-
The "Essential Facility" Doctrine:Legal Limits and Antitrust
Considerations
Gregory T Gundlach and Paul N. Bloom
The essential facility doctrine provides a basis for imposing
antitrust liability for aftrm'srefusal to provide a rival acce,ss
to something "essential" for competition in a particularmarket. For
marketers, development of this legal doctrine .seems curiously at
odds withaccepted notions of competition and strategic advantage.
Its increasing application suggestsits importance. The authors
trace the origins of the doctrine from law relating to refusals
todeal and analyze its current application in the Federal
judiciary. They then discussimplications for public policy and
marketing.
A charge increasingly heard from competitors relatesto one
firm's refusal to provide access to an "essen-tial" asset or gtxxl
required for another firm to com-pete in a particular market. Most
often these charges are lev-eled against a competitor thought to be
involved in exclu-sionary or predatory conduct against rivals in
ways thatlessen competition and injure consumers. The
essentialasset or facility (i.e., tangihie physical object)
provides thebasis for the alleged conduct. Antiti^st law embraces
thisconcept under the rubric of the Essential Facility Doctrine.As
stated by Sullivan [1977, p. 131]:
If a group of competitors, acting in concert [or individually],
op-erate a common facility and if due to natural advantage,
cus-tom, or restriction.s of scale, it is not feasible for excluded
com-petitors to duplicate the facility, the competitor[s] who
operatethe facility must give access to the excluded competitors on
rea-sonable, non-discriminatory terms.
The problem the essential facility doctrine has sought toaddress
encompasses those circumstances in which a com-petitor is prevented
from serving desired customers becausethey patronize specific
facilities or assets that are controlledor owned by another
competitor. The competitor's monop-oly over facilities that are
essential for serving denied cus-tomers has motivated actions by
rivals and antitrust enforce-ment agencies to provide broader
access to those facilities.Many successful challenges have been
mounted, includingones that permitted competitors' access to
airline computer-ized reservation systems, local telephone lines,
football sta-diums, and multi-mountain ski-lift tickets.
Compared with notions of competition and marketing'sconcept of
strategic advantage,' the essential facility doc-trine seems
curiously in opposition to accepted notions of ri-valrous conduct.
Its application raises implications regard-
GRKGORYT. GUNDLACH is an Assistant Professor, Department
ofMarketing, College of Business Administration, University ofNotre
Dame. PAUL N. BLOOM is a Professor, Kenan-Flagler Busi-ness School,
University of North Carolina. The authors extendtheir appreciation
to their respective departmental colleagues,three anonymous
JPP&M reviewers, JAKKI J. MOHR, and the editorfor their helpful
comments.
ing a firm's incentives to develop and maintain facilities
pos-sibly considered essential and the potential of
competitors"free riding" on their rivals' advancements.
Notwithstand-ing these issues, application of the essential
facility doctrineas a basis of antitrust liability has increased
steadily andwith much^reater frequency in recent years. A survey
ofcases ideimfying the doctrine suggests its increasing use
inantitrusfcases by both competitors and antitrust enforce-ment
agencies (see Figure I).
Most recently, Microsoft, the world's leading
softwaremanufacturer, has been under investigation by the
FederalTrade Commission (FTC) for alleged exclusionary
businesspractices involving its products. Referring to Microsoft's
re-luctance to share knowledge of its key operating systemsfor
IBM-compatible computers with those seeking to pro-vide compatible
software products, Philippe Kahn, Chair-man of Borland
International Inc., laments, "We know thatMicrosoft takes full
advantage of the fact that it owns Win-dows" [Rebeilo, Lewyn, and
Schwartz 1992, p. 33].Though the FTC's probe is still pending,
Borland and othercompetitors claim Microsoft has an unfair
advantage in themarketplace because it sells both the operating
system andsoftware applications. These competitors claim
Microsoft'soperating system is an "essential facility" for
competitionwithin the software industry and, therefore, they should
beallowed access to knowledge surrounding the system.
In the future, greater use of the essential facility doctrinecan
be expected as firms increasingly adopt joint ventureforms of
combination to obtain efficiencies and achieve com-petitive
advantages. Joint ventures provide a unique basisfor the
development of essential facilities [Piraino 1991].Moreover, the
trend toward outsourcing specialized pro-cesses and technologies is
likely to promote conflicts overaccess to critical knowledge and
resources. Marketing's em-phasis on relationship marketing and
long-term associationsfor obtaining advantages can also be expected
to increaseuse of the doctrine because these relationships possess
thepotential for developing facilities considered critical by
ri-vals to compete. Finally, the proliferation of
informationtechnologies and other technological advancements
consid-ered essential for competing in today's markets suggests
156 Journal of Public Policy & MarketingVoi 12 (2)
Fall 1993. 156-169
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Journal of Public Policy & Marketing 157
Figure 1. Essential Facility Doctrine Analysis of Federal Court
Cases
15
0 -—I—^ i—^ 1—^ i i i i i 1 n 1 "1 " î ~—i '^n ^ r
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
1990 1991 1992Year
^ B Cases per year
U.S. Supreme Court, Court of Appealsand District Court (total =
95)
the application of this doctrine [see Bloom, Milne, andAdler
1994]. The technologies themselves may serve as thebasis of an
essential facility challenge.
Our objective is to examine antitrust policy toward the
es-sential facility doctrine. We focus on the origins and
devel-opment of the doctrine as well as its current judicial
appli-cation. We then analyze it and discuss its implications
formarketing and public policy.
Essential Facility DoctrineThe essential facility doctrine
provides a basis for imposingantitrust liability for a finn's
refusal to provide another firmaccess to something essential for
competition in a particularmarket. An often cited statement of the
doctrine is Neale's[1970, p. 67] synthesis of a variety of cases^
involving sim-ilar fact patterns from which the doctrine
extends:
The Sherman Act requires that where facilities cannot
practica-bly be duplicated by would-be competitors, those in
possessionof them must allow them to be shared on fair terms. It is
illegalrestraint of trade to foreclose the scarce facility.
The doctrine, which has evolved in various forms, hasbeen
applied in industries ranging from railroads to fruitand vegetable
wholesaling to telecommunications to profes-sional sports [Ratner
1988]. At its root is the idea that afirm or group of firms violate
the antitrust laws when theyfail to make access to a facility
important for competitionavailable to their competitors on fair and
reasonable termsthat do not disadvantage them [Gerber 1988;
Gorinson1990]. Using the doctrine, competitors have gained accessto
facilities such as local telephone lines, newspaper wire ser-vices,
and railroad switching stations.
Theoretical OriginThe origins of the essential facility doctrine
may be tracedto theories underlying refusals to deal within
antitrust law.Under monopolization theory, denying access to
somescarce resource necessary for competition provides evi-dence of
an intent to monopolize. In United States v. Grin-nell Corporation
[1966, p. 570-71], the essential elementsfor monopolization were
held to include "(1) the posses-sion of monopoly power in the
relevant market and (2) the
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158 The "Essential Facility" Doctrine
willful acquisition or maintenance of that power as
distin-guished from growth or development as a consequence of
asuperior product, business acumen or historic
accident."Foreclosing a competitor from access to an essential
facilitymay provide evidence suggestive of an intent to
monopo-lize. The theory of monopolization has been employed
fre-quently as the basis for an essential facility challenge
underboth Sections 1 and 2 of the Sheniian Act.̂
Public trust theory also underlies the doctrine and is di-rected
at preventing a party from exploiting, in a mannerthat reduces
consumer welfare, some transfer of govern-ment resources into
private hands. More particular than mo-nopolization, public trust
theory applies in these limited cir-cumstances to protect consumer
welfare [Epstein 1988].For example, in American Federation of
Tobacco GrowersV. Neal \ 19501, a trade association, given the
power to regu-late warehouse sales, denied another finii access to
local auc-tions. Use of the essential facility doctrine to prevent
exclu-sion in these circumstances is defended as a means of
pre-cluding parties from exploiting a transfer of government
re-sources into private hands [Hylton 1991].
