Oral History of Robert Pitofsky
Sixth Interview
March 30,2004
Ms. Born: This is the sixth interview of Robert Pitofsky for the Oral History
Project of the Historical Society of the District of Columbia Circuit. It is being taken on March
30, 2004 in a conference room at Arnold & Porter, 555 Twelfth Street, N.W., Washington, D.C.
20004. Bob, when you became FTC chair, what was your attitude about the rulemaking role of
the FTC?
Mr. Pitofsky: I thought of it as a very important decision about the direction for the
agency. Much of the difficulty that the FTC encountered in the 1960s and ’70s came about as a
result of rulemaking. Rulemaking is efficient. Instead of bringing case after case, if a party
violates the rule, you sue the party for that violation. The problem is that if you try to regulate a
broad segment of an industry, you must address much detail about aspects of that industry and
you organize the opposition. Everybody in that industry, those that are violating legal and
ethical principles and those that are not, get together, hire lawyers and resist the rule. Also, if
you issue enough rules, some of them are going to be wrong headed and then people are going to
climb all over the agency for issuing that kind of rule. I think that one or two of the rules the
commission issued in the ’70s rank among some of the very best things that the commission has
accomplished. The rule regulating marketing in the funeral industry and the rule addressing the
way in which local optometrist organizations induced state legislatures to discriminate against
the chains: those were outstanding rules. Other rules were not as well thought out.
Ms. Born:
Mr. Pitofsky:
Did you do any rulemaking during your period as chair of the FTC?
My two bureau directors, Bill Baer and Jodie Bernstein, and I came
to an early decision that we would either initiate no rules or very few rules and rather engage in
case by case enforcement. It’s more flexible, it’s more focused, and in most sectors of the
economy respectable companies when they find out what the law is as a result of a court
decision, obey the law. You don’t need a rule. Now, there were some rules that Congress
directed us to undertake, and of course, we did that sort of rulemaking. But aside from rules that
came to us from Congress, I can’t think of a single rule that we initiated. There may have been
some in the consumer protection privacy area but we went from a commission heavily involved
in rulemaking especially on the consumer side, with much criticism as a result of those rules
from Congress and the press, to an agency that did very little rulemaking. And I think it has paid
off. My successor seems to be following the same strategy.
Ms. Born:
Mr. Pitofsky:
What about the “do not call” issue?
When I first heard reports of that proposal, I said, for goodness sake,
why didn’t I think of that? That’s such a good idea, and it’s a wonderful initiative by the
commission. But then I was reminded that, just after I left the commission, Congress passed a
statute that enabled the commission to get into the business of the “do not call” rule. I
understand now there are more than fifty million people on the list, and it’s growing very
rapidly. I’m on the list, and it has improved my life immeasurably.
Ms. Born: Mine too. You had throughout your career been interested in
remedies. What was your view of remedies while you were chair of the FTC and what was the
FTC’s take on remedies?
Mr. Pitofsky: I’ve written a short piece, published in the Georgetown Law Review,
with the following thesis-that in the six plus years that I was at the commission, there was very
little change with respect to the rules of the game: what’s legal, what’s illegal. I can come up
with a few instances in which new interpretations of the antitrust laws or consumer protection
statutes were introduced, but very few, and they weren’t exactly radical changes. But remedies
changed enormously in the ‘90s. That was deliberate, both at the Department of Justice and the
Federal Trade Commission. It was deliberate because we had a system for all too long where it
paid to violate the law. Even if you were caught, and there’s always a question of what
percentage of people are detected in their behavior as opposed to those that get away with it, the
violators end up paying a combination of fines, penalties, even treble damages, that is less than
they took in as a result of their illegal activity. Also, in many areas, the penalty doesn’t include
interest. So by the time you have illegally extracted ten dollars from consumers, you end up
paying three or four dollars back. We wanted to change that. Anne Bingaman and Joel Klein at
the Department of Justice moved in the direction of much more stringent fines and penalties
including a few fines that were in the $500 million or more category. I believe total criminal
fines for antitrust violations increased by a factor of about 10 in the period between 1990 and
2000. The Federal Trade Commission has no criminal enforcement authority. It was an issue of
finding a way to extract the illegal gains from the person found to have violated the law and
return it to the target of the violation. One of the principal initiatives in that area was
disgorgement. We didn’t invent disgorgement-there were one or two cases that sought
disgorgement previously at the FTC, many cases in the SEC-but we certainly gave it a more
prominent role where you had exceptionally bad behavior-and the Mylan case is the leading
example-where anyone would have known in advance that this was improper behavior. This is
not someone stumbling in an arcane or uncertain area of the law.
Ms. Born:
Mr. Pitofsky:
Why don’t you describe the Mylan case?
Mylan was a pharmaceutical company manufacturing an
antidepressant and other types of drug therapies. It managed to enter into contracts with the only
sources of the raw materials for those particular products, thereby denying competitors the
ability to manufacture the product. It then raised the price an extraordinary amount. I think the
price may have been roughly ten or fifteen dollars per hundred pills before they entered into
these contracts, and they raised the price to over three hundred dollars. To a large extent, it was
a kind of pharmaceutical where you take it on a regular basis, and many people on fixed income
were the victims. I never in my years at the FTC received the kind of pathetic letters that I
received from people who were complaining about the pricing of these products. We said, it’s
not enough to stop doing it, it’s not enough to pay the Treasury a fine. We want you to pay back
to the victims the amount of money that was taken from them when the price went from roughly
$10.00 to $350.00. And since it’s a pharmaceutical issued by prescription, we know who those
people are. The company claimed the remedy was unprecedented-it was almost
unprecedented, but not quite-and unfair. But in the end, the court backed the FTC completely,
and as far as I know that money has been paid back. The organization and management of the
payment can get quite complicated, but we had an excellent judge, Judge Thomas Hogan of the
D.C. District Court, and we were joined by many state AGs. I think there must have been twenty
or more state AGs participating in the case and in the distribution of the monies. I believe it
worked successfully.
