Hope on the Horizon
It's an ugly moment, but if you look closely, monopolies are beginning to lose a few fights.
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“Despotism, be it financial or political, is vulnerable, unless it is believed to rest upon a moral sanction. The longing for freedom is ineradicable. It will express itself in protest against servitude and inaction unless the striving for freedom be made to seem immoral.” - Louis Brandeis, 1914
Today I’m writing about how the fight against monopolies is moving into a new stage. We’re actually starting to win some things here and there.
In the courts, the regulatory agencies, and Congress/states, the power of dominant firms is, ever so slightly, beginning to erode. It’s a weird time to say that, because politics is otherwise so dysfunctional. Retail sales are down, so is manufacturing output, inflation is at 7%, and a majority of Americans, pretty evenly across both parties, feel that democracy is in danger of collapsing. So that’s not good.
But beneath the surface, the relationship that the public with the most powerful institutions in American society - dominant corporations - is changing.
Here are eight different examples from the last week showing that monopolists are facing real headwinds.
(1) Big Tech Antitrust Trials Move Forward as Facebook Loses Motion to Dismiss: The antitrust trials against big tech are moving forward, and the government is doing well. There are two big trials, one by the Federal Trade Commission, and one by a group of state attorneys general. On Tuesday, the Federal Trade Commission won an important procedural step against Facebook. Judge Boasberg - who is not particularly friendly to antitrust enforcers - had dismissed the first agency complaint filed in 2020, but Lina Khan filed a new complaint with stronger claims. Facebook asked for another dismissal, and even more aggressively, for Khan to be recused. The judge ruled against Facebook on both counts, so the case will be going to trial. (I was on Marketplace talking about this development, which you can listen to here.)
On the second case against Facebook, with state attorneys general, the judge had ruled against them on obscure procedural grounds. In a different context, the states would have given up in a fight against one of the biggest companies in the world. This time, however, they appealed.
Meanwhile, in the Texas case against Google, a judge unsealed the price-fixing deal between Google and Facebook in which Google paid Facebook to withdraw from the third party online market, further revealing that Google CEO Sundar Pichai and Facebook CEO Mark Zuckerberg both personally signed off on the deal. Oh, and there are more details on exactly what Google was doing in its rigging of advertising auction markets, which is known in technical terms as ‘stealing.’
(2) Antitrust Law Hits Individual Executives: Martin Shkreli, the infamous pharma bro put in jail for securities fraud, was found personally liable for directing a scheme to inflate the cost of the life-saving drug Daraprim by excluding competitors from the market. A judge order him to pay $64 million, and also barred him from the pharmaceutical industry for life. More than the obnoxiousness of the villain, the precedent here matters. It’s rare for an individual to be found liable for monopolization, so this decision means that judges are getting more comfortable seeing antitrust violations as immoral behavior, instead of seeing the problem as well-meaning businessmen being a bit too zealous.
Antitrust expert Dina Srinivasan had an interesting comment.
This comment isn’t interesting because of the content, but because of the messenger. Srinivasan worked on the Texas complaint against Google. When she points out the precedent here for individual liability over monopolization, it should be a worrisome sign to the executives at Google and Facebook.
(3) New York Moves Forward on Stronger Antitrust, App Stores: Last week, the groundbreaking antitrust bill in New York authored by state Senator Michael Gianaris moved through committee, and it will likely pass the state Senate shortly. Then it goes to the Assembly, and if it moves through that body, it goes to the Governor, Kathy Hochul.
Unsurprisingly, Wall Street and the power players from the legal world, as well as executives from powerful corporations, came out against the bill. A notable opponent is Timothy G. McEvoy, who is the Deputy General Counsel, Delaware North Companies. That’s not a very important name, except McEvoy works for William Hochul, the husband of… Governor Hochul. So that’s interesting.
Meanwhile, New York legislators just introduced a new bill to regulate app stores.
(4) Conservatives Begin to Push Stronger Antitrust Law: One of my predictions for 2022 was that there would be increasing tension within the Republican Party over antitrust. The GOP has traditionally been very supportive of dominant firms, but that’s changing. Republican voters simply do not support monopolies anymore, with just 20% of GOP voters having confidence in big business. Republican politicians are a lagging indicator, but now they are starting to turn, as the most conservative faction in the U.S. House of Representatives, the House Freedom Caucus, just endorsed stronger antitrust law.
The specific bill the House Freedom Caucus endorsed is one of those super process-y technical issues that don’t seem very important, but does matter in litigation. Right now, when a state attorney general files an antitrust suit, the firm they are suing can often get the case moved out of state to a different judge. Google, for instance, likes to have its cases heard in California in front of friendlier judges. This bill would stop this nonsense, and let state attorneys general in antitrust cases manage the venues in which they file cases.
On a political level, this is the first time the Freedom Caucus has endorsed stronger antitrust law, essentially getting crosswise with fellow conservative Jim Jordan and potential Republican Speaker Kevin McCarthy. And now there’s a list of 56 House Republicans who are publicly out on antitrust.