Leverage theory provides an additional origin for the doc-trine
and derives from a firm's use of its control over ascarce resource
in one market to leverage controi in anothermarket. For example, a
firm may use its control over theonly local television station to
channel advertising businessin Ihe direction of one advertising
agency. When control ofanother market is achieved through the
concerted actions ofmore than one firm, this theory can provide the
foundationsfor an essential facility challenge under Section 1 of
theSherman Act. Anticompetitive leveraging conduct involv-ing
single-firm conduct {Section 2) has also been held to beillegal
\United States v. Griffith 1948]. Together, these the-ories provide
the theoretical foundations from which the es-sential facility has
been derived.
Concerted Versus Unilateral Activity AmongFirmsThe essential
facility doctrine has been applied to both sin-gle-firm conduct and
activities involving concerted actionamong several firms in an
industry. Presumptions regardingthe anticompetitive intent of
denying access to an essentialfacility in each of these
circumstances have developedwithin the law.
Concerted Denial of an Essential FacilityFor concerted conduct,
the element of joint activity pro-vides an easier basis from which
a court may infer anticom-petitive intent under Section 1 of the
Sherman Act. Joint ac-tivity among firms involving an essential
facility closely re-sembles a group boycott—a per se violation of
the antitnistlaws [Fashion Originators' Guild of America v. FTC
1941;Klor's Inc. v. Broadway-Hale Stores, Inc, 1959]. Cases
in-volving joint conduct suggest a presumption that refusals todeal
pursuant to an agreement are anticompetitive [Associ-ated Press V.
United States 1945; Gameco, Inc. v. Provi-dence Fruit A. Produce
Building, inc. 1952; U.S. v. Termi-nal Railroad 1912]. Joint
conduct among firms involvingan essential facility may also provide
evidence of the essen-tiality of the facility in question. Firms
joining together sug-
gests the importance of the facility and the inability of
theindividual firnis to procure the facility unilaterally.
Unilateral Denial of an Essential FacilityCases involving
single-firm conduct present a more challeng-ing scenario. According
to Areeda [1990, p. 849]:
Concerted activity is exceptional, whereas unilateral action
Isomnipresent. Innumerable firms engage in unilateral actionevery
day. We have to be very waiy about examinint; the deci-sion of each
of those firm-s in our economy, particularly whenanything one has
that another wants may be called an 'essentialfacility.'
The essential facility concept applied to single-firm
conductrests wilhin Section 2 of the Shennan Act, which
requires,beyond market power, conduct necessary to constitute
mo-nopolization. At a minimum, "willful acquisition or main-tenance
as contrasted with monopoly achieved as a result ofhistorical
accident, business acumen, or the like" is re-quired [United States
v. Grinnell Corporation 1966, pp.570-71]. An often employed
characterization is "exclusion-ary [or predatory] conduct" or
"monopoly power plus ex-clusionary conduct" [Byars v. Bluff City
News Co. 1979].A firm's exclusionary or predatory behavior provides
thenecessary evidence of "intent" for a Section 2 violation.
Cases associated with application of the doctrine to
sin-gle-firm conduct distinguish circumstances involving
verti-cally integrated firms and nonintegrated firms. Courts
aresuspicious of refusals to deal by single-owner firms thatcompete
at lower levels within a channel, because they fearthat monopolists
who control one market may employ theirpower to gain an advantage
in a second market.
In describing exclusionary conduct and the law, theCourt in
United States v. Griffith [1948, p. 107], stated,"the use of
monopoly power, however lawfully acquired,to foreclose competition,
to gain a competitive advantage,or to destroy a competitor, is
unlawful." A similar conclu-sion was reached in Lorain Journal Co.
v. United Stales[1951], in which tbe Court held that a firm with an
estab-lished monopoly position that leverages its power to ex-clude
competition by refusing to deal with tbose who dealwith rivals
violates the Sherman Act [p. 154]. Further sup-port for imposing a
duty to deal on monopolists who com-pete with competitors on other
levels within the market chan-nel is provided indirectly in Otter
Tail Power Co. v. UnitedSlates [19731 (discussed subsequently).
In contrast to integrated fimis competing at various mar-ket
channel levels, nonintegrated firms appear to enjoy a pre-sumption
that their refusals to deal are valid until proven tobe predatory
or monopolistic in intent [Fulton v. Hecht1978]. For example, in
Official Airline Guides, Inc. v. FTC[1980], Airline Guides
published a consolidated listing ofairline flight schedules but
refused to include a small air-line. Concluding that Airline Guide
had no reason (or in-tent) to act anticompelitively toward the
airline, the Court re-jected imposition of the doctrine's duty to
deal. Predatoryconduct by a nonintegrated monopolist to exclude a
rivalthrough use of an essential facility, however, appears to
pro-vide sufficient intent or "purpose" for an antitrust
violation[Aspen Skiing Co. v. Aspen Highland Skiing
Corporation1985].
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Journal of Public Policy & Marketing 159
Economic AnalysisNotwithstanding the preceding arguments, some
commenta-tors have suggested that judicial presumptions that a
refusalto deal by firms jointly holding an essential facility or
thepresumption that a single vertically integrated finn in
pos-session of an essential facility is anticompetitive may not
beconsistent with economic theory [see generally Boudin1986; Gerber
1988; Gorinson 1990; Hylton 1991; Owen1990; Ratner 1988; Reiffen
and Kleit 1990; Troy 1983].
Concerted ConductIn the case of jointly held essential
facilities, some econo-mists suggest that whether a facility is
controlled by onefirm or many, the competitive effect and economic
incen-tives remain the same. They argue differential treatment
ofsingly versus multiply owned essential facilities must reston the
greater likelihood that refusals to deal by jointlyowned facilities
are collusive or anticompetitive. Examin-ing the economic logic
underlying cartel theory, they findthis rationale to be suspect.
These authors cite the many in-stances in which joint venture
activity among firms pro-duces efficiencies otherwise unobtainable
by the firms indi-vidually. To ignore these efficiencies through
presumptionof some anticompetitive intent disregards the welfare
produc-ing outcomes of joint venture conduct. Moreover, a
presump-tion of ill intent for joint possession of an essential
facilitymay thwart productive and efficient combinations
amongfirms. Importantly, these authors argue only against a
pre-sumption of anticompetitiveness for jointly held essential
fa-cilities. Their arguments recognize that various circum-stances
may exist where joint conduct by firms involvingan essential
facility may involve anticompetitive intent.
Single Integrated Firm ConductFor refusals to deal by vertically
integrated firms, these com-mentators argue the presumption that
these organizationsseek to decrease competition in downstream
markets (i.e.,leverage) contradicts the widely held view that
vertical ar-rangements generally cannot augment monopoly power.They
suggest that because monopolists do not need to re-fuse to deal to
extract monopoly profits (i.e., they can sim-ply increase the price
they charge), refusals are generally ef-ficient and not
anticompetitive. Citing economic evidencethat vertical
restrictions, including refusals to deal, permitfirms to reduce
transaction and overhead costs and prevent"free riding" among
downstream firnis, these authors coun-sel that a presumption toward
integrated monopolists in pos-session of an essential facility is
without foundation. Theyargue that such a view sanctions
anticompetitive behaviorby nonintegrated monopolists, deters
certain efficient behav-ior by competitor monopolists, and reroutes
investmentfrom productive essential facilities into other
suboptimalforms.
