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Antitrust Law and Distributive Politics in the American States
Colin Provost
Department of Political Science/School of Public Policy
UniversityCollegeLondon
29/30 Tavistock Square
London, WC1H 9QU
United Kingdom
Email:
Phone: +44 (0)20 7679 4903
Abstract: State enforcement by state attorneys general has become a major component of American antitrust law. Much has been written about state antitrust enforcement, but existing accounts of AG incentives and behavior are incomplete. As elected officials in 43 states, AGs must represent their constituents and therefore will be drawn to cases that maximize the level of settlement reward. These will be cases with large, wealthy defendants and where clear wrongdoing has been established. Settlement rewards are likely to be higher when there are clear violations of the law, as in price-fixing cases, rather than in merger cases, where no wrongdoing has necessarily been established. Finally, in an important area such as antitrust, state AGs also represent their constituents along ideological lines, but this relationship is also conditioned by case characteristics that involve the potential settlement reward. Thus, this study has implications for how distributive politics shapes political responsiveness to the electorate.
Keywords: antitrust law, competition law, state attorneys general, multi-state litigation, regulation, distributive politics
State enforcement of antitrust law has long been an important part of antitrust law enforcement in the American federal system. States, through their attorneys general, have the power to enforce both state and federal antitrust laws and a wealth of research has been published describing this role of state AGs in antitrust federalism (Calkins 2003; First 2001; Lemos 2011). Some scholars have been highly critical of state antitrust enforcement, arguing that state AGs are too driven by electoral concerns rather than by considerations of economic efficiency, and that their standards diverge from federal standards, creating a messy, overlapping process (Flexner and Racanelli 1994; Gelhorn 1989; Greve 2005; Posner 2004; Zimmerman 1999). Other research defends the role of state AGs, claiming that they supply additional regulation not provided by federal enforcers and that they have better knowledge of local markets (Calkins 2003; First 2001; Hubbard and Yoon 2005).
Valuable as these studies are, little research has demonstrated what drives AG behavior in antitrust enforcement. As elected officials in 43 states, state AGs know they must be responsive to their state constituents, as the large majority of them face reelection and many later run for higher office (Mahtesian 1996; Provost 2010a). However, the level of responsiveness AGs display towards constituents will vary according to the characteristics of particular cases they pursue. Previous research on state antitrust enforcement has not systematically captured this dynamic of AG accountability towards the electorate (Feinberg and Reynolds 2010; Lemos 2011). In this paper, I argue that AG responsiveness to the electorate is conditional on case salience and salience in turn is represented by defendant characteristics in antitrust cases.
AGs will strive to be ideologically responsive to their constituents, partly by bringing home pork in the form of lawsuit settlements. In antitrust regulation, they will do this in two primary ways. First, they will target wealthier, larger companies, who have the ability to pay larger settlements. As defendants grow in wealth, differences in ideological responsiveness to the electorate ought to gradually disappear, as a majority of the AGs rush to claim their share of the settlement. This builds on previous work which demonstrates that in consumer protection cases, AGs only exhibit responsiveness to the electorate when defendants are large and wealthy (Provost 2010b). However, in this case, the high probability of a reward from an antitrust case, particularly against a large, wealthy defendant, means that AGs from conservative states are more likely to temporarily put aside conservative principles in order to claim a share of the reward. Second, they will focus on cases in which significant wrongdoing has occurred, and therefore where there is also potential for a larger payoff. For state AGs, these cases provide strong incentives to participate. Examining the types of antitrust infractions AGs are most likely to pursue has been done in previous research, but also without systematic explanation (Feinberg and Reynolds 2010).
To test these propositions, I examine all multi-state antitrust cases between 1989 and 2008. I begin by briefly describing the arrangements of American antitrust federalism, as well as describe precisely how multi-state lawsuits function. I then discuss the incentives and motivations of state AGs, which is followed by the presentation of testable hypotheses. Finally, I present an empirical model designed to evaluate the relationships between AG multi-state participation, responsiveness to the electorate and case characteristics.
