman Act. This vote is a signal to every private antitrust lawyer, state attorney general, and judge, that the Robinson-Patman Act can once again be dusted off and used.
Insulin is a great test case for this law, because everyone knows how unfair and inefficient the insulin market truly is. It’s a medication that has been around since 1922, and yet it has been increasing in cost every year for decades. And while the three main producers engage in all sorts of schemes to push up cost, most of the high cost of insulin is actually a result the middlemen named pharmacy benefits managers - CVS Caremark, Cigna (Express Scripts), and United Healthcare (OptumRx) - who manage and control how medicine is priced and sold. PBMs demand rebates of up to 70% for the right to have an insulin company sell their product to patients. These rebates in turn massively drive up the price of insulin.
PBMs are increasingly hated by both parties. Last week, in a separate but related action, the FTC voted 5-0 for an investigation into PBMs, which Republicans like Senator James Lankford cheered on. And now this week, the FTC revealed that the Robinson-Patman Act is coming back. But while PBMs are the immediate focus, there are many other dominant middlemen who are vulnerable to the resurrection of the Robinson Patman Act. Last November, for instance, the FTC launched an investigation into price discrimination by, among other firms, Amazon. Amazon knows it is vulnerable; a few years ago, FTC alums Tim Muris and Jonathan E. Nuechterlein wrote a paper financed by the online giant on why the use of Robinson-Patman to go after a grocery chain in the 1930s was bad for consumers. Their attempt to control the historical narrative is a tell that keeping this law dormant is an important corporate priority.
Even more surprisingly, the vote was not partisan. Christine Wilson and Noah Phillips, the two Republicans on the commission, voted to resurrect this law, and even praised Lina Khan for doing so. So if I’m a middleman who uses rebates, aka corporate bribery, to control a market, I’m very unhappy by what the FTC just did.
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The third big policy action was also at the FTC. The commission forced some significant restrictions on private equity firm JAB, which is seeking to roll-up veterinary care clinics nationwide. Under this decree, JAB must get the FTC’s permission to buy up a specialty or emergency veterinary clinic within 25 miles of any JAB-owned clinic in Texas and California. This is the use of an authority called ‘prior approval’ that Khan dusted off last year, and it begins fulfilling a pledge Khan made to address the roll of private equity in monopolization of industries nationwide. The Republicans on the commission, Christine Wilson and Noah Phillips, voted for the decree, but with a statement asserting they think private equity is good. Alas.
What these actions show is that there is a fundamental reorientation of the law happening. In her strategic memo last September, Khan outlined a number of different priorities. She wants to get at root causes of consolidation, address dominant middlemen, and the business trend of private equity and its impact on competitive markets. And Kanter has discussed the need to use his enforcement tools to push the law in useful directions. They are both following through on their pledges. Neither the FTC or DOJ has operationalized the use of these new tools, but that is the next step.
It takes a while to stop a giant ship, turn it around, and get it going in the opposite direction. That’s where we are with antitrust. We started this journey in 2013 or so, and finally got the ship stopped by the end of the Trump administration. Well, the ship has turned around, and it is beginning to move in the right direction. Slowly. But it’s speeding up.
Congress Actually Does Stuff on Antitrust, Shipping
There’s good news and bad news on the legislative fight over antitrust. Let’s start with the bad news. The big tech antitrust bills have run into political problems. I noted that Apple CEO Tim Cook is personally lobbying Senators against the bills, so is Amazon CEO Andy Jassy and Google CEO Sundar Pichai. The more significant issue is that four Democratic Senators - Ron Wyden, Brian Schatz, Tammy Baldwin, and Benjamin Ray Lujan - have asked Amy Klobuchar for a textual clarification to make sure that the self-preferencing bill doesn’t prohibit content moderation. The Republicans will go nuts if that language gets in there. It’s a dumb dispute, because no one seriously reads the bill to have any effect on content moderation, but there we go. The bill vote is delayed into July.