These commentators acknowledge, however, that undersome
circumstances, refusals to deal by vertically inte-grated
monopolists may indeed be anticompetitive. Specifi-cally, when a
monopolist is prohibited from increasing itsprice (such as within a
regulated industry), the incentive fora firm in possession of an
essential facility to anticompeti-tively refuse to deal may be
present. In short, refusing to
deal may provide a basis for the monopolist to evade
priceregulation. Interestingly, essential facility cases tend to
pro-liferate in regulated or semiregulated industries [see
MCICommunications Corporation v. American Telephone andTelegraph
Co, 1983; Otter Tail Power Co. v. United States1973; United States
v. American Telephone & TelegraphCo. 1981].
Another circumstance in which a vertically integrated
mo-nopolist's refusal to deal may be anticompetitive involvesthose
circumstances, because of the nature of the essential fa-cility, in
which the monopolist is unable to charge a discrim-inating price
(i.e., the nonregulated price case). This wouldinclude, for
example, a monopolist in possession of abridge or other asset for
which only a flat fee may becharged. Flat fee pricing, in response
to the inability to mon-itor usage, is common in many business
settings. Pricing ofthis nature can occur when a firm finds it too
difficult orcostly to monitor disproportionate usage (e.g. toll
roads,bridge tolls, etc.). A monopolist employing fiat fee
pricingmay not increase price relative to a user's output. Unable
toincrease price to obtain monopoly profits, an anticompeti-tive
vertically integrated monopolist in possession of an es-sential
facility may resort to refusing to deal in order to elim-inate
competition in the downstream market and thus createthe desired
monopoly price.
Trends in Application of the DoctrineThough economists suggest
that application of the doctrinemay not be consistent with economic
theory under somecircumstances, its increasing use is evident
through reviewof the case law. Figure 1 provides a summary analysis
ofthe frequency with which the doctrine and its associatedcases
have been referenced in the Federal judiciary since1977. This
analysis was obtained through archival examina-tion of written
opinions of the Federal judiciary containingreference to the
doctrine. A computerized data base (WES-TLAW) search of cases
before the U.S. Supreme Court,U.S. Court of Appeals, and U.S.
District Courts was con-ducted and then content analyzed to ensure
their proper ref-erence context.'* Two cases were deleted because
of im-proper reference context (i.e., the words "essential
facility"were not employed in the context of an antitrust
violation),leaving a total of 95 cases. As can be seen in Table 1,
appli-cation of the doctrine has increased steadily since its
initialarticulation in Hecht v. Pro Football, Inc. [1977].
Judicial OriginsSeveral judicial principles have contributed to
developmentof the essential facility doctrine. These principles
address re-fusals to deal among competitors and other rivals. Each
pro-vides a basis from which an essential facility challenge maybe
formulated and includes (1) concerted refusals to deal in-volving
bottlenecks, group boycotts, and resale price main-tenance
agreements and (2) unilateral refusals to deal consist-ing of
attempts at monopolization, unilateral foreclosure ofscarce
resources, arbitrary refusals to deal, price squeezes,and vertical
integration [Werden 1987]. Figure 2 summa-rizes these
principles.
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160 The ^'Essential Facility" Doctrine
Table 1. Elements Underlying Application of the Essential
Facility Doctrine
Elements of InquiryIs the firm in possession of the alleged
essential facility a"monopolist?"
What is the nature of the "facility?"
Is the facility "essential" for competition in the relevant
market?
Ektes the firm in possession of the facility also
maintain"control" of the facility?
Is the complaining firm a "competitor?"
Has the complaining firm been "denied access?"
Is access "essential" for the complaining firm to compete in
therelevant market?
Dispositive PointsDoes the finii possess the power to raise
price? Does the firmpossess the power to exclude competitors?
What is the nature of the "facility?" Is the "facility"
a"structure?" Is the "facility a "tangible physical object?"
Is duplication of the facility "economically infeasible?"
Woulddenial of access to the facility infiict a "severe handicap"
on thewould-be competitor? Can the facility be
"practicablyduplicated?" Would denial of access to the facility
threaten the"economic existence" of the would-be competitor?
What is the nature of the refu.sing firm's control over Ihe
facility?Is the facility owned by the firm? Does the firm have
control vis-&-vis contractual rights? Does the firm have
control by virtue ofltspower? What is the duration of the firm's
control?
What is the nature of the relationship between the firms? Does
thefirm that has been denied access compete at the same level as
therefusing firm? Is the firm that has been denied access of the '
'classof persons who [arej under a commercial compulsion to use
theproduct?"
What is the nature of the access denial? Was the firm
deniedaccess absolutely? Were less overt methods of access
denialemployed (e.g., hard bargaining, price, etc.)? Was the firm
deniedaccess unfairly and unreasonably? Was the firm denied access
ina discriminate fashion?
Would provision of the "essential facility" be impractical?Would
allowing access to the "essential facility" inhibit thefirm's
ability to serve its customers?"
Concerted Refusals to Deal
BottlenecksThe essential facility doctrine is most often
associated withthe Supreme Court's "bottleneck" decisions in
UnitedStates V. Terminal Railroad [1912], Associated Press v.United
States [1945] and Silver v. New York Stock Ex-change [1963].
"Bottleneck" entails the classic "essentialfacility" in which "one
group alone has sufficient com-mand over some essential commodity
or facility iti its indus-try" [Neale 1970, pp. 68-69].
Terminal Railroad involved a consortium of railroad com-panies
that refused entry of a competitor to the sole St.Louis switching
station. In condemning the association'sconduct, the Court stated,
"the inherent conditions are suchas lo prohibit any other
reasonable means of entering thecity, the combination of every such
facility under the exclu-sive ownership and control of less than
all of the companiesunder compulsion to use them violates" the
Sherman Act[p. 409]. The Court further noted that access to an
essentialfacility must be afforded "upon such just and
reasonableterms and regulations as will, in respect of use,
character,and cost of service, place every such company upon
asnearly an equal plane as may be" [p. 411].
Associated Press v. United States [1945] involved an
or-ganization of 1200 newspapers that prohibited its membersfrom
selling news to nonmembers and excluded competi-tors from joining
their association. Support for the essential
facility doctrine is provided through Justice
Frankfurter'sconcurring opinion which compared the Associated
Pressto a public utility—"a business infused with the public
in-terest that was required lo serve all those desiring access."The
Court also noted that the Associated Press bylawsserved "seriously
to limit the opportunity of any new paperto enter," and thai its
services "give many newspapers acompetitive advantage over their
rivals" [pp. 13, 17].Though not directly characterizing the
doctrine, the Court'srationale provides a substantive foundation
for itsdevelopment.
Finally, in Silver v. New York Stock Exchange [1963],the Court
condemned the Exchange's refusal to provide di-rect wire
connections to two brokers who requested access.The court stated,
"[a] valuable service germane to peti-tioner's business and
important to their effective competi-tion with others was withheld
from them by collective ac-tion" [p. 349, n. 5]. The Court appeared
to be persuaded bythe presence of an important (i.e., essential)
facility with-held from competitive rivals. Together, these cases
providethe foundations on which a classic essential facility
chal-lenge may be brought.
Group BoycottsAgreements among competing sellers (buyers) to
refuse todeal with particular buyers (sellers), are known as
"groupboycotts." Several Supreme Court decisions, beginningwith
Eastern States Retail Lumber Dealers' Association v.United States
[1914], suggest that group boycotts are a vio-
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Journal of Public Policy & Marketing 161
Figure 2. Judicial Origins of Essential Facility Doctrine
Rcfbisals to Deal
Concerted Activii
Bottlenecks—Refusals to deal involving circumstancesin which
firm.
Group Boyco!l.s—Refusals to deal involving agreementsamong
competing sellers to refuse to deal withparticular buyers, or
agreements among buyers to reftiseUi (ILMI wjih ccrt;iin
sellers.
Resale Price Maintenance Agreements—Refusah todeal by a channel
member in concert with another firmextending from a channel
partner's noncompliance withresale price directives.