Antitrust Federalism in Context
State antitrust enforcement has become a prominent part of antitrust federalism for multiple key reasons.1 First, in 1976, Congress enabled states to collect treble damages for antitrust violations through the Hart Scott Rodino Antitrust Improvements Act of 1976. The Act allowed state AGs to collect damages to be distributed back to the states, its consumers or injured businesses. This gave state AGs a strong incentive to enforce the law, as monetary rewards could serve as a form of regulatory pork-barreling, a dynamic I discuss in more detail in the next section. Additionally, many state AGs serving in the 1980s and 90s believed that federal enforcement of both consumer protection and antitrust laws weakened considerably during the 1980s (Clayton 1994; Lynch 2001; Ross 1990; Zimmerman 1998). In antitrust, this shift has been well documented, as the Federal Trade Commission and Department of Justice moved from the “Structure Conduct Paradigm” (SCPSchool) to the ChicagoSchool philosophy of antitrust. The SCPSchool dictated that big was bad and that all mergers of large companies ought to be viewed suspiciously, while the ChicagoSchool condoned mergers and large market players, as long as they did not diminish consumer welfare (Eisner and Meier 1990). Many AGs believed the shift was an excuse to pursue a regime of weak enforcement and thus, they banded together to pursue multi-state cases (Greenblatt 2003; Lynch 2001).2
Multi-state cases begin because one or more state AGs suspect that state or federal antitrust laws are being broken on a large enough scale to affect the public at large. State AGs have the authority to issue civil investigative demands (CIDs) “to obtain both documentary and testamentary evidence from anyone who may have information relevant to the investigation” (Ross 1990: 208). CIDs allow AGs to investigate and gather information before deciding whether a lawsuit should be filed or not. In most multi-state cases, one state or a small group of states does much of the early investigative work and then once a lawsuit is filed, other states will also file, provide assistance on the case and share the settlement money (Lynch 2001; Tierney 2002).3 Most defendants prefer to settle cases quickly and it is not uncommon for some businesses to ask that all or most states be included in the settlement to preempt the possibility of future litigation (Greenblatt 2003: 56). Final settlements usually include a cash settlement for the states or for state consumers, along with mandates that the defendant(s) will not repeat the forbidden activity, yet they rarely include an admission of guilt from the defendant(s).
Antitrust Enforcement and the Motivations of State AGs
To explain AG behavior in multi-state litigation, it is necessary to evaluate the institutional arrangements, incentives and motivations of state AGs. As chief state law enforcement officer, the office of state AG is a very powerful one. State AGs are charged with representing the state’s legal interests, as well as the governor, state legislators and other members of state government, but they are also responsible for representing the public interest, a broad claim that gives them much discretion in their policy pursuits (Davids 2005; Ross 1990). Two institutional factors ensure that state AGs are able to pursue their own policy goals with a minimum of interference from other state actors. First, they are elected in 43 states, which makes the large majority of them accountable to the electorate first.4 Second, in all 50 states, AGs have either common law authority or parens patriae authority to enforce the law in the public interest as they see fit.5 In the case of antitrust law, states have parens patriaeauthority under Hart Scott Rodino to sue companies in federal court to recover monetary damages. Thus, state AGs are executive, elected officials who are responsible to a large extent for judicial policy-making, who are accountable to the electorate and simultaneously charged with representing the interests of state government. This lengthy list of responsibilities ultimately helps to make state AG one of the most powerful offices in American state government.
Because AGs are elected in 43 states, electoral factors are a major motive for state AGs, as the office is frequently used as a springboard into governorships and U.S. Senate seats (Clayton 1994; Mahtesian 1996; Provost 2010a). Thus, state AGs must be mindful of the concerns of voters, businesses and interest groups when they pursue their policy goals. Many scholars have tried to systematically demonstrate what drives AG antitrust enforcement, but much of this research lacks a systematic accounting of responsiveness to AG constituents. Lemos (2011) provides an excellent discussion of how state AGs can influence the law more broadly, but accountability to the electorate is more incidental to the discussion. Feinberg and Reynolds (2010) tell us more about state economic factors and AG characteristics, and not as much about AG constituents andthe responsiveness relationship. Finally, other scholars have been critical of the role of state antitrust enforcement and their goal is not necessarily to provide a thorough explanation of what drives AG behavior (Greve 2005; Posner 2004; Zimmerman 1999). Here, I attempt to present a model of AG responsiveness to the electorate in multi-state antitrust enforcement.
The degree to which AGs will be ideologically responsive to their constituents in their policy making depends to a large extent on the salience of the policy to those constituents. A great deal of research has found that state politicians are ideologically responsive to the electorate when making policy (Brace et al. 2002; Erikson, Wright and McIver 1993; Gray et al. 2004; Jacoby and Schneider 2001). However, this relationship is conditional according to the level of salience placed on the issue by the electorate. If a particular issue escapes public attention, then policy makers may be able to follow their own policy preferences (to the extent that they diverge from voter preferences) or be quietly responsive to elites or organized interests. The conventional cases of regulatory capture in which regulators do the bidding of regulated firms occur, in part, because the issue in question is important only to the regulated interests, but not to consumers, voters or watchdog organized interests (Bernstein 1955; Peltzman 1976; Stigler 1971). However, for issues that are salient to voters, politicians exhibit higher levels of responsiveness to the electorate (Burstein 2003; Gormley 1986; Jones 1994; Wlezien 2004). That is to say, politicians from liberal areas will produce liberal policies and politicians from conservative areas will produce conservative policies.