Ms. Born: Were there a number of other cases where disgorgement was
Mr. Pitofsky: I don’t know if the cases are finished yet, but there have been other
cases in which disgorgement was sought. The Antitrust Section of the American Bar
Association was opposed to this disgorgement remedy. Admittedly, it should be used cautiously
and carefully. It’s not a common everyday remedy. You have to know who the victims are, you
have to make sure there is a feasible means of compensation. It should involve an area of the
law where the law was clear and so forth. But there are disgorgement cases that are in the works
right now.
Ms. Born:
Mr. Pitofsky:
Any other particular developments on remedies?
Jodie Bernstein on the consumer side was very original in thinking
about remedies-not just punishment for past behavior, but structuring behavior in the future.
There were some innovative remedies. There were also some very large fines. As I recall,
Citicorp paid a fine of over $100 million for what is called predatory lending by one of its
subsidiaries. Citicorp bought a subsidiary that engaged in this terrible practice of seeking out the
most innocent of possible borrowers and essentially lending more money than they could
possibly pay back, where the lender had knowledge the borrowers couldn’t do it. And then you
flip them. You foreclose on that house and then you do the same thing to the next person and the
next person. One of the worst set of stories I heard is that these marketers would follow
hurricanes across the South and they would come across a house where the roof had blown off
and they would offer a loan on the spot, sometimes with unconscionable conditions in it, and
then they would be back a year later to foreclose on the house. Some very rough stuff. Parallel
to disgorgement is the idea of restitution. It’s a very similar set of approaches, and the
commission did more work with restitution in that period than previously. On the antitrust side,
again speaking of remedies, I was very concerned about the rising tide of concentration in the
media. It seemed to me that we were on a path where six or eight or nine conglomerates would
end up owning a large share of TV networks, affiliates, radio, even newspapers and cable. Some
of those cases were very difficult to deal with under the antitrust laws because they weren’t
horizontal mergers, they weren’t even vertical mergers, they tended to be conglomerate. And
those are very difficult theories to pursue successfully in court. But I did feel, especially when
there was a vertical aspect to the transaction, that the least we could do was to mandate access in
the future so that, for example, if a large programmer acquires a large cable company, other rival
cable companies have access to the programs and other programmers would have access to the
cable outlet. That was the essence of the settlement in Time WarnedTurner and it was the
essence of the settlement in the AOL/Time Warner.
Ms. Born: Tell me about the merger wave of the 1990s and how it affected the
FTC and your activities?
Mr. Pitofsky: I believe it was the largest merger wave in the history of the country.
There had been a merger wave between 1895 and 1902, when the economy was much smaller,
and therefore, those earlier mergers may have accounted for a larger percentage of the gross
domestic product. But this merger wave in the 1990s dwarfed that in terms of the assets that
were acquired and exchanged.
Ms. Born:
Mr. Pitofsky:
What caused the merger wave?
Many books have been written on the subject, but I’m not sure I’m
persuaded by any of them. One theory that I’ve advanced is that it was a consequence of the
grossly inflated stock market. Unlike previous decades, many of these mergers were stock for
assets, and many of the CEOs of the acquiring companies took the approach that we know our
stock is inflated, it’s not worth that much; therefore, let’s use our stock to buy something real,
like assets. There are many instances in which that sort of thing occurred. Globalization of trade
also led to mergers. You would have a powerful Japanese company and a powerful American
company who would join forces; the combined company would be more effective in world
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competition. The enormous increase of the significance of high-tech and intellectual property
meant for the best of reasons that companies needed partners with complementary technologies
in order to get the most out of what they knew. In fact, most mergers are probably a good idea
from the consumer’s point of view. But it’s the five percent or less that are not where the
government must step in. The other thing that was different about the ‘90s was it wasn’t a stock
market manipulation funny-money kind of thing, the sort of thing you saw in the 1980s with
junk bonds. These were real industrial companies, and they were joining forces. The result of so
many of these mergers being horizontal-joining direct rivals and therefore dangerous to the
competitive process, and the consequence of the sheer volume of it meant that for six years two
thirds of our antitrust resources were devoted to nothing but investigating and then clearing or
challenging mergers. There’s never been a situation like that at the Federal Trade Commission.
And I regretted it to some extent because I thought there were other things worth doing, but the
merger review system has deadlines built into it. We really had no choice but to devote those
resources to it.
Ms. Born: So, it took an enormous amount of the FTC antitrust resources away
from other issues. What were the major cases during the time you were there involving
Mr. Pitofsky: Before turning to specific cases, I should mention one significant
change in overall government enforcement against mergers. In 1997, the Department of Justice
and the FTC joined forces in amending the Merger Guidelines to clarify and emphasize the
availability of an efficiency defense. The defense was intended to be narrow-the efficiencies
had to be substantial, could not be achieved in some less anticompetitive way, likely to be passed
on to consumers, and could not justify merger to monopoly or near monopoly-but they could in
a close case be the difference between legality and illegality. No court has yet relied on an
efficiency defense to change the result of a decision, but I know (and my successor has
confirmed) that some complaints were never filed because strong efficiency considerations
influenced the result.
Now let me turn to several major merger cases. First, there was a series of mergers in the oil
industry. It’s odd that we would have so much activity in that area because, when this
concentration of oil companies began, the oil industry was a rather deconcentrated market.