Unilateral Activity
Attempts at Monopolization—Refusals to deal by asingle firm
motivated by exclusionary oranticompetitive purpose or effect.
masgawBii iiillTliilMllilllll'llllllftilBlffllWffinTIW
MH^BHNIHHHHHRHHHMHIUnilateral Foreclosure of a Scarce
Resource—Refusalsto deal by a single fimi involving essential
facilities thatcannot practicably be duplicated by
would-becompetitors.
Arbitrary Refusals to Deal—Refusals to deal by asingle firm
involving a noncompetilor.
Price Squeezes—Refusals to deal by a single firmthrough
intentionally raising price to a level thatprohibits competitors or
other rivals from reasonableaccess to supplies or needed
good.s.
Vertical Integration—Refu.sals to deal stemming from asingle
firm's attempt at integrating into the distributionof its own
products ia a downstream market.
lation of the Sherman Act (Section 1) [see also
FashionOriginators Guild of American, Inc. v. FTC 1941;
NorthernPacific Railroad V. United States 1958; Times-Picayune
Pub-lishing Co. v. United States 1953; United Stales v. Colum-bia
Steel Co. 1948]. In 1959, group boycotts were formallyheld to be
illegal per se in Klor's Inc. v, Broadway-HaleStores, Inc. [1959].
This case involved an agreement be-Iweeti one retailer and several
manufacturet^ that preventedthe manufacturers from dealing with one
of the retailer'scompetitors.
Recently, the Supreme Court has recanted its per se
stand[Wholesale Stationers, Inc. v. Pacific Stationary and
Print-ing Co. 1985]. The case involved a purchasing cooperativethat
excluded a member for violating the cooperative's by-laws. The
Court emphasized that "not every cooperative ac-tivity involving a
restraint or exclusion will share ... the like-lihood of
predominantly anticompetitive consequences" [p.294]. In
distinguishing Wholesale Stationers from previousper se cases, the
court held that [pp. 296-7]:
Unless the cooperative possesses market power or exclusive
ac-cess to an element essential to effective competition, the
conclu-sion that expulsion is virtually always likely lo have an
anticom-petitive effect is not warranted.... Absent such a showing
with re-
spect to a cooperative buying arrangement, courts should applya
nile-of-reason analysis.
The ruling in Wholesale Stationers, in conjunction withlower
court decisions,' indicates that a rule-of-reason anal-ysis will be
employed for refusals to deal with competitorsinvolving concerted
actions. For essential facility chal-lenges, these cases establish
that concerted refusals to dealinvolving market power or exclusive
access to an element es-sential to effective competition are
illegal per se. However,in the absence of market power, or where
the essentiality ofa "facility" is not established, other factors
will be consid-ered in assessing the overall nature of the boycott
conduct.
Resale Price Maintenance AgreementsRefusals to deal often extend
from attempts at implement-ing or enforcing vertical restraints in
market channel relation-ships. In particular, noncompliance with
resale price direc-tives by an upstream channel member to a
downstream part-ner may lead to the member's refusal to deal. Cases
involv-ing resale price maintenance tend to hinge on whether
con-certed activity is involved and therefore raise similar
issuesas the essential facility doctrine.
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162 The "Essential Facility*' Doctrine
Unilateral decisions to refuse to deal are consideredlegal. In
United States v. Colgate & Co. [1919], Colgate'spractice of
announcing a standard price policy and refusingto trade with anyone
who did not follow the policy wasfound legal. In this case, the
Court held that [p. 306]:
in the absence of any purpose to create or maintain a
monopoly,the [Sherman] Act does not restrict the long recognized
right oftrader or manufacturer engaged in an entirely private
business,freely to exercise his own independent discretion as to
partieswith whom he will deal.
In contrast, if the refusal to deal extends from an agree-ment
that suggests "a conscious commitment to a commonscheme designed to
achieve an unlawful objective" [p.364], a violation may be found.
Consequently, concerted re-fusals to deal involving resale price
maintenance agree-ments may fail witbin tbe rubric of the essential
facility doc-trine (if access to a facility is denied).
Unilateral Refusals to DealIn contrast to joint conduct,
unilateral refusals to deal in-volve an individual firm's refusal
to engage in exchangewith a competitor or other rival. The
principal origins of tbeessential facility doctrine underlying
unilateral refusals todeal extend from cases involving (1) a single
firm's foreclo-sure of a scarce resource (i.e.. true essential
facilities), (2)an individual firm's attempt at monopolization, (3)
arbi-trary refusals to deal involving a single firm and a
noncom-petitor, (4) price squeezes tbat result in foreclosure of
ascarce resource, and (5) downstream integration through re-fusals
to deal. Eacb may provide a basis for an antitrust cbal-lenge under
tbe doctrine.
Attempts at MonopolizationUnilateral refusals to deal may
violate tbe Sberman Act (Sec-tion 2) on ihe basis tbat a firm's
conduct was motivated byan intent to monopolize a particular
market. In combinationwitb some "essential*' facility, an intent to
monopolize amarket can provide the necessary elements for
applicationof tbe essential facility doctrine.
In Eastman Kodak Co. v. Southern Photo Materials Co.[1927],
acquisitions by Kodak were alleged to be an at-tempt at
monopolization witbin tbe pbotographic suppliesmarket. Unable to
complete tbe acquisition of SouthernPhoto, Kodak refused to sell
supplies to Southern at otberprices than retail. Tbe Court held
that Kodak's refusal todeal was part of a plan "in furtherance of a
purpose to mo-nopolize" [p. 375] and in violation of the Sberman
Act.Tbougb not directly addressing elements underlying an
es-sential facility, tbe case provides a basis for finding
illegalunilateral refusals to deal in furtberance of a
monopoly.
In a subsequent case. Lorain Journal Co. v. UnitedStates [1951],
a publisher refused to accept advertisingfrom any local business
that advertised through a new radiostation. In analyzing tbe case,
tbe Court appeared to iden-tify the Journal as an essential
facility, concluding tbat it"was an indispensable media of
advertising for many Lo-rain concerns" [p. 152]. Tbe Court then
beld that "a singlenewspaper, already enjoying a substantial
monopoly in itsarea, violates the 'attempt to monopolize' clause
... when ituses its monopoly to destroy threatened competition"
[p.
154]. The importance of the case derives from identifica-tion of
the Journal as an essential facility (i.e., "indispensa-ble media
of advertising") within the context of an attemptat
monopolization.
Furtber elaboration of "intent to monopolize" as a basisfor the
essential facility doctrine is provided in UnitedSlates V. Griffith
[1948] and Otter Tail Power Co. v. UnitedStates [1973]. In
Griffith, the Court offered language thathas been equated to tbe
essential facility doctrine, stating"tbe use of monopoly power...
to foreclose compelition [inanother market], to gain a competitive
advantage, or to de-stroy a competitor, is unlawful" Ip. 107|. In
Otter Tail, sev-eral municipalities were found to have been
illegally deniedaccess to electric power and/or access lines for
servicingtbeir customers. Though not directly addressing tbe
essen-tial nature of these "facilities," tbe Court did bold that
at-tempts at monopolization involving what could be deemedan
essential facility violate tbe Sherman Act.
Tbe most recent attempt-to-monopolize case witb whicbthe
doctrine has been associated is Aspen Skiing Co. v.Aspen Highlands
Skiing Corjforation [1985]. Aspen Skiing,owner of three of four ski
areas, stopped offering a multi-mountain ticket witb Highlands. Tbe
Court of Appeals up-held a jury verdict in favor of Highlands on
the basis thatthe multi-mountain ticket was an "essential
facility." TbeSupreme Court affirmed tbe decision, stating tbat if
tbe juryfound that the defendant acted "with exclusionary or
anti-competitive purpose or effect" then it could fmd for
theplaintiff [Travers 1986].