Consumer protection has traditionally been classified as a salient issue (Gerber and Teske 2000; Gormley 1986; Ringquist, Worsham and Eisner 2003), as everybody in society is a consumer and can fall victim to market failures, such as poor information (fraudulent or deceptive advertising) or market power (price fixing, bid rigging or supply restrictions). This salience is apparent in previous studies which demonstrate political responsiveness to the electorate in issues of consumer protection, as liberal states are more likely to pass consumer protection statutes and spend money on consumer protection programs (Bernacchi 1976; Ford 1977; Sigelman and Smith 1980). Additionally, state AGs from liberal states are likely to participate more frequently in multi-state consumer protection cases than those from conservative states (Provost 2006).
Salience in consumer protection can vary, however, with defendant characteristics. Some defendants are small and will generate neither attention nor the probability of a high settlement reward. However, a case against a large, wealthy defendant increases the probability of a high reward, as well as case attention, thereby raising the overall level of salience. Indeed, Provost (2010b) has found that in consumer protection cases against small defendants, the relationship between AG behavior and citizen ideology does not hold up, as too few AGs join these suits. However, in salient cases, (those with Fortune 500 defendants), the relationship does bear out, as participation increases across the spectrum of AGs, but particularly so for AGs from liberal states.
We should expect a different dynamic from antitrust cases. Antitrust policy has traditionally been considered a less salient issue than consumer protection, due to its greater complexity and its focus on assessing the merits of mergers (Gerber and Teske 2000; Gormley 1986; Ringquist, Worsham and Eisner 2003). However, this characterization is based largely on federal antitrust enforcement. Multi-state antitrust cases can bring monetary rewards to state government, to the electorate and to injured businesses, thereby raising its level of issue salience considerably. Under federal law, state AGs can pursue violators of antitrust statutes and recoup treble damages, which can then be paid back to the states or to affected consumers. Thus, the potential promise of large payouts make antitrust cases among the most salient ones that state AGs pursue and thus, we ought to see responsiveness on the part of state AGs to their constituents. However, as defendants become large and wealthy, the political cost of not participating increases for AGs in conservative states, as the potential rewards of the case become too great to ignore. These AGs then become more likely to participate, and the responsive relationship actually breaks down as a majority of the AGs rush in to claim their share of the spoils. Thus, as case salience increases in consumer protection cases, the conditioning effect is one of strengthening the relationship between citizen ideology and AG behavior (Provost 2010b), but in antitrust cases, increases in salience have the effect of weakening the relationship, as a majority of AGs are lured in by the potential rewards of the case.
Finally, the motivation to bring home large rewards will also influence the type of cases in which state AGs participate. Price fixing and supply restriction cases are cases in which market power has clearly been abused and consumers have been made worse off as a result of firms artificially raising prices or decreasing supply. For state AGs, the opportunity is perceived not only as a chance to bring justice to those consumers, but simultaneously as a method to bring funds to the state. Merger cases do not necessarily share this trait, as potential wrongdoing is under consideration, rather than actual wrongdoing. Thus, the larger potential payoffs associated with price fixing and supply restriction cases ought to bring greater AG participation in those cases.
Hypotheses
The salient nature of antitrust cases should ensure that AGs are responsive to their electorates. Therefore, we should expect those AGs from liberal states to participate in cases more often, as voters in those states will be more likely to support lawsuits to curtail market power abuses. Consumers do not typically bring the complaints that generate antitrust lawsuits, as they do not have access to the information required to know if the law is being broken. Rather, most complaints are brought by rival businesses, which I address shortly. However, consumers and voters will still react to settlement outcomes, along ideological lines. Voters in conservative states are likely to look at intervention in the markets a little more suspiciously than voters from liberal states, whereas voters in liberal states are more likely to view the efforts of AGs more favorably.
Hypothesis 1: As the electorate of a state becomes more liberal, AGs ought to participate in multi-state antitrust cases more frequently.
However, this relationship is conditional on the types of cases in which AGs participate. When a case is against a large and wealthy defendant, an AG is likely to think two things. First, the company’s size is likely to lead to a higher level of attention for the case and therefore to consumers. Second, the company’s large net worth may lead to a very large settlement, which might directly benefit citizens of the states. AGs from liberal states are still just as likely, if not more likely, to participate in these cases, as an AG’s participation still comports with those voters’ policy preferences, as well as brings distributive benefits to the states. However, AGs from conservative states have more of a dilemma, as they must balance conservative principles against the benefits of a potentially large settlement. As the potential for a large settlement increases, AGs from conservative states are more likely to participate, as the benefits become too significant too ignore. Failing to join such a case is “like turning down federal stimulus money”, according to one former state AG. At this point, the responsiveness relationship begins to break down, as all AGs join in order to claim their share of a potential settlement.