There were over fifteen major sellers. So when the first pair came in to the Federal Trade
Commission and said they were thinking of merging and the overlaps are slight and we’ll sell off
this refinery and that refinery, there would be no way to challenge that. Then came the second,
then came the third, then came the fourth. I still believe you take the world as you find it and the
fact that the commission let three through earlier doesn’t mean that you don’t challenge the
fourth. The truth is we became tougher and tougher on oil mergers, but by the time we were
finished, there weren’t 15 major oil companies in the world, there were about twelve. It’s a
different world today. I don’t think we fully blocked any merger in the oil industry, but we
certainly insisted on restructuring virtually every one of them. In terms of impact on the law, I
would say that the Staples case and the Beechnut/Heinz case were the most important. Those are
two cases we won. Before we finish let me not fail to tell you about the cases we lost. In
Staples, the previous 20 years had seen the enormous growth of stationery super stores to the
point where three chains dominated the country. That doesn’t mean there weren’t many mom
and pop stationery stores around, but they just found it very difficult to compete with Staples,
Office Max, and Office Depot. But numbers one and two proposed to merge, arguing that the
market should include all stores, not just super stores, and arguing that there were very
substantial efficiencies to the transaction, and finally arguing that their history has been to lower
prices, so that, if the government let this merger go through, there would be even lower prices. It
was a very close call at the commission level, but a majority of the commission decided to
challenge the transaction. An excellent staff of lawyers and a super economist from Princeton,
Professor Ashenfeld, assisted our efforts.
Ms. Born:
Mr. Pitofsky:
Where was this tried?
Tried right here in Washington, D.C., and the judge happened to be
Thomas Hogan again.
Ms. Born:
Mr. Pitofsky:
In the federal district court?
Right. We were able to convince the judge to visit Staples, Office
Depot, and other stores in the area. And unlike other occasions in antitrust enforcement, where
the judge takes the lawyers from both sides on a site visit, he just got in his car one Saturday and
drove around, and his conclusion was that it approached being absurd to think of Staples as in
the same market with these tiny stores that sell fancy stationery. On the efficiencies claim, he
allowed it as a relevant factor even though the Supreme Court has never concluded that
efficiencies can be a defense to an otherwise illegal merger. But the Department of Justice and
FTC had changed our old guidelines to incorporate an efficiency defense, and he accepted it.
But he concluded as many others did that the claimed efficiencies were vastly exaggerated.
When the lawyers reported to the board on the transaction, the efficiencies were one 1X. When
the board voted it out, the statements said the efficiencies were 2X. By the time they were being
investigated, the claimed efficiencies were 4X. By the time we were in court, the efficiencies
were 8X. It was called the Pinocchio effect. The judge saw right through it. Let me tell you an
interesting sidelight about that case, one of the most interesting pieces of evidence I can ever
recall. The way these super stores advertise is they take full page ads with perhaps smaller
boxes which incorporate maybe thirty-two different products, and they say, sale on typewriter
ribbon $21.50, that sort of thing. This man, whose name I don’t recall, lived in one city in
Florida and worked some 80 miles away in another city. In the city where he lived, there were
three super stores, all three of the major players were present, and in the city where he worked,
only one was present. He sent us the full page ads from the newspapers in these two cities, and
all you had to do was look at the ads to see that the prices in the city with only one store were
something like 15 or 20 percent higher than the prices in the other city. It was the clearest
demonstration of the effect of monopoly power that one could imagine. Now, I thought the ads
were very persuasive, although the judge never cited it in his opinion. But it certainly had a
great deal of influence on me. I thought this case was important because it was one of the very
first cases in which a judge took an efficiency defense to heart and examined it carefully and
closely. It was a case in which both sides used regression analysis. Judge Posner has since
written that Staples is the case in which, from an economic point of view, antitrust came of age.
And that’s where this professor from Princeton was so good. We weren’t going to allow
ourselves to be outgunned by an expert witness from the private sector. We had an expert
witness who was at least as good.
Ms. Born:
Mr. Pitofsky:
Ms. Born:
Was the Staples’ case decision appealed to the court of appeals?
No, the deal collapsed after Judge Hogan’s opinion.
Was there then a settlement or did Staples and Office Depot just not
Mr. Pitofsky: They just did not merge, and the three major stores are still out there
competing quite vigorously and as far as I know they are doing pretty well.
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Ms. Born:
Mr. Pitofsky:
Tell me about Beechnut.
BeechnuUHeinz was very unusual in this sense-the dominant firm
in the baby food business is Gerber. It has over 60 percent of the market, Beechnut has maybe
14 percent Heinz has maybe 12 percent. They are distant second and third. They made the
plausible argument that, given a firm of such dominant market power as Gerber, we ought to
allow a merger between the other two in order to let them compete more effectively against
Gerber. They also said that they tended to be in different parts of the country, although they
agreed there was some overlap. But what the market really was like is that virtually every store
that sold baby food sold Gerber, and then there would be a vigorous competition to see who
would be the number two baby food on the rack because almost no outlet carried all three, a few
stores but not very many. One of the companies had a plant that was very run down and
The other company had a plant that was more up-to-date but had unutilized capacity. To put it
simply, it was really one of the strongest efficiency claims that one could make. Neither
company was failing. They weren’t making a lot of money, but they weren’t failing, and the
barriers to entry into this market were extremely high. No one had entered the baby food market
in the United States in 30,40, 50 years, including foreign companies. I don’t know why some
good foreign company wouldn’t come into the United States and take on Beechnut or Heinz,
maybe not Gerber. It was a very sound efficiency defense, but the antitrust laws have been on
the books for 1 10 years, and we have never allowed a merger of three to two when neither of the
two combining companies was failing and there were high entry barriers. It would have been a
total departure. In that case we lost in the trial court.
Ms. Born: Was that tried in D.C.?