Together, the cases dealing witb unilateral attempts at
mo-nopolization provide support for the essential facility
doc-trine. Though not focusing on the "essential" nature ofthose
facilities at issue, the Court has tiiade it clear that afirm with
monopoly power and monopolistic intent maynot act to exclude
rivals.
Unilateral Foreclosure of a Scarce ResourceUnilateral
foreclosure of a scarce resource to exclude rivalsprovides tbe
elements of a "true" unilateral essential facil-ity dispute. Cases
involving unilateral resource foreclosuresdiffer from tbe preceding
monopolization cases in thatcourts have found antitrust violations
without relying on tbeintent of the parties. For example, in
Gameco, Inc. v. Provi-dence Fruit & Produce Building, Inc.
[1952], tbe court,tbough applying "intent to monopolize"
principles, was ex-pressly persuaded by tbe presence of an
essential facilityand lack of justification for refusing access to
a competitor.Tbe Court held tbat "it is incumbent on one witb the
monop-olist's power to deny a substantial economic advantage ...to
a competitor to come forward witb some business justifi-cation" [p.
489]. Similarly, in United States v. Otter TailCo. [1971], tbe
lower court held tbat [p. 61]:
[A] unilateral refusal to deal with another, motivated by a
pur-pose to preserve a monopoly is illegal... it is an illegal
restraintof trade for a party to foreclose others from the use of a
scarcefacility ... lt]he Sherman Act requires that where facilities
can-not practically be duplicated by would-be competitors, those
inpossession of them must allow them to be shared un fair
terms.
Though not explicitly identifying tbe doctrine, the court's
-
Journal of Public Policy & Marketing 163
bolding closely parallels its articulation in not requiring
an"intent" to monopolize.
Tbe first case to fonnatly state the essential facility
doc-trine is Hecht v. Pro Football, Inc. [1977]. Tbe DistrictCourt
stated [p. 992]:
The essential facility doctrine, also called the 'bottleneck
prin-ciple' states that 'where facilities cannot practicably be
dupli-cated by would-be competitors, those in possession of
themmust allow them to be shared on fair terms. It is illegal
restraintof trade to foreclose the scarce facility.'
Tbe case involved a potential franchisee of the AmericanFootball
League's challenge of a covenant in tbe then-Washington Redskins'
stadium lease, which prohibited itslease to any other professional
football team. In formulatinga test, the Court of Appeals held that
the covenant was an un-reasonable restraint of trade if (1) use of
tbe stadium was es-sential to the operation of a professional
football team inWashington, (2) the stadium could not practicably
be dupli-cated, (3) anotber team could use tbe stadium without
inter-fering witb tbe Redskins' use, and (4) access was in fact
de-nied because the covenant prevented potential competitorsfrom
sharing the stadium [p. 993]. Following Hecbt. thecourt in MCI
Communications v. American Telephone andTelegraph Co. [1983]
articulated a virtually identical test.^
Other courts have similarly applied the doctrine to unilat-eral
refusals to deal and applied equivalent tests [see AspenSkiing Co.
v. Aspen Highlands Skiing Corporation 1985;City of Mishawaka v.
American Electric Power Co. 1981].In United States v. American
Telephone and Telegraph Co.[1981], the doctrine is cited and
referred to as an "applica-ble legal standard" that declares [p.
1352], "any companywhich controls an 'essential facility' or a
'strategic bottle-neck' in tbe market violates tbe antitrust laws
if it fails tomake access to tbat facility available to its
competitor onfair and reasonable terms that do not disadvantage
them."In Fishman v. Estate of Wirtz [1986], the court applied
tbedoctrine finding the Chicago Stadium to be an essential
fa-cility and denial of access to it violated tbe Sherman Act.
Arbitrary Refusals to DealRefusals to deal involving a
noncompetitor dxt termed "ar-bitrary" refusals to deal and also
provide a basis for appli-cation of the essential facility
doctrine. Arbitrary refusals todeal generally involve a
nonintegrated monopolist refusingto deal in a downstream market in
wbicb it does not com-pete. A leading case is Official Airline
Guides, Inc. v. FTC[1980], in wbicb the FTC challenged the Official
AirlineGuides' refusal to publish information on connectingflights
ofcommuter airlines as violative of the FTC Act pro-hibiting unfair
methods of competition [La Peyre v. FTC1966].''
Recently, tbe FTC has suggested the viability of the FTCAct as a
basis for condemning essential facility related con-duct. In an
unprecedented consent settlement in August1992, the FTC used tbe
Act to order Vons Supermarketchain of California to sell one of its
three acquired storeswithin a concentrated market. A key point in
the case wasVon's earlier refusal to sell its store (i.e., an
essential facil-ity) to a would-be competitor at a higber price
than Vons re-
ceived from the drugstore company tbat purchased it [Da-vidson
1992].
Price SqueezesAn often employed tactic for refusing to deal
involves"price squeezes," or intentionally raising price to
probibitcompetitors or other rivals from reasonable access to
sup-plies or needed goods. Tbough few cases specifically
artic-ulate tbe elements of a price squeeze, tbe use of tbis
tacticcan underlie an essential facility cballenge. In United
StatesV. Corn Products Refining Co. [1916], for example.
ComProducts was found to violate tbe Sherman Act for using
amonopoly and price tactics on glucose and starch to driveout
downstream competitors. Similarly, in United States v.Aluminum Co.
of America (Alcoa) [1945], Alcoa possessedmonopoly power in primary
aluminum. The court foundthat Alcoa had charged ingot and sheet
prices which pre-vented independent fabricators from operating at a
profit.Thougb otber factors were involved in both cases, each
pro-vides tbe basis for application of the essential facility
doc-trine when facilities are denied through other tban pure
re-fusals to deal.
More recently, cases involving several airline carriersand their
computerized airlitie reservation systems em-ployed illustrate the
elusive nature of a price squeeze[Guerin-Calvert 1989]. Smaller
airlines have long com-plained that tbe fees cbarged by larger
airlines for use oftbeir reservation systems put them at a
competitive disadvan-tage. In 1984, tbe Civil Aeronautics Board
(CAB) issuedrules governing fees and practices associated with the
re.ser-vatlon system, whicb were cballenged by tbe major airlinesin
United Airlines el ai v. Civil Aeronautics Board [\9%5].Tbe CAB
successfully argued tbe major airlines, tbroughtbeir pricing and
other practices, effectively denied reason-able access by smaller
airiines to tbe "essential" reserva-tion systems. However, in a
later suit, Alaska Airlines et al.V. United Airlines [1991], a U.S.
Circuit Court of Appealsruled that the practices of tbe airlines
did not effectivelydeny access to tbeir "essential" reservation
systems.
Vertical IntegrationRefusals to deal tbat stem from a firm's
attempt at integrat-ing into tbe distribution of its own products
can provide thebasis for an essential facility doctrine cballenge.
For exam-ple, in Byars v. Bluff City News Co. [1979], new owners
ofa business cbose to deal direct to all retailers and tenninateda
previously employed independent distributor. The courtstated [p.
861]:
There are situations ... where a refusal to deal as part of a
verti-cal integration scheme is anticomf>etitive. That is, (I)
where in-tegration facilitates price discrimination so that the
monopolistcan reap the maximum monopoly profit from different
custom-ers; (2) where integration increases first-level entry
barriers sothat potential competitors are stymied; and (3) where
integra-tion facilitates evasion of regulation of monopoly profits.
... Insuch cases, a court should not hesitate to find a Section
2violation.
