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April 17, 2009 10:47 AM

Litigator Gary Reback Calls for Tighter Antitrust Enforcement in New Book

Posted by Ross Todd

33091459 Antitrust litigator Gary Reback says he realized that there were some serious flaws in the way the U.S. government was approaching enforcing antitrust laws in the wake of Enron's collapse. So, Reback, who is of counsel at Palo Alto firm Carr & Ferrell, set out to write a book and essentially stopped practicing for two years to finish the manuscript. The result, Free the Market! Why Only Government Can Keep the Marketplace Competitive, published by Portfolio, came out this week. In it Reback challenges the Chicago School philosophy, which advocates for minimal government intervention. The Am Law Daily talked to Reback by phone at his Silicon Valley office this week about the book, the new administration's approach to antitrust enforcement, and what he sees on the horizon for the practice. (We've edited the conversation for style and space.)

What was it that sparked you to write this book?

I started thinking seriously in 2002 after the collapse of Enron [about the problems with antitrust enforcement]. It was becoming increasingly clear that the general legal approach we were taking in the U.S. wasn’t helping entrepreneurs and promoting innovation. So I wanted to think about the role that government should play in doing the right thing and in particular what role that the law and lawyers should play.

You write in the introduction, "Toxic assets didn’t fell the nation’s economy. A toxic philosophy did.” Explain what you mean by that.

For many decades the Chicago School’s philosophy has governed our antitrust law competition policy. That philosophy is one of laissez-faire. We’ve now found out in the most shocking way that this philosophy doesn’t work in its rawest and most unrefined form. There has to be a role for the government if our economy is to function properly. I challenge the notion that the market will fix itself. That’s not how modern economic markets work.

Why not?

It all has to do with an economic concept called network effects. Many of the modern industries, particularly software, semiconductors, and telephones, exhibit very strong network effects. Something becomes more valuable to you when other people use it. That’s not the case traditionally. In an agrarian economy, the fact that all your friends might like broccoli still doesn’t make broccoli desirable to you. But in modern economies the notion that all your friends would use craigslist means that you have to too. You want to sell a car, that’s where you have to go. Not because you think it’s wonderful, but because everyone else uses it. What’s interesting about these types of markets is that they tend to run toward monopolies.

So how do you deal with that tendency?

Our antitrust laws were first passed in the 1890s during a period much like our own time, a time of boom and bust cycles. There were new technologies that roiled the markets. All of a sudden big corporations started appearing, and enormous, arguably corrupt, financiers came to dominate the economy. What did Americans do at that point? They looked to the government to cure the problems the free market was creating.

What’s your early assessment of the Obama administration’s approach to antitrust enforcement?

Right away you can see how antitrust is going to be central to the goals of the Obama administration. A lot of people have been complaining about the fact that many people can’t afford health care. One of the reasons that our health care costs are so high is because anti-competitive hospital mergers have driven up costs. The government has tried for decades to stop these things and only within the last year have they been able to block one.

And take, for instance, high-speed Internet. It’s hard to imagine a more vital facility for the new economy. Young people need it for education. Businesses need it to connect with customers. Early on in the Bush administration the United States was fourth in high-speed Internet connectivity and by the end we were 14th and dropping fast. A key reason for that is that the old administration let the telecom companies acquire their rivals. They let SBC acquire the old AT&T. They let Verizon acquire the old MCI, so there’s really not that much competition.

What are the antitrust fights on the horizon?

Mergers. The Bush administration at least for a period of time let everything go. And I think everyone expects the new administration to scrutinize more closely mergers between competitors. But I think a key point is going to be how they deal with mergers of companies that make complementary products: "vertical mergers." Take the pending merger between Ticketmaster and Live Nation--those companies don’t really compete directly with each other all that much. But they’re related vertically. It turns out that vertical mergers can give companies chokeholds over entire industries in very unproductive ways. Look at AIG for example. You’ll see that they got power from one market to another market. And once they cratered, it didn’t just bring down one market. It brought down a whole lot.

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I dragged out reading "Free the Market!" Now, I know why. I want to know more. Reback's description of market behavior in high tech industries -- including the behavior of the economists and lawyers and bureaucrats -- squares with my merely descriptive and ancient research on livestock markets. Reback recasts the issue from "regulate / don't regulate" to "foster competition." Our country will be better off to the degree that businesses actually compete. That doesn't happen when government sits on its hands.

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