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Mr. Pitofsky: Tried in D.C. Jim Robertson was the trial judge. One can see why
he came out the way he did, especially on the efficiency ruling.
Ms. Born: So he gave judgment for the defendants because of the efficiency
Mr. Pitofsky: There were other aspects of his opinion that I didn’t agree with, but I
was sympathetic with his treatment of the efficiency issue. And then we appealed it to the court
of appeals. Debra Valentine, our then general counsel, argued it, and a unanimous court of
appeals reversed and blocked the merger. It was a hard case, because I have some sympathy
with the numbers 2 and 3 fighting a company like Gerber. But the solution is to put new fresh
money into number 2 and number 3, not to allow them to merge and eliminate whatever
competition existed between the two.
Ms. Born:
Mr. Pitofsky:
At least between them if not with Gerber.
Gerber’s history is remarkable. To retain the market share at its
level for so long is most unusual. I think our record on merger enforcement was something like
12 or 14 wins and 2 losses. The two losses were both hospital mergers, and I shake my head
over those cases time and again because in each instance it was a merger of two to one or maybe
of four to three in cities in which next nearest hospital was 50,60, 80 miles away. But I believe
I understand what happened there. These are nonprofit hospitals. Important members of the
community are on the board, and the instinct of local judges is what business is it of the antitrust
law enforcement people in Washington coming here, to say, Pine Bluffs, Missouri and telling us
how we should structure our hospitals.
Ms. Born: So those were tried in the local communities in the federal district
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Mr. Pitofsky: Exactly.
Ms. Born: Do you want to talk in more detail about mergers like AOL/Time
Warner or any of the particular oil industry mergers?
Mr. Pitofsky: I sound somewhat defensive about AOL/Time Warner. I spent a
year considering various theories to challenge that transaction because the companies were so
enormous. But the problem is Time Warner is a powerhouse in programming, but it held less
than 30 percent of any market that it was in-Time Magazine, Time Network, Warner Studios
and so forth. So if you look upstream at the programming aspect, they are in antitrust terms in
safe harbors. Recent cases have said, if a firm does not have over 30 percent, then a vertical
challenge just doesn’t apply. Downstream you do have Warner Cable which is, I think, number
two in the country, and of course you have AOL, which at that time dwarfed competitors. Some of
the competitors have done better since then, partly because our order has required that they be
treated in a different way-so that Earthlink and Microsofi are now significant competitors of
AOL. But we finally decided that the major issue of whether or not Time Warner upstream-a
strong programmer and a powerful cable company-would be permitted to merge with a
powerful Internet provider wasn’t reachable under current antitrust law as fairly interpreted. On
the other hand, there were smaller dimensions of the case such as the fact that Time Warner
owned Road Runner, a broad band Internet distributor. AOL was obviously the most powerful
potential entrant into that field. Time Warner had a very significant financial interest in AT&T
Cable and then it owned its own cable company, so its market share arguably was not 25 percent
it was 50 percent or something like that. We also had the most formidable group of American
business people ready to testify in that cas40 anything, they would say, just block that
merger. We decided that we would require restructuring, which was largely access related.
Earthlink could not be denied programming materials, AOL had to allow additional Internet
service providers to have access to their materials and so on. I think it’s worked reasonably well
although I said at the time it would be five years before we have any idea whether or not this set
of restrictions is going to do any good. Meanwhile, within six months of our concluding that
case, the stock market pulled the plug on AOL. I still hear from people saying, “Why didn’t you
block that merger? It cost me a fortune.”
Ms. Born: Any of the particular oil company mergers-MobiUExxon, for
example-that you want to talk about?
Mr. Pitofsky: ExxodMobil is as simple as it gets. They just don’t compete very
much in markets in the United States. They compete in discovery, transportation, extraction,
some refining, but except on the East coast and California, Exxon is in one part of the country
and Mobil is in another. So we required the sale of about 2,500 stations as I recall. And they
leaped at that opportunity and went ahead and merged. I believe Exxon and Mobil merging is
not a good idea for the national welfare, but its not an antitrust question. BP/Arco, we actually
went to court on that one, because in my view those two companies do compete in California
where gasoline prices are the highest in the United States. There was a legitimate argument that
oil refining and distribution is a world market, not a local market. I don’t believe that is true,
certainly not true in California where the gasoline is specially designed. Finally Sir John
Browne, the head of BP, came to the United States and said, I may not agree with you, but we’ll
give you what you want. So the deal went through.
Ms. Born:
Mr. Pitofsky:
Which was some sale of facilities?
There’s always going to be a refinery here or there that overlaps. In
BP/Arco the problem had to do with overlapping rights in Alaska where each of them were
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major producers. They each had a share of the Alaska pipeline, and they each used that to sell in
the United States. We insisted that one or the other company sell off its production facilities in
Alaska, and we rejected the argument that it’s a world market. They were always willing to sell
off this piece and that piece in checkerboard fashion, but they weren’t willing to sell off the
entire holding. We were ready to try that case. I believe to this day that we would have won that
case. We should talk a little bit about oil pricing because it’s become now and will continue to
be such a major issue in this country. Several times we were directed by Congress to investigate
the phenomenon of price spikes, which usually happens in California but occasionally in other
parts of the country. The most extreme example was in the Midwest-Chicago and surrounding
areas-where prices went well over $2.00 as I recall. We were asked whether there was
collusion. We never found collusion. We did find documentary evidence that one oil company
deliberately withheld supply on the theory that it could only drive prices up and then they’d sell
it at the higher price. I’m not sure that’s a violation in the antitrust law. I certainly think its
price gouging, and we disclosed all of that to Congress. I tried to persuade the Department of
Energy and people in Congress that there’s a different problem here than people have been
looking at. I don’t think its really collusion in any sense. I think oil refining is one of the only
industries I’m aware of, if not the only one in the United States, that year round operates at 92
percent to 94 percent of capacity and during the driving season operates at 98 percent of
capacity. The result is that all you need is one refinery fire, or one miscalculation of how to
design summer oil, or one underestimate of how much heating oil will be used in the winter, or
one barge to sink in the Mississippi, and you have more demand than there is supply, and the
prices go through the ceiling. I can say right now with confidence that something like that will
happen every summer. There hasn’t been a new refinery constructed in this country in
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something like 15 years, and almost 100 small ones have been closed down. I don’t know if I’m
really blaming the oil companies. I think the government regulators should find a way, if
necessary to subsidize, but certainly to encourage the construction of refineries in the United
States. They haven’t done it.
