Sue OPEC?

Posted on July 3, 2008 by Darren Bush
In an op-ed published in the LA TIMES, Darren Bush and co-authors Harry First and John J. Flynn advance the notion that the brazen actions of the OPEC cartel run afoul of U.S. antitrust laws.
As the national average price of gasoline raced toward $4 a gallon and airlines laid off workers by the thousands because of rising jet fuel costs, the House of Representatives took action: It overwhelmingly passed the Gas Price Relief for Consumers Act of 2008. The bill would have made it illegal for foreign states "to act collectively" to limit the production or distribution of oil. Put simply, the bill permitted the U.S. Justice Department to charge the Organization of the Petroleum Exporting Countries with violating American antitrust laws.

Even before the 324-84 House vote last month, President Bush pledged a veto, saying OPEC might retaliate against U.S. interests overseas or cut oil production further. But he didn't have to make good on that promise. Senate Republicans held the line for him, last week threatening a filibuster that Democrats couldn't break. That effectively killed the bill and, for now, any hope that the United States would finally start treating oil the same way it does computer chips, vitamins, rubber and all other products.

OPEC may call itself an "organization," but everyone knows that it is, pure and simple, a cartel that manipulates markets, restricts output and fixes prices. The United States and the European Union have vigorously prosecuted other multinational cartels for doing the same thing in the vitamin, lysine, computer chip and elevator/escalator markets. Swiss healthcare company F. Hoffmann-La Roche, for instance, paid a $500-million fine to the U.S. in 1999 for its part in a years-long scheme to raise prices on vitamin products. Just last year, British Airways and Korean Air each paid a $300-million fine to the U.S. for fixing international cargo rates.

But when it comes to oil, the U.S. gets squeamish. For nearly 50 years, the members of OPEC have openly operated as a cartel. OPEC's statutory provisions even state that its mission is "the coordination and unification of the petroleum policies of member countries and the determination of the best means for safeguarding their interests, individually and collectively."

The cartel's economic effect on the U.S. has been devastating, dating from the oil embargo in the 1970s, which led to the first U.S. fuel shortage since World War II, to today's unstoppable escalation of pump prices. Just in the last three years, crude prices rose from $54 to nearly $140 a barrel -- which means U.S. spending on imported oil has gone from about $185 billion a year to an expected $440 billion this year. Much of that excess is winding up in the pockets of OPEC members, increasing their global economic and political power.

High gas prices have now gone from consumer irritation to a serious threat to our national economic health. Our antitrust laws are tailor-made to help out in such a crisis.

OPEC is clearly a "combination or conspiracy" that restrains trade in violation of the Sherman Act. Unfortunately, over the years, courts have made it nearly impossible to use the act against OPEC, whose members claim they are sovereign nations and thus immune from such prosecution. But OPEC's behavior is commercial, not governmental or diplomatic. It is perfectly appropriate for Congress to remove these legal obstacles. Foreign businesses and individuals have long been subject to U.S. antitrust laws -- even for conduct overseas, if it has substantial effect on commerce here. So should OPEC.

Imagine suing OPEC members for the amount they overcharged for petroleum products the U.S. government purchased. Then triple that amount -- for that is what can be awarded to consumers injured by cartel activity. Imagine the seizure of OPEC assets to pay this award, such as Venezuelan government-owned Citgo headquarters in Houston or Saudi Arabia's Aramco assets in New York.

Imagine criminal charges filed against key cartel individuals when they come to the U.S. And imagine Justice Department officials compelling OPEC and its co-conspirators to disclose documents that might bring to light exactly how this cartel has functioned. Might this information show a relationship between OPEC and U.S. oil companies?

If we are afraid of OPEC, remember that our decades of putting up with this cartel have done nothing to reduce oil prices.

The bill Congress proposed was actually somewhat cautious. It didn't allow private suits for damages but gave enforcement jurisdiction exclusively to the Justice Department. Under the Bush administration, the attorney general seems unlikely to have used this authority anyway, but all that could change come January, when a new president and new Congress get to work. Job One for them should be to look past the fear-mongering rhetoric and enact this important piece of legislation.

At the very least, passage of this bill would send this loud and clear message to OPEC: Competition -- the basis of free enterprise and economic organization throughout most of the world -- ought to be the norm for producing oil just as it is for producing anything else.

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Antitrust in Dallas

Posted on November 2, 2006 by Darren Bush

A letter to four ranking Congressmen gets to the heart of the antitrust issues surrounding the supercharged plans involving airfields in Dallas.