The good news is that the Senate last week quietly and unanimously passed a bill that would let state attorneys general choose the venue for antitrust cases. It hasn’t gotten a lot of attention because it sounds technical and nerdy, but this is the first bill passed to strengthen antitrust law in a generation. So that’s… a big deal. Second, while the bill changes procedure, and that sounds super-boring, in litigation, procedure is what matters.
Here’s what the bill does. Right now, when Federal enforcers bring antitrust cases, those cases are heard in the districts in which they are filed. But when state attorneys general do so, their cases can get moved around via something called the Judicial Panel on Multidistrict Litigation. This process results in state-level antitrust cases, like the Texas or Colorado ones against Google and Facebook (or pharmaceutical firms), to be moved to a different court in a different part of the country. They are often combined with private lawsuits. So state AGs don’t bring cases, because it means their ability to prosecute is slowed down dramatically, and dominant firms often get to move cases to a monopoly friendly court that is far away from the state in which the case was originally filed.
The bill changes this dynamic. State attorneys general will be able to file antitrust cases and keep them in their home district. There are a lot of implications on the importance of this procedural change, but primarily what it will mean is that enforcement is going to happen not only at the Federal level, but much more often at the state level. And that’s key, because administrations and administrative priorities on a Federal level change, so having other avenues to use antitrust law creates the kind of long-term shift we need.
Meanwhile, the President signed the Ocean Shipping Reform Act into law, which is intended to regulate the ocean carrier industry. It is the first re-regulation of an industrial sector since the Cable Act of 1991. And it will reduce shipping costs.
Football coaches across the country are panicking as the two main corporations who manufacture helmets - Schutt and Riddell - can no longer supply high schools and youth sports leagues.
What happened? One immediate cause was a fire at a supplier of Riddell that makes helmet linings, but there are also standard problems of getting access to materials, aka the ubiquitous ‘supply chain’ problems. These are real enough, but it usually amplifies the problems when firms are owned by financiers, whose main goals are to monopolize an industry or squeeze out short-term cash rather than focusing on operational capacity.
And wouldn’t you know it? It turns out that there’s a private equity roll-up in the space. Riddell is owned by private equity giant Fenway Partners, which has been trying to find a merger strategy for the firm for the last fifteen years. And its rival Schutt is owned by Innovatus Capital Partners, which put out a press release announcing its intent to consolidate the space in 2020 due to the pandemic.
“We believe the sports equipment space is ripe for consolidation. The number of independent operators is shrinking. Those that can weather the storm will emerge stronger and leaner once team sports return in the second half of next year,” said David Schiff, Founding Partner at Innovatus.
Both corporations have been dealing with the legal fall-out from concussions in football. Apparently the new strategy is to be unable to make helmets in the first place. Smart.
What I’m Reading
Academic Roy Shapira has a useful paper showing that big corporations are an economic problem.
Pete Buttigieg’s Day Job, American Prospect. Dealing with a canceled flight? Read this and you’ll realize it’s not a weather or staffing issue, it’s a scandal from unregulated and consolidated airlines.
Messed Up Markets, The Terminal. This is a piece by Dave Lauer about how consolidated financial markets have become, and he shows how rebates are a key mechanism used by certain firms to control trading. The Robinson-Patman Act only covers commodities, but it should be expanded to cover services and financial instruments as well.
It’s Time to Fix the Unequal Power Dynamic Over Small Businesses and Enforce a Competitive Market, Small Business Majority
Apollo, Carlyle See Buyout Fundraising Slow With Markets on Edge, Bloomberg. Oh wow, it looks like private equity is in trouble.
Billionaires plough more money into private equity, FT. Huh, maybe private equity is not in trouble.
Private Equity Faces ‘Crisis of Value’ Over Inflated Prices, Bloomberg. Wait, I thought private equity was not in trouble! I’m so confused.
Thanks for reading!
And please send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation and democracy. And consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member.
P.S. I’m looking into two monopolies. The first is a roll-up called “Smooth-On,” a firm that is buying up firms in the modeling materials space. And the second is Black Knight-ICE, which has to do with the ownership of financial exchanges and mortgage data. If you know anything about either, send your thoughts my way.