Ms. Born: Are there no new refineries because the investment is so
Mr. Pitofsky: I don’t think so. That’s not the argument that the oil industry makes.
The oil industry blames it on the EPA-they say the regulations are so heavy handed and so
difficult to deal with, and on the fact-and I think it is a fact-that communities rise up when
they hear refineries are going to be built in their back yard, and they block it. But when you
compare oil prices today even discounted by inflation to oil prices 15-20 years ago, there’s got to
be enough profit to build a refinery and make some money. But we just haven’t done it. So as
to our report to Congress, I don’t think the situation is any better now than it was then.
Ms. Born:
Mr. Pitofsky:
Congress never acted on the report, or did they?
The one company in the Chicago area, Marathon, that on the record
showed that it had price gouged took a bit of a beating in terms of the public reaction. But no,
there has been no action as far as I know. No energy task force has recommended construction
of additional refineries. And this business about the communities won’t allow it-I understand
that’s not true in Texas and Louisiana. They will allow it.
They would welcome the jobs.
That’s right. It’s a serious problem that has not been addressed in
Ms. Born:
Mr. Pitofsky:
this country. Its more serious here than it is in Europe. And one of these days somebody is
going to make a big fuss about it.
Ms. Born:
Mr. Pitofsky:
Tell me about vertical price fixing of CDs.
A little background here. The rule against minimum resale price
maintenance has been on the books since 191 1-extremely controversial, conservatives hate it.
They managed to get the Supreme Court to eliminate the rule against maximum resale price
maintenance, but they never have been able to vacate or eliminate the so-called Dr. Miles rule
describing minimum price fixing as illegal per se. The way they handle it is when the
Republicans are in charge of antitrust enforcement they just don’t bring vertical price fixing
cases. They don’t bring any vertical distribution cases. I’ve always believed they are wrong
about this. I think their explanations for minimum resale price maintenance do not hold up. So
we brought half a dozen of these type of cases at the beginning of my tenure. Then this case
came along in which the record companies-I think there are six of them-found that their
distributors were engaged in a fierce price war. Target and other stores had driven the average
price of a CD down from about $15 to less than $10. The record companies then introduced a
program which wasn’t really minimum resale price maintenance. It was more indirect. The
program controlled the way the signs read in a store, the way labels were put on the compact
disks. We decided that the combination of restrictions amounted to resale price maintenance,
but it wasn’t the usual type, so we did not try to bring this as a per se case, We brought a rule of
reason case. We showed power, purpose, effect, absence of good business reasons and so forth
and won that case. We entered a cease and desist order, but the real punishment came when
class actions were filed by purchasers of CDs which extracted enormous amounts of money from
the record companies.
Ms. Born:
Mr. Pitofsky:
Where was your case brought-here in the District?
If I’m not mistaken, the record companies settled the case with an
order before we actually filed in court. It was the biggest resale maintenance case since the case
against Levi jeans. It was probably bigger than that. This was not some small scale instance of
resale price maintenance.
Ms. Born:
Mr. Pitofsky:
What about the California dentist case?
Not my favorite case. It was initiated before I arrived as Chairman
but I supported it. It was a rule of the California Dental Association that members of the
association were not allowed to advertise low prices or superior quality. The commission found
that that constituted an agreement not to advertise low prices and was a form of price fixing.
The Ninth Circuit affirmed our view although on a less restrictive theory then we had advocated.
Then to my surprise the Supreme Court took cert. on the case. They took cert. on the issue of
whether or not the FTC had authority to regulate a nonprofit organization like a dental
association. The Supreme Court found our way, nine nothing, a totally insignificant issue that
had been settled four or five times before. Then when the court moved on to the merits in the
case, they decided 5 to 4, not that we were wrong, but that the Ninth Circuit had been inadequate
in the way it explained its decision. Justice Souter in one the strangest lines in a Supreme Court
case I’ve ever seen in effect said, “Now Ninth Circuit, if you had written the kind of opinion that
Justice Breyer wrote in dissent, we wouldn’t be sending this case back to you. But we are.” The
case was remanded to the Ninth Circuit, and the court said: we’ve taken another look at the
record and we reverse ourselves entirely; we are not sending it back to the Federal Trade
commission, we are simply dismissing the case. Meanwhile, the industry had dropped the rule
we had challenged. On the one hand you can say consumers are better off, but on the other hand
it made some law both in the Supreme Court and the Ninth Circuit that I know is going to create
mischief in the future. It was just a series of errors. I wrote the opinion for the commission. I
could have written a better opinion. But I thought frankly that the facts were very strong in our
favor. For example, one of the issues in the case was whether or not there were any actual
effects in the marketplace from the association’s rule, and it turned out that 99 percent of the
dentists followed the rule. If they deviated from the rule and for example put an ad out saying,
for soldiers ten percent off, and then they received a letter of complaint from the dental
association, every one of them caved in and withdrew their ad. Now if that’s not actual effect in
the marketplace, I don’t know what else you have to prove. But I didn’t get into the effects side
of the case as deeply as I perhaps should have.