Articulating the same rule in the reverse context, tbecourt in
Becker v. Egypt News Co. [1983] stated, "since ver-tical
integration by monopolists can have procompetitive ef-fects, a
refusal to deal to accomplish tbis integration, 'as
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164 The "Essential Facility" Doctrine
sucb without more, cannot be beld violative of tbe ShermanAct'"
[p. 366]. Otber cases have held sitnilar results [seeBelfore v. New
York Times 1987; Paschall v. Kansas CityStar Co. 1984, which states
(p. 181), "vertical integrationeven by a monopoly publisher 'does
not, without more, of-fend Section 2"'J- These cases indicate that
vertical integra-tion alone, even wben rivals are excluded, will
not be foundunlawful. However, when additional circumstances are
pre-sent, exclusionary integration (vertical) may violate the
an-titrust laws and provide a basis for application of the
essen-tial facility doctrine.
Elements of InquiryTbougb the essential facility doctrine bas
not been formallycharacterized by tbe Supreme Court, lower court
articula-tion of tbe necessary elements underiying an essential
facil-ity challenge in several cases provides a generalized
prescrip-tion of tbe doctrine. Tbese judicial decisions may be
distin-guisbed for tbeir application of tbe doctrine across
differingcircumstances. Studying tbem enables identification of
keylimitations and aspects of the doctrine. Table I provides
alisting of questions or elements considered key points of in-quiry
by the courts when applying the doctrine followingthe test in MCI
Communications v. American Telephoneand Telegraph Co. [1983]. Eacb
is analyzed as it relates tojudicial standards of application for
the doctrine.
Is the Firm in Possession of the Alleged EssentialFacility a
"Monopolist"?According to traditional antitrust analysis, "the
material con-sideration in determining whether a monopoly exists
is[whether] power exists to raise price or to exclude competi-tion"
[American Tobacco Co. v. United States 1946, p.811]. Applying this
standard, a monopolist need not be oftbe pure form. The mere
existence of the ability to raiseprice or exclude competition
witbin a defined market is allthat may be required.^
Analysis to date of tbe cases tbat apply the essential facil-ity
doctrine suggests tbat tbe doctrine was intended to em-brace only
pure monopolies witbin a defmed market. Themajority of cases
applying tbe doctrine involve pure monop-olies, and it is difficult
to reason tbeir opinions under circum-stances involving other than
monopolies of a pure form.For example, in Hecht v. Pro Football.
Inc. [1977], thecourt probably would not bave found a restrictive
covenantin tbe stadium lease to be a per se violation had a pure
mo-nopoly not been involved. The presence of a monopoly
con-tributed persuasively to the essentiality of the facility.
Also,in Gameco, Inc. v. Providence Fruit & Produce
Building,Inc. [1952], it is unlikely tbat a violation would bave
beenfound if a competitor bad been denied entry within the con-text
of a nonmonopoly. As such, it remains unclear as towbich "monopoly"
standard is controlling. The lack of clar-ity also highlights tbe
importance of market definition intbis determination. A narrow
standard is likely to result inmore "pure" monopolies being found.
In contrast, a morebroadened market defmition would result in the
determina-tion of fewer "purer" monopolies and potentially
constrainapplication of the doctrine.
What Is the Nature of the "Facility"?Tbe definition of what
constitutes a "facility" under the doc-trine is not specifically
addressed by the courts. Presuma-bly, bowever, the use of tbe term
"facility" was not acciden-tal. At least one commentator bas
suggested tbat "facility"applies only to a broadly defined
"structure" [Werden1987]. Authority for tbis position is not
strong, but cursoryreview of the cases that mention tbe doctrine
involve struc-tures (defmed broadly).
At least one court has questioned application of tbe doc-trine
to anything but "tangible physical objects" [NorthAmerican Soccer
League v. National Football League1979, p. 676, n. 20]. Anotber
court refused to apply tbe doc-trine to the denial of hospital
privileges involving moretban mere access to a hospital building
[Pontius v. Chil-dren's Hospital 1982]. Characterizing tbe refusal
to licensetechnology as a facility has been questioned by tbe FTC
inE.I. du Pont de Nemours & Co [1980]. Cited in the samecase,
the FTC notes that a monopolist is under no obliga-tion to disclose
new product developments or design itsproduct so as to facilitate
competition [Berkey Photo, Inc. v.Eastman Kodak Co. 1979]. Patents
bave also been foundnot to be facilities within the meaning of tbe
doctrine [seeSperry Rand Corp. v. Nassau Research and Development
As-sociations 1957; United States v. L.D. Caulk Company1954].
In contrast, some courts have intimated tbat
restricting"facilities" to denote "structures" may be too limiting.
InAspen Skiing Co. v. Aspen Highlands Skiing Corp. [19851,an often
cited case in support of the doctrine, the "facility"involved a
ticket to tbree ski mountains constituting one es-sential facility.
Tbougb the Supreme Court declined toadopt tbe essential facility
doctrine for its disposition of tbecase, the decision stands as one
in wbich the doctrine hasnot been restricted to "structures."
Anotber case is Direc-tory Sales Management Corporation v. Ohio
Bell Tele-phone Company [ 1987], which involved Obio Bell's
provi-sion of the yellow pages. Tbougb the court found the
ser-vices were not essential, it did not comment on whether
theservices constituted a "facility." Finally, in United
StatesFootball League (USFL) v. National Football League(NFL)
[1986], tbe USFL claimed tbat they had been un-fairly denied access
to one of the three major television net-works. The USFL cbarged
that the NFL used its monopolypower to coerce tbe networks into
denying il access to tbetelevision media. Tbe court focused on the
television mediaas a "facility." Tbougb tbe jury found USFL's
cbargestrue, because it was unable to detertnine whether
lossesclaimed by tbe USFL were caused by illegal activities or
le-gally competitive acts, it awarded tbe USFL only one dollarin
damages (trebled).
Is the Facility Essential for Competition in theRelevant
IMarket?Judicial standards for assessment of the "essential"
natureof a facility are stated in Hecht v. Pro Football, Inc. [
1977,p. 992]:
To be 'essential' a facility need not be indispensahle; it is
suffi-cient if the duplication of the facility would be
economically in-
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Journal of Public Policy & Marketing 165
feasible and if denial of its use inflicts a severe handicap on
po-tential market entrants.
In MCf Communications v. American Telephone & Tele-graph Co.
[1983], the court simply stated facilities are essen-tial if they
"cannot be practicably duplicated" Ip. 1132]. To-gether, these
cases suggest that to find a violation, courts re-quire that denial
of access serves to exclude the would-becompetitor from a
particular market in whicb tbe competi-tor attempts to compete.
Thougb this standard seetns obvious, at least one commen-tator
proposes a substantially different test—that tbe doc-trine should
be invoked only if denial of access threatens"the economic
existence" of the would-be competitor[Troy 1983], Focus on tbe
existence versus competitive abil-ities of the would-be competitor
shifts antitrust emphasisfrom competition to competitive
survival.
Does the Firm in Possession of the Facility alsolVlainiain
"Control" of the Facility?That ownership of a facility constitutes
one form of controlis clear from analysis of cases applying tbe
doctrine [e.g.,Hecht V. Pro Football 1977]. Control, bowever, may
alsobe obtained tbrougb contractual rights or by virtue of powerand
dependence. In MCI Communications v. American Tele-phone &
Telegraph Co. [1983] and other decisions, tbecourts suggest
application of the doctrine extends also tocontractual integration.
However, tbe degree of contractualintegration necessary for tbe
doctrine to apply is not clear.
Extending the doctrine to those instances in which a firmwas
simply offered (albeit through contract) use of an essen-tial
facility on an exclusive or sbort-term basis raises a vari-ety of
issues. Such application suggests that a firm offereduse of an
essential facility may risk antitrust liability. Moreo-ver, an
owner of an essential facility may find it more prof-itable to
exercise its monopoly power downstream througban exclusive contract
[Werden 1987].