(5) California to Break Insulin Cartel: California passed a law in 2020 to enable the state to actually produce its own pharmaceuticals, which it will likely do by hiring a contract manufacturer. The first drug on deck? Insulin. Here’s the Governor of California last week:
Antitrust isn’t the only tool in the toolbox.
(6) Mega-Mergers Slow: We’re currently in an insane merger wave, but one type of deal is missing. The mega-merger. The reason is that deal-makers are afraid of more aggressive antitrust.
“Some of the new approaches on the regulatory front, antitrust in particular, will likely wind up being adjudicated by the courts one way or another,” said Peter Orszag, the C.E.O. of Lazard’s financial advisory business. He added that the flurry of legal challenges was a primary reason that many of the deals announced last year involved $10 billion or less. Relatively small deals are considered less likely to draw opposition from regulators.
It’s not just mega-mergers. Here’s one example of a deal that didn’t go through, but ordinarily would have. It was between email security provider Proofpoint and Mimecast. Proofpoint is owned by Thoma Bravo, the private equity firm responsible for the hack of nuclear weapons facilities through its mismanagement of SolarWinds. Proofpoint sought to buy Mimecast, but Mimecast refused the bid, citing “antitrust risks.”
Meanwhile, the FTC is using its prior approval tools - recently dusted off by FTC Chair Lina Khan - to block future mergers in Utah by dialysis giant DaVita. The merger wave is almost unstoppable because of cheap credit, but there are real attempts to stop it nonetheless.
(7) Biden Smacks Pharmacy Benefit Manager Monopolists: Another prediction I made for 2022 was that there would be serious government actions against pharmacy benefit managers. And it looks like that might be happening.
This week, the Centers for Medicare & Medicaid Services put forward a proposed rule that made independent pharmacists cheer, by getting rid of the most obnoxious parts of what are called direct and indirect reimbursement (DIR) fees. “After many years and multiple administrations,” said National Community Pharmacists Association CEO Douglas Hoey, “This is as close as we’ve ever come to reforming pharmacy DIR fees.”
Pharmacies operate in a weird industry, because most of their money doesn’t come from patients, but from reimbursements from those patients’ health insurance firms, who contract with what are called pharmacy benefit managers (PBM) to handle payments. PBMs keep a list of drugs and their prices, and manage the relationship between health insurers, patients, and pharmacies. To put it differently, a PBM is as best I can tell a firm that holds a spreadsheet of drugs and drug prices, and it gets to extract fees for no reason. (Distributing and selling pharmaceutical is by far the most pointlessly complex industry I’ve ever encountered.)
Like most parts of the health care system, PBMs are consolidated, with three of them controlling 80% of the prescription drug market. It’s also a massive industry; CVS is considered a drug store chain, but in 2018 it made two thirds of its revenue from its PBM arm. (By way of context, American PBMs have more in annual revenue than France spends on its entire health care system.)
As one would expect, these firms use legal loopholes to wield power, especially when it comes to Medicare, which is paid for by the government. Medicare allows PBMs to not only have extremely one-sided contracts with independent pharmacies, but also to claw back money months after they have dispensed a medication through what are called DIR fees. For random boring reasons, inflating the cost at the point of sale and recouping money later on tends to raise prices for patients, who have to pay more than they should. Meanwhile, pharmacists are hit with these unpredictable fees at seemingly random times. From 2010-2020, the amount of DIR fees assessed increased by 107,000%, to $9.5 billion.
The Biden administration’s rule would eliminate most of these clawbacks. It wouldn’t fix everything, as the industry is incredibly complex and messed up, but if it is finalized into a rule, it would be a step forward.
(8) The Progress of Private Antitrust Cases: As antitrust has gotten hotter, more firms and class action suits are coming, with judges, lawyers, and business leaders having a deeper and richer understanding of how and when to use this part of the law. Last week I wrote about the price-fixing suit against top universities, but there’s a lot more happening. John Deere was just hit with a suit over its refusal to allow farmers to repair their own equipment, there’s now a class action suit against LinkedIn, and a rival suing wrestling monopolist WWE. Meanwhile, the case against cheerleading monopolist Varsity Brands is getting nasty.
I don’t expect many of these cases to succeed, but if they keep getting filed, there will eventually be breakthroughs. In fact, there already have been. Last year, in a private case, a court broke up a door-making conglomerate. Break-ups are rare, and to have one happen in a private suit is… remarkable.
Conclusion: It’s a pretty ugly moment in politics in general, and we’re going to take our lumps on the anti-monopoly front. But there’s enough happening to justify some genuine hope. Despotic monopoly power is, as Brandeis noted, “vulnerable, unless it is believed to rest upon a moral sanction.” That moral sanction, so strong and powerful for forty years, is eroding quickly.
And there we go.
Thanks for reading.
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