Ms. Born:
was appealed to the Ninth Circuit?
Mr. Pitofsky: Right.
Ms. Born:
So this was a case that came up through the commission and then
Did you have many cases that were tried internally in the
commission during your term?
Mr. Pitofsky: Far fewer than before and fewer than are occurring today. We were
reduced to just two administrative law judges during my period. I don’t believe these
complicated merger cases belong in the administrative process. I believe they should be heard
before a district judge.
Ms. Born: Why?
Mr. Pitofsky: First of all, there’s the remedy in court of preliminary injunction
which is not possible to obtain in the administrative process, so it clears the matter much more
quickly. Second, I’m not sure that through the years the ALJs have been of a quality equal to the
average district court judge. These are very complicated, economically-oriented cases. So I
think the cases get a better airing in court. On the consumer side, there is no reason why you
wouldn’t bring more cases into the administrative process, but the fact is very, very few
companies who are challenged by the Federal Trade Commission for consumer fraud have any
interest in litigating. The conversation immediately turns to, well, what do you want us to do to
end this case. So there were few cases. There was an interesting advertising case involving
analgesics that was tried before an administrative law judge while I was there. I don’t mean the
two ALJs don’t have enough to do, but its nothing like it was when I first came to the
commission as a bureau director, when there were probably 12 or 15 ALJs busy all the time, and
there were two or three arguments a month before the full commission. Its nothing like that
Ms. Born: Is this a testament on the consumer side to the effectiveness of the
commission in choosing cases and prosecuting them that they tend to settle?
Mr. Pitofsky: I give the praise to the staff, to the Bureau Director and the senior
staff. They were outstanding, Jodie, Teresa Schwartz, others. There were so many targets out
there to bring cases claiming consumer deception-not interestingly in national advertising
which was the active area of litigation when I first came to Washington. National advertising is
regulated through a self-regulatory scheme that works. Today, it’s this fraud on the Internet, it’s
invasion of privacy, it’s 800-number calls that are so out of bounds that when the commission
challenges the companies fold.
Ms. Born: Fraud on the Internet must have been a new issue during your tenure
because use of the Internet burgeoned during that period.
Mr. Pitofsky: Absolutely. Just monitoring the Internet was an enormous
challenge. What are you going to do? How many websites can a person check? We would have
monitoring days, we would have people checking, we would receive in the mail all sorts of
complaints about what had happened when consumers tried to buy something through an
Internet connection. But it was very difficult to keep up with the levels of fraud. The Internet, I
once said, was like the Wild West, it was as if nobody was watching until the commission
became very active.
Ms. Born: Nobody was watching (laughter) the first few years. Bob, is there
more that you would like to say about the commission’s approach to Internet fraud, how you
organized that? I know that you held web surfing days for other federal agencies as well, which
was very helpful.
Mr. Pitofsky: A substantial portion of our consumer protection resources were
devoted to Internet fraud. My recollection is the first such Internet fraud case was brought in
late 1994 and by September 1999 the agency had brought 100 such cases. Beyond just law
enforcement, the agency was very active in workshops and hearings-both to educate consumers
about the dangers of doing business on the Internet and sellers about appropriate rules. We
recognized throughout that the Internet was a vast new marketplace that could provide great
benefits to consumers and to the competitive system. The idea was to protect consumers without
undermining the growth of electronic commerce. A special dimension of commission activities
related to concerns about on-line privacy. After holding six public forums, and researching and
writing four reports on the subject, the commission became a credible source of information
about on-line commerce. Also in 1998, the commission recommended legislation to protect the
privacy of children on-line and Congress enacted the Children’s On-Line Privacy Protection Act.
I should add that Tim Muris, my successor as Chairman, and his commissioners and staff have
continued and indeed expanded commission enforcement activities and fact surveys about online commerce.
Ms. Born: The Microsoft case was transferred to the Justice Department. Did
that transfer occur before you were at the FTC?
Mr. Pitofsky: It did.
Ms. Born: Did the FTC have any participation in the case while you were at the
commission, and if not, tell me your views about the Microsoft case in any event.
Mr. Pitofsky: The history is very unusual. The commission opened the
investigation. But one of the five commissioners had some stock investment and therefore
recused himself earlier. The other four investigated over a long period. It came to the
commission and was sent back to the staff, came to the commission and back to the staff for
something like three years. Finally, they deadlocked two to two. Senator Metzenbaum, who
was the head of the Antitrust Subcommittee of the Judiciary Committee, intervened and arranged
to have the case transferred from the Federal Trade Commission to the Department of Justice.
That’s happened about twice in 100 years. Ironically, the case the commission couldn’t decide,
the Justice Department brought in no time at all. Microsoft folded and entered into a consent
order. Sometime later-I think in less than a year-the Department of Justice began to believe
that Microsoft was violating the consent order. In the course of that investigation it was decided
that Antitrust Division would take on Microsoft in many different aspects of its business, but
primarily the way it used its dominant position with Windows in order to tie-in other
applications and specifically the way it used Windows to win its fight with Netscape over the
browser. Joel Klein and I met often and discussed many cases, but we didn’t talk all that much
about Microsoft. I felt it was his case and I should stay out of it. If I had a contribution to make,
it was probably that, when it came to my attention that Joel was thinking of bringing in an
experienced outside lawyer to litigate the case, I suggested David Boies who did take on the case
and did a superb job. My views on the case? I thought the Justice Department won left and right
and center. Microsoft was found to have violated the antitrust laws in 10, 1 1, 12 different ways.
And then came the election. Joel left, Charles Brown took his place, and I thought the settlement
with Microsoft left something to be desired. It was a target of a great deal of criticism, but I’m
not sure I know enough about the details of these issues to come down strongly one way or the
Ms. Born:
Mr. Pitofsky:
How did you know David Boies?