Is the Complaining Firm a Competitor?At the extreme, some courts
bave limited tbe essential facil-ity doctrine only to "true"
competitors. These cases pre-clude a noncompetitor (e.g., a
customer in an adjacent tnar-ket) from use of the doctrine. Other
courts bave Iitnited thedoctrine to cases in which "the monopolist
competes at an-other level witb Ibose foreclosed from access, and
... thoseforeclosed are tbereby excluded from tbe market in
whicbthey would compete with the monopolist" [Dart Drug
Cor-poration V. Corning Glass Works 1979, pp. 1097-98, n.9;Fulton
V. Hecht 1978, pp. 1247-8; Shapiro v. General Mo-tors Corporation
1979, p. 644]. Still otber decisions have ex-tended the essential
facility doctrine analysis to that "classof persons who were under
a commercial compulsion touse the product [of the facility]"
[General Motors (CrashParts) V. FTC 1982, paragraph 22,330; cf.
Official AirlineGuides, Inc. v. FTC 1980]. For example, in Official
Airline,the commuter airline omitted from the guide did not
com-pete with the publisber of tbe reference book (i.e.,
defen-dant). Nevertbeless, the FTC found tbat tbe commuter
air-lines' absence from the guide placed them at a
substantialcompetitive disadvantage relative to large air carriers
in-cluded in tbe guide.
Application of the doctrine for otber tban competitorsmight
imply that tbe courts are attempting to protect "com-petitors"
rather than competition or conversely that the es-sential facility
is so intimately associated witb competitorsas to inhibit
competition.
Has the Complaining Firm Been '^DeniedAccess"?The question of
what constitutes denial of access to an es-sential facility is
straightforward in those instances involv-ing absolute refusals to
deal. However, less overt methodsof access denial are possible and
raise implications for ap-plication of tbe doctrine. For example,
hard bargaining andless-than-reasonable terms (e.g., price,
delivery, etc.) maybe construed as a refusal to deal.
Most cases applying the doctrine have involved absolutedenial
[see Blumentbal 1990], so the courts have bad few oc-casions to
consider less overt metbods. Dicta in many oftbe cases imply tbat
essential facilities tnust be made avail-able on a "fair and
reasonable" basis [Town of Massena v.Niagara Mohawk Power
Corporation 1980, paragraph76,812, n. 41; United States v. American
Telephone & Tel-egraph Co. 1981, p. 1353] or
"nondiscriminatory" terms[MCI Communications v. American Telephone
& Tele-graph Co. 1983]. In Fishman v. Estate ofWirtz.
[1986],thougb Wirtz did offer to make tbe stadium available to
Fisb-man, the terms of the offer were found by the court to be
un-reasonable [pp. 527, 540-41]. In Consolidated Gas Co. ofFlorida
v. City Gas of Florida [1987], City Gas would onlypermit access to
its pipeline at what was detennined to bean unreasonably bigb price
"tantamount to a refusal todeal" [paragraph 58,927]. Sitnilarly, in
the airline reserva-tion cases [e.g., Alaska Airlines et al. v.
United Airlines1991; United Airlines et al. v. Civil Aeronautics
Board1985], high prices and other practices were found to
effec-tively deny access to tbe reservation systems.
Perbaps the best guidance as to wben terms of access
areunreasonable is provided in United States v. American Tele-phone
& Telegraph [1981], in which the court ruled that [p.1353]:
access must be offered 'upon such just and reasonable termsand
regulations as will, in respect of use, character and cost
ofservice, place every company upon a nearly as equal a plane asmay
be.'
However, in a civil suit involving the same parties, tbecourt
ruled tbat "Absolute equality of access to essential fa-cilities
... is not mandated by the antitrust laws." Conse-quently, it
remains uncertain as to when terms of accessmay be construed as
denying access to an essential facility.
Is Access "Essential" for the Complaining Firm toCompete in the
Relevant Market?According to tbe court in Hecht v. Pro Football,
Inc.[1977], "tbe antitrust laws do not require tbat an essetuial
fa-cility be shared if sucb sharing would be impractical orwould
inhibit the defendant's ability to serve its customersadequately"
[pp. 992-3]. Tbis dictum suggests some de-gree of exclusion of a
rival may be allowed in order not toimpair the competitive
advantage of a firm in possession ofan essential facility. At least
one commentator bas sug-
-
166 The "Essential Facility'* Doctrine
gested that this qualification of the doctrine implies a
monop-olist may give preference to itself and make only excess
ca-pacity available to competitors [Werden 1987]. Citing
thelanguage in Southern Pacific Communications Co. v. Amer-ican
Telephone and Telegraph Co. [1984], this author con-tends that [p.
457]:
[Tlie] restriction presupposes that the essential facility
doctrinedoes not impose a common carrier obligation with its
concomi-tant requiremenl of prorationing when operating at full
capac-ity. The freedom not to prorate, in fact, may be what is
meantby the dictum that 'absolute equality of access ... is
notmandated.'
Marketing and Public PolicyImplicationsFor marketers, emergence
of the essential facility doctrineand its increasing application
provides a variety of implica-tions. Perhaps most notable is the
doctrine's apparent con-trast to accepted notions of competitive
conduct. Though abasie tenet underlying much of marketing theory
and prac-tice is the concept of competitive advantage,
interpretationand application of the doctrine challenges this
learning. De-fined as the distinctive competence obtained through
spe-eial or unique capabilities of an organization, tbe concept
ofcompetitive advantage underlies mueh of marketing [Kerin,Mahajan,
and Varadarajan 19901. In an attempt to articulatethis concept. Day
and Wensley [19881 identify two sourcesof competitive
advantage—skills and resources. Superiorityacross these sources
provides the firm with an advantageover its rivals. Superior skills
arise from the ability to per-form certain functions more
effectively than competitors.These skills (e.g., engineering,
technical, marketing, etc.) en-able a firm to produce better
products than its competitors.Superior resources, in turn, are
tangible requirements thatprovide a firm with the ability to
develop advantages overtheir competitors. These resources include
plant and equip-ment, distribution systems, production facilities,
and uniquesourcing of raw materials. Though each of these
resourcesmay provide a firm with distinctive competencies and a
com-petitive advantage, they may also furnish the underlyingbasis
for an essential facility challenge.
This dilemma is not without consequence. Of immediateconcern is
the potential of a firm "competing" itself intoan antitrust
challenge. That is, successfully creating a distinc-tive
resource-based competence that is then challenged by arival as an
essential facility. It is not difficult to envision aprospective
market entrant employing this strategy to gainaccess to a new
market or product arena. Rivals might alsoattempt to "free ride" on
current competitors in this fash-ion. By allowing other competitors
to develop key products/systems or "facilities" and then
challenging them as essen-tial facilities, these firms could gain
access to critical re-sources without the burden of development
costs, etc. Cur-rent rivals might even consider this scenario as a
predatorystrategy to gain an advantage through increasing the
firm'scost vis-i-vis defending such an antitrust challenge. Themere
process of an antitrust suit can be costly in terms ofboth
financial and managerial resources.
The prospect of these outcomes is compounded by the in-creasing
emergence of .strategic alliances, strategic partner-ing,
single-sourcing, and other exchange arrangements thatemphasize
long-tenn relationships and closely coordinatedworking
associations. Competitors, excluded from such ar-rangements, could
argue that these relationships deny themaccess to essential
facilities. Consequently, a direct implica-tion of the doctrine's
emergence in the context of changingpatterns of exchange, currently
the focus of much interest inmarketing, is the prospect of greater
risk incurred to these ex-change participants.
An indirect implication extending from increasing use ofthe
doctrine is the prospect that the risk associated with a po-tential
essential facility challenge may deler antl/or reduce in-centives
for development and maintenance of new prod-ucts, technology, etc.