September 13, 2006

The Honorable Arlen Specter, Chairman

Committee on the Judiciary

United States Senate

711 Hart Building

Washington, DC 20510

The Honorable Patrick J. Leahy,

Ranking Member

Committee on the Judiciary

United States Senate

433 Russell Senate Office Bldg.

Washington, DC 20510

The Honorable F. James Sensenbrenner, Jr., Chairman

Committee on the Judiciary

United States House of Representatives

2449 Rayburn House Office Building

Washington, DC 20515

The Honorable John Conyers, Jr, Ranking Member

Committee on the Judiciary

United States House of Representatives

2426 Rayburn House Office Building

Washington, DC 20515

Dear Honorable Sirs:

I am writing in response to a letter issued to your respective offices dated September 8,

2006. The letter (hereafter D/FW response letter)(1), signed by well-respected attorneys in

the law offices of Hogan & Hartson, LLP and Vinson & Elkins, LLP, attempts to address

issues that were raised in a letter submitted by myself and other antitrust law professors

to you on August 29, 2006 (“Antitrust Professors’ letter). Unfortunately, the DFW

response letter fails to address few if any of our substantive issues.

With respect to the competition issues, the D/FW response letter is mistaken in its

characterization of our positions in the Antitrust Professors’ letter. First, the D/FW

response letter states that through-ticketing will create a “Southwest effect” in Love

Field. The Antitrust Professors’ letter stated clearly that the “only procompetitive

benefits stem from the relaxation of through-ticketing restrictions in the short run and the

complete elimination of the Wright Amendment in the long term.” In short, we already

acknowledged that fact, although one question that ought to be raised is whether there are

less restrictive alternatives to achieve the benefits of through-ticketing as well as other

potential benefits. For example, the competitive benefits of through-ticketing will likely

be reduced given the reduction in gates that will limit the expansion capability of

Southwest at Love Field. In other words, the disciplinary effect of the “Southwest effect”

will be hampered to some degree. Thus, one less restrictive alternative would be to

eliminate the gate restriction provision in the proposed legislation. The D/FW response

letter does not address this issue.

Moreover, the extent of the “Southwest effect” could depend crucially on whether new

entrants can initiate service at Love Field. As discussed in the Antitrust Professors’

letter, “such additional service, likely provided by a low cost carrier (LCC), would

potentially have the effect of reducing fares while expanding service options for

passengers flying to and from the DFW metropolitan area.”(2) Indeed, Pinnacle Airlines

found the status quo sufficiently attractive to start entering before the Compromise was

made public.

Second, the D/FW response letter mentions that the Antitrust Professors’ letter is “simply

wrong” about the ability of the incumbent carriers at Love Field to blockade entry.

Clearly, the agreement essentially provides for the restriction of entry before the

termination of the Wright Amendment. Post-Wright, the restrictions as to gates and the

like do not go away. Moreover, insofar as the proposed legislation confers power upon

the parties to implement the legislation, there is likely an issue of implied immunity.

This latter issue is also addressed in detail in the Antitrust Professors’ letter.

The Antitrust Professors’ letter also mentioned that competition in the offering of air

passenger service on a particular route has some degree of time-sensitivity. For example,

suppose Southwest offers flights on a particular route at 9 a.m., 1 p.m., and 4 p.m.


Suppose further that these are the optimal times for business travelers. Southwest’s use of

gates at these optimal times may preclude competitors from offering services at those

times regardless of the Love Field Master plan. Nothing in the Master Plan appears to

address that issue. Additionally, the D/FW response letter suggests DFW is a substitute

airport to Love Field in terms of potential entry. This is also an issue we addressed in our

letter where we note that Love Field’s location perhaps makes it a superior choice to

business travelers located in Dallas.

Third, the D/FW response letter’s characterization of the Noerr-Pennington doctrine is

not compelling.(3) While I do not wish to delve into a determination of whether the

negotiation of the agreement is exempt from antitrust scrutiny under Noerr, I do wish to

note that the Noerr exemption would depend largely upon how the agreement is

characterized. If the agreement goes beyond the petitioning of Congress, Noerr may not

apply.

The D/FW response letter also mentions state action doctrine as an exemption implicated

by the proposed legislation.(4) I am skeptical as to the application of that doctrine to

federal law given that state action doctrine is a principle of federalism. I am, of course,

cognizant of the implied immunity and primary jurisdiction issues inherent in the

promulgation of federal legislation. In fact, the Antitrust Professors’ letter raises these

issues in great detail with respect to the Love Field agreement.

Apart from the D/FW response letter’s challenge to our antitrust analysis, I wish to

emphasize other components of the D/FW response letter that are troubling. First, the

D/FW response letter acknowledges that outright repeal of the Wright Amendment could

confer competitive benefits. However, the D/FW response letter notes that one must

consider the environmental effects of the agreement, and other costs and benefits that are

unrelated to competition.

In part, I agree with this approach, as I am on record as noting that Congress should

weigh the costs and benefits of any proposed legislation.(5) However, the weighing of

costs and benefits is not done in a vacuum. Instead, less restrictive alternatives should be

considered. In other words, if it is possible to achieve the same positive effects with

fewer costs, then this less restrictive alternative might be a better solution than the one

originally proposed.