David Boies, after he graduated from Yale and was an associate at
Cravath, was looking for something to keep him busy, as being an associate at Cravath wasn’t
enough for him, so he took my course on regulated industries at NYU. He was so good in the
classroom that at the end of the course I invited him to come and teach with me the following
year-this was a seminar-and he did. We became fnends, we lived in the same building, and I
knew him quite well. He was-probably still is-the best student I’ve ever had.
Ms. Born: Was he still at Cravath when he handled the Microsoft case or had he
left and gone out on its own?
Mr. Pitofsky: I’m not sure. I think he had gone out. He worked for Senator
Kennedy for a while. Then did he go back to Cravath or start his own firm? I don’t recall. I
think he was on his own.
Ms. Born: While you were at the FTC, did you deal with the applicability of the
antitrust laws to acquisitions of intellectual property?
Mr. Pitofsky: I am very interested in that field and in fact after I left the
commission I taught a seminar on the subject. There are two lines of authority in this country,
not reconciled and not reviewed by the Supreme Court. One line of authority says that, where
the source of a sellers’ market power is intellectual property, it has a much greater range of
permissible action including using your intellectual property to gain advantage in other markets.
That’s the Xerox case in the Federal Circuit. There’s another line of authority that says
intellectual property presumptively gives you some advantages, but that presumption can be
overcome if the intellectual property claim is a pretext, if the anticompetitive effect is enormous,
and so forth, That’s the Koduk case in the Ninth Circuit. The difference between the two is that
the court in Koduk was willing to look at subjective evidence, whereas the court in the Federal
Circuit simply says subjective evidence is irrelevant to an issue like this. I remember in the
waning days of the Clinton administration’s term, I tried to induce the Solicitor General’s Office
to ask for cert. on the Federal Circuit decision. There was too much going on and too many
other important cases pending at the time, and I just lost that argument. The result is that I don’t
think people can confidently advise clients about the limits of rights based on intellectual
property. Certainly the Federal Circuit case would overrule some very conventional antitrust
law about patent misuse and tie-in sales.
Ms. Born:
Mr. Pitofsky:
Tell me about the Intel case.
Very unusual case of a disarming simplicity. Intel would deny it,
but I think fairly clearly it has a monopoly position with respect to the microchip, the so called
brains of the computer. It made arrangements with a dozen of its largest customer OEMs
(original equipment manufacturers), companies like Dell and Compaq, that it would make
available to them advance trade secrets and samples with respect to each new generation of
microchip. Intel changes these designs often. It would make available samples, instructions
and so forth. The truth of the matter is, if an OEM does not have access to the samples and the
know how, it will be six months behind the curve, and if you’re six months behind the curve in
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that business, you’re out of it. Intel found itself in intellectual property disputes with three
companies. Two were customers and potential competitors; the other was an actual competitor.
They tried to work it out. Intel was really rather generous with some of the offers it made to
settle the controversy, for example, by saying look, you say this patent is yours, we say it’s ours,
why don’t we cross license each other? The companies were not willing to do that. In three
instances the companies either sued Intel or threatened to sue, and Intel promptly cut them off
from the advance information and the samples on the theory that we don’t have to do business
with someone that sues them. There’s not much case law on this, but what there is says, if
you’re a small company and someone sues you and you refuse to continue to do business with
them, fine, let them do business with the other 80 or 90 percent. But when you’re a monopolist
and you refuse to do business, you take all of the air out of the room, and that’s not justified. Is
that clearly the law? No. Do I think it’s the right answer? Yes. Intel wanted desperately not to
be thought of as the equivalent of Microsoft, as being a rough and tough company that took
advantage of its rivals. We couldn’t settle the case, and we sued. I remember a meeting in my
office in which Andy Grove, the CEO of Intel, came and defended his side of the argument more
adroitly than any businessman I’ve ever known. He’s brilliant and charming. I remember he
said we try so hard to stay on the right side of the line, and I said someone drew the line in the
wrong place. This was a meeting that must have included 20 lawyers. Usually the business
people sit quietly and speak when they are spoken to, but Grove took over this meeting. I said to
him I am very influenced by a line by Lord Koch in the 1 6th century, 1 Sh century, in which
somebody asked Lord Koch, why do you favor the rule of law? It was right at the point where
England was moving from feudalism into the industrial age and toward democracy. Lord Koch
said, if you leave matters of dispute to self-regulation, the strong will prevail over the weak
everytime. And that’s my attitude toward Intel. We pay judges, we build courthouses, we hold
legal proceedings. I have no idea whether Intel was right or the three challengers were right
about that patent. I believe that should be settled in court and not by a monopolist dominating its
rival. And that’s where we left it. I think Bill Baer and the present chair of Arnold & Porter
Mike Sohn had very extensive negotiations with the current CEO, then general counsel. We
were able to come up with a very complicated settlement that was described by Intel as a winwin. Intel got what they wanted, and they said we got what we wanted. I think that was largely
true. We wanted to make it clear that a monopolist cannot cut off a rival or customer simply
because they sue you. Their position was, suppose someone sues us and tries to get an
injunction against us using our intellectual property. They are suing us to put us out of business,
and you’re saying we have to keep doing business with them. I thought that was a fair point, and
there is a paragraph in the settlement that provides that the plaintiff can have any remedy
available, damages, accounting, fines, and so on. But if the plaintiff seeks a preliminary or
permanent injunction, then the monopolist doesn’t have to deal with that company. Then there
are all sorts of other provisions about when you can cut someone off and when you can’t cut
someone off. My impression is it’s worked fairly well. I should say that the Federal Circuit
took on one of those three cases and found for Intel and against Integraph. So at least one court
thinks we got it wrong. But I’m pretty comfortable with the Intel settlement.
