Investors Business Daily, May 4, 2001

Economics of Networks

Investors Business Daily, May 4, 2001

Will Bush's New Antitrust Chief Usher in New, Less Intrusive Era?

By Joseph Guinto

Investor's Business Daily

If Bill Gates was hoping to get a peek inside the mind of Charles James this week, he must be disappointed. James, President Bush's nominee to head the Justice Department's antitrust division, demurred before a Senate panel Wednesday on what he'd do with the government's case against Microsoft Corp.

"I don't want to get into the specifics of cases," James said. He gave only one hint. "We will look as closely as possible to preserving (past administrations') victories and rectifying defeats if we can," James said. Even without specific comments, James breezed through the hearing. The full Senate was expected to confirm him as early as Thursday. If it does, James may lead the Bush administration to usher in big changes in antitrust policy. "It all comes down to whether you trust markets or you don't trust markets," said Luke Froeb, antitrust expert at Vanderbilt University and former Federal Trade Commission official under President Reagan. "President Bush has indicated that he has a much better trust in markets than the Clinton administration did."

Reversing Clinton

Clinton's antitrust attorneys took on plenty of big-name companies: Microsoft, Intel, Visa and MasterCard, American Airlines, and Barnes & Noble. The last of those cases involved a so-called "vertical" merger. And observers say James isn't fond of vertical antitrust. That would set him apart from the Clinton Justice Department, which challenged such mergers with an unprecedented abandon. Vertical mergers link firms operating along the same supply chain. Barnes & Noble tried to acquire Ingram Books, the nation's largest book wholesaler. The FTC blocked that merger under Clinton. That case broke new ground for antitrust actions. Most antitrust cases involve horizontal mergers or price fixing. Horizontal mergers are pairings of companies in the same industry. For instance, Office Depot and Staples, which the FTC also blocked under Clinton. But the Clinton trustbusters didn't shy away from either type. In fact, they took on 12 times as many vertical cases as the Reagan and first Bush administrations combined. And neither of those administrations ever brought a vertical case into court.

"The Clinton administration had gone way too far in using antitrust to interfere with normal business activity," said Nicholas Economides, economics professor at New York University. "I expect that the Bush administration will pursue a more traditional antitrust policy instead of the excesses of the Clinton years." That seems to be the consensus on James. A review of his career by Washington-based law firm Arent Fox concludes that James "is regarded as endorsing mainstream enforcement positions." It also found he "believes strongly in the long-term remedial influence of markets, which suggests that he would not stretch enforcement in marginal cases." James has a long track record on antitrust. He worked for the FTC under Reagan. He was acting head of the antitrust division at Justice for the last few months of the first Bush administration. If confirmed, James will be the first African-American to run the division on a permanent basis.

Senatorial Third Degree

On Wednesday, senators questioned James on Microsoft, airline mergers, consolidation in the farming industry and possible antitrust action against OPEC. James chose not to comment on specific cases. Instead, he cited general rules for antitrust enforcement. That's a subject he should know well. In the early 1990s, James played a key role in writing federal guidelines on enforcement of horizontal mergers. Most of those guidelines remain in place today. With Microsoft, James will have the chance again to set federal precedents. The company was ordered split in two last year by U.S. District Court Judge Thomas Penfield Jackson. But a federal appeals court may reverse at least part of Jackson's ruling, leaving James with a tough decision.

If the appeals court remands part of the case back to the lower court, James could negotiate a settlement with Microsoft. Or he could simply close the case. Not surprisingly, there are many who don't want to see that happen. James "will be guided by the facts here and the facts point to a consistent pattern of misconduct" by Microsoft, said Kenneth Starr, the ex-special counsel who investigated Clinton.

Settle With Microsoft?

Starr now works on behalf of the Project to Promote Competition and Innovation in the Digital Age. "ProComp," as it's known, is opposed to any settlement in the case with Microsoft. Whether James pursues a settlement may depend on how much of the case the appeals court upholds. And opinions on that subject vary wildly. "I believe the guts of the case will be upheld," said Robert Litan, economist with the Brookings Institute.

Economides, on the other hand, expects more drastic action. "The court of appeals is likely to throw out at least two-thirds of the guilty verdict of the district court," he said. What is fairly consistent, though, are expectations for the Bush administration's pursuit of the case if the appeals court decision requires the government to pursue any kind of further actions toward a final outcome. "If it requires an active step," Froeb said, "I don't think Justice will take that step." Still, you won't be hearing Charles James saying anything about that anytime soon. After the hearing Wednesday, he indicated he won't comment on Microsoft until after the appeals court rules. "Then, the wall of silence will come down," James said.

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