For example, one of the arguments weighing in favor of the destruction of gates and

restriction of competition at Love Field relates to noise pollution. Certainly, having

fewer flights and fewer gates at Love Field will reduce noise, post termination of the

Wright Amendment. However, there are less restrictive alternatives to this approach.

There are a variety of measures that could mitigate noise pollution associated with airport

growth, such as noise limitations, restrictions on plane size, or the imposition of fines and

fees. Noise pollution is also a function of the type of aircraft flying into Love Field. The

newer, quieter passenger jets that would be utilized in an expanded Southwest presence

and by new entrants create less noise and pollution that most of the cargo jets (typically

older aircraft like DC-10s) that currently utilize Love Field.(6)

Second, the agreement is portrayed as a compromise between warring factions. That may

be the case, but other stakeholders are implicated here who are not part of this agreement,

have had no say in this agreement, and who are injured by this agreement. Specifically,

this agreement implicates competition beyond the reaches of the state of Texas. As the

Antitrust Professors’ letter stated, “Any passenger seeking to fly to the DFW area or

through the DFW area from a city outside the Wright Amendment territory is affected by

the Wright Amendment restriction.” In short, this is an issue of interstate commerce, with

effects outside the state of Texas. It is not just a local issue between two airlines and two

cities.

The debate fostered by the Antitrust Professors’ letter and the D/FW response letter

suggests need for Congress to approach the proposed legislation restricting competition at

Love Field with care. The D/FW response letter fails to address any of the concerns

raised in our initial letter. Thus, I can only conclude my letter as I did the previous one:

Namely, the “proposed agreement and legislation confers few, if any benefits to

consumers, while producing significant anticompetitive effects. In particular, the

agreement as structured would nullify any procompetitive effect arising from the

elimination of the Wright Amendment. In particular, it would likely cause a reduction in

service, an increase in fares, and the eradication of any potential competition in the

provision of air passenger service to and from the DFW metropolitan area. It should,

therefore, not be blessed with any sort of antitrust immunity, express or implied. Instead,

the least restrictive alternative (and the one conferring the most consumer benefit) is the

eradication of the Wright Amendment without the underlying proposed agreement.”

Very truly yours,

Darren Bush

Assistant Professor of Law

University of Houston Law Center

Notes:

1

According to the Dallas Morning News, the law firm of Hogan & Hartson represents D/FW while Vinson

& Elkins represents the City of Dallas and Southwest Airlines. See Sudeep Reddy and Robert Dodge,

Texans Working Overtime on Wright, available at http://www.dallasnews.com/sharedcontent/dws/dn/latestnews/stories/091306dnbuswright.273d53b.html.

See also Maria Recio, Panel Plans Wright Vote, available at

http://www.dfw.com/mld/dfw/business/15507201.htm. (“A day before the letter was sent, Hogan

& Hartson got a 10 percent, or $2,000 per month, boost in pay and half-year extension from D/FW.”) If true,

this information was not disclosed in the letter. In fairness, I disclose that I do not represent anyone in the

matter of the Wright Amendment repeal and the Love Field Agreement. I am thus speaking solely on my

own behalf as a scholar of antitrust law & economics and airline deregulation.

2

A memo from the DOJ on the Love Field agreement accurately makes this claim. See also Entry and

Competition in the U.S. Airline Industry: Issues and Opportunities, Transportation Research Board, Special

Report 255, (1999), p. 52.

3

See Eastern R.R. Presidents Conference v. Noerr Motor Freight, 365 U.S. 127 (1961). Noerr held that the

exercising of the right of association for the political purpose of influencing legislation is immune from

Sherman Act challenge. However, “[t]here may be situations in which a publicity campaign, ostensibly

directed toward influencing governmental action is a mere sham to cover what is actually nothing more

than an attempt to interfere directly with the business relationships of a competitor." 365 U.S. at 144.

4

See Parker v. Brown, 317 U.S. 341 (1943); see also F.T.C. v. Ticor Title Ins. Co., 504 U.S. 621, 632-633

(1992)(Noting that in Parker, the Supreme Court “announced the doctrine that federal antitrust laws are

subject to supersession by state regulatory programs. Our decision was grounded in principles of

federalism.”)

5

See Darren Bush, Gregory K. Leonard, and Stephen Ross, A Framework for Policymakers to Analyze

Proposed and Existing Antitrust Immunities and Exemptions: Report Prepared by Consultants to the

Antitrust Modernization Commission, available at

http://www.amc.gov/commission_hearings/pdf/IE_Framework_Overview_Report.pdf.

6

See Eric Torbenson and Suzanne Marta, Who’s Making Noise at Love?, available at

http://www.dallasnews.com/sharedcontent/dws/bus/wright/stories/050306dnbusnoise.2c41a23.html.

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