Ms. Born:
Mr. Pitofsky:
When was that? And why was Mike Sohn involved?
It would have been around 1999, maybe 2000, toward the end of my
stay. Mike may not have been involved in our decision to sue. I think he was brought in to see
if there was a way to settle the case.
Ms. Born: Wasn’t there an investigation about violent entertainment material
during your tenure?
Mr. Pitofsky: Yes, that was an extraordinary experience. We did not initiate the
project. That came from the White House. It was one of the only instances I can recall where
the White House asked us to look into something. The something was reports that had to do
with motion pictures, music and video games. All three had labels, although the music labels
were not very informative. Motion pictures was the matter most people cared about most. There
was an R rating, which means someone under 17 can’t be admitted without being accompanied
by an adult. There’s an X rating that says people under 17 can’t be admitted at all. There’s a PG
rating, which is parental guidance strongly suggested. We received reports that the ratings were
not being enforced and that many motion picture theaters, especially in big cities, not in small
towns where the manager at the movie theater thinks of himself as part of the community, were
admitting many young people to R-rated movies with no identification check whatsoever. There
were also reports that movie companies knew that was going on and were designing the movies
to appeal to an underage audience. There were documents that indicated they were having focus
groups on R-rated movies-does this part of the movie appeal and does that part of the movie
appeal-using 9 and 10 year olds as the focus group. So we issued a very substantial report
describing what was being done, and we made recommendations about how these rules could be
better enforced. I have always felt that Hollywood was the most sympathetic with the idea that a
real rating system served their interest. Others have said, and I agree, music is least sympathetic.
They see themselves as a slightly outlaw crowd. In any event they resent government censorship
and regulation. Video games I thought came around pretty well though some of the recent
publicity we have seen just in the last two or three weeks suggests that some of these video
games are really extremely violent and not properly labeled. For the most part, I thought that the
investigation was a constructive thing to do, and in a follow-up investigation after I left-I think
at least a year or so later-we found that things had improved. As I said when I first took on this
assignment, you don’t want the Federal Trade Commission to be the national thought controller.
You don’t want censorship in this area, but you want parents to be in control of the situation. If
you tell parents a film is PG-13 and it’s really extremely violent, that’s not fair and not right. I
do think violence in media contributes to a certain coarseness and violence in our society so it’s
not as if this is insignificant or irrelevant. The problem is to come up with a solution that’s not
worse than the disease. I don’t see anything wrong with 15-year-old kids seeing Saving Private
Ryan, but I want that decision to be made by their parents, assuming their parents are paying
attention. We did a survey, and we found that parents pay far more attention to this issue, and to
the ratings, than most people give them credit for.
Ms. Born: So the results were basically to make the report public so that the
public was aware of what was going on and voluntary actions by the industries?
Mr. Pitofsky: And we thought it would be useful to have more informative ratings.
Why should it just be R; why can’t it be an R for the following reasons? Why does it have to be
a tiny little letter in the corner of the ad; why can’t it be in big print? Why can’t there be a sign
explaining what R and PG really mean? All of those things are going on today in movie theaters
if you look around. I can’t say there’s been that much progress on music and video games, but
as far as Hollywood goes, one or two studios were resistant and resentful, but the overwhelming
majority in Hollywood, led by Jack Valenti who had initiated this rating system, were as
cooperative as anyone could ask. It doesn’t change the world, but at the margin I thought it was
a very useful thing to do.
Ms. Born: What other significant initiatives did the consumer side of the FTC
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do while you were there?
Mr. Pitofsky: One that’s the most significant by far had to do with invasions of
privacy. The direct marketers and other private sector people always said they too were opposed
to invasions to privacy, collecting data and selling it to other people without your knowledge or
awareness. The question is whether you do it by self-regulation, as the advertising crowd have
done, or government regulation or some combination of the two. The majority of the
commission, myself included, thought it was premature to ask for legislation. Commissioner
Sheila Anthony was always outspoken about wanting regulation. We did several studies finding
that invasions of privacy were fairly widespread. We filed several reports with Congress dealing
with various issues. The main issue is whether or not people are allowed to use information they
extract ffom the marketing process unless you opt out or only if you opt in. The sentiment is
fairly divided on this. Industry of course is very much against seeking permission. About
halfway through my term, I came around to the view that self-regulation was not working and I
think at least one other commissioner experienced the same change of view so we joined Sheila
Anthony and recommended regulation. But it hasn’t happened so far. I understand the case
against government regulation. On the other hand, I’m very concerned that there is a lot of talk
about self-regulation but so far it hasn’t really happened. Even after the election of President
Bush, privacy was a real issue in the Congress because there are individuals in both the Senate
and the House who feel very strongly on this issue and they don’t let it die. But after 9/11
nobody paid attention to it. Privacy intersects with efforts by the FBI and others to guard against
terrorism. Now you have a whole new set of issues that complicate that picture. I believe that
eventually there will be a moderate statute protecting against invasions of privacy unless
consented to by the consumer, but it’s not imminent.
Ms. Born:
Mr. Pitofsky:
Other things are higher on the priority list right now.
Even among the most ardent advocates of protecting privacy. And
it’s interesting how it crosses the political spectrum. William Safire, the columnist in the New
York Times is very conservative. Nevertheless, he is probably one of the most eloquent people in
talking about the threat to the welfare of the citizens of the country because of invasions of
privacy. And that’s true in the House and the Senate as well. It’s going to be awhile before that
issue surfaces again, and my successor has adopted a wait and see attitude. He doesn’t seek a
leadership position on this. I’ve never denied that the people who don’t want legislation have
some pretty good arguments on their side. It’s a close call.