Firms involved in these activitiesmight foresee the possibility of
an essential facility chal-lenge as precluding the benefits from
investment in these ac-tivities. The potential risks of expending
considerable re-sources in the development of new products or
technologiesand then having to share these with rivals is
illustrated inthe previously cited case involving Microsoft's
computer op-erating system. Though charges that Microsoft was
attempt-ing to take advantage of its ownership of the essential
oper-ating system are pending, it is difficult to distinguish
theiractions from simply strong competition.
Concerns underlying some essential facility challenges
ob-viously have merit. As many of the "intent" cases citedhere
attest, a refusal to provide access to a critical "facil-ity" to
purposely injure a competitor is not difficult to en-vision. Firms
pressed to compete on narrower and narrowergrounds may in fact find
the strategy an option. It also isnot difficult to envision firms
teaming together in concert toachieve such anticompetitive ends.
The doctrine's increas-ing use suggests organizations facing this
form of anticom-petitive conduct may have a useful tool for its
deterrenceand redress in the fonn of the essential facility
doctrine.
Alternatively, application of the doctrine in those
circum-stances involving the absence of anticompetitive intent
ormeans (i.e., "true" essential facilities) seems tnjiy at oddswith
marketing's concept of competitive advantage and faircompetition.
Forcing a competitor monoptilist to provide ac-cess to critical
resources obtained through proper competi-tive conduct is difficult
to square with traditional notions ofcompetition. Prudent
application of the doctrine under thesecircumstances requires
analysis of the overall impact that de-nial of access to an
essential facility has on consumer wel-fare. When welfare is
substantially enhanced (e.g., competi-tion improved, prices
reduced), imposing a duty to share anessential facility may be
justifiable. Such enhancement is un-likely, however, when imposing
a duty to deal would in-hibit other socially desirable activity
(i.e., product develop-ment, etc.), the possessor of the facility
is not an actual or po-tential competitor, the firm's merely
substitute for one an-other, or the monopolist already is charging
a monopolistprice [Areeda 1990],
Even when these conditions are satisfied and consumerwelfare
would benefit through granting access to an essen-tial facility,
basic fairness suggests that a duty to deal be im-posed only where
it is critical to the competitive vitality
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Journal of Public Policy & Marketing 167
(i.e., the competitor cannot compete without it and
practicalalternatives are not available) of the would-be
competitor.In addition, the firm in possession of the essential
facilityshould be allowed to proffer some legitimate business
pur-pose for its denial, which the challenger must prove is
un-justified. In this regard, the recent case of Image
TechnicalService, Inc. v. Eastman Kodak Co. [1990] suggests
reasonsproffered must be "genuine" and not "pretextual." In
thiscase and on being granted Certiorari (i.e., review) by the
Su-preme Court [Eastman Kodak Company v. Image TechnicalService,
Inc. 1992], the Courts questioned the validity ofKodak's business
justifications for an equipment-servicetying arrangement that
excluded other service suppliers. Cha-racterizing the arrangement
as that of an essential facility,the Court of Appeals and
subsequently the Supreme Courtfound, in denying Summary Judgment,
that Kodak's mo-tives of quality maintenance, controlling inventory
costs,and "free rider" considerations were not justifiable.
Future policy development in the area of essential facili-ties
requires that these considerations be recognized and in-corporated
within the current elements of inquiry. Addition-ally, development
of the doctrine requires recognition of dif-fering modes of
competition (e.g., cooperation) now com-monplace in many
industries. Cooperative forms of compe-tition, including strategic
alliances and long-term partner-ships, represent complicating
factors to the current inquiryschema. In particular, assessment of
questions relating tothe level of control, nature of a competitor,
and extent of ac-cess denied (see Table 1) are affected by these
emergent mar-ket forms. The evolution of technology and its impact
onhow firms compete must be considered as well. New tech-nologies
(e.g.. information networks) and the rate of techno-logical change
bear implications for the questions to beasked within an essential
facility inquiry.
Further development of the doctrine also depends on itsability
to identify circumstances in which denial of accessto an essential
facility undermines consumer welfare. Inthis vein, researchers
exploring aspects of the doctrinecould provide information useful
for its development. Mar-keting's understanding of the elements and
dimensions of"products" (i.e., "resources" that might be the target
of anessential facility challenge) could be usefully employed
formore fully delineating what constitutes a "facility." At
themargin, this issue remains to be clarified in the courts.
Im-portant influences complicating this prospect include
con-flicting principles underlying patent and copyright laws
andassociated ' 'confiict of laws'' issues. For example, a key
el-ement to any essential facility case inquiry is
characteriza-tion of the offending facility holder to possess
"monop-olistic" powers. Current antitrust doctrine emphasizes
mar-ket definition as substantive in this determination.
Market-ing's extensive knowledge of market definition,
segmenta-tion, and strategy could inform policy makers and
thecourts in this respect. Indeed, work by Dunfee, Stem,
andSturdivant [1984] may be directly applicable in this context[see
also Day, Massy, and Shocker 1978; Milne 1992].
Further understanding of what constitutes an "essential"facility
is also required. Current standards depend on the gen-eral economic
criteria of "indispensabiiity" and "feasibil-
ity of duplication." The nature of these elements require
fur-ther elahoration and understanding. Research into the
essen-tiality of resources possessed by one firm and desired by
an-other would benefit development of the doctrine. Studies
ofbuyers' decision-making, and especially of what it mighttake to
persuade buyers to break away from their loyalty toa disputed
facility, could be very relevant.
Another example of research involves further characteri-zation
of the nature of "control" over a facility required be-fore it is
considered under the dominion of a particular mo-nopolist firm.
Control may be achieved through a variety ofmechanisms beyond
ownership, including contractual inte-gration, power, dependence,
etc. Research into the differingnature of these mechanisms and
their implications for thedoctrine is needed.
Further insight into what constitutes denial of access toan
essential facility is also required. Research involving
iden-tification of strategies employing less overt methods of
ac-cess denial than absolute refusals to deal would benefit
thedoctrine's development. Conduct, such as less than meticu-lous
bargaining, unreasonable price and trade terms, andother conduct
may be employed to deny access to an essen-tial resource. Research
examining the nature of this form ofdenial is needed.
ConclusionUnder the essential facility doctrine a firm's refusal
to pro-vide another finn access to some resource considered
"es-sential" for competition in a particular market is unlawful.The
nature and increasing application of the doctrine cou-pled with the
doctrine's apparent contrast with accepted no-tions of competition
and competitive advantage suggests itsimportance to marketers and
others. Analysis provided hereis intended to aid these individuals
as they attempt to under-stand the legal nature and implications of
this doctrine.
Notes1. Day and Wensley [1988] reference two sources of
competitive
(strategic) advantage—skills and resources [cf. Kerin, Ma-hajan,
and Varadarajan 1990]. In a strict sense, we refer to ad-vantages
emanating from "resources." Application of the doc-trine to
nonresources (i.e., skills) has yet to be endorsed by thecourts
Isee discussion, intra. "What Is the Nature of theFacility?"].
2. Though disagreement exists as to the specific cases, the
doc-trine's origin is most commonly associated with a series
ofcases beginning with United Stales v. Terminal Railroad
Asso-ciation [1912], Associated Press v. United States 11945],
andGameco. Inc. v. Providence Fruit & Produce Building,
Inc.[1952]. Neale's synthesis in 1970 provided the first scholarly
ar-ticulation of the doctrine. The first case to formally state the
doc-trine was the district court case Hecht v. Pro Football.
Inc.[1977].
3. Section 1 provides:
Every contract, combination in the forms of trust or other-wise,
or conspiracy in restraint of trade or commerce amongthe several
States, or with foreign nations, is hereby declaredto be
illegal.
-
168 The "Essential Facility*' Doctrine
Section 2 of the Sherman Act provides;
Every person who shall monopolize, or attempt to monopo-lize, or
combined or con.spire with any other person or per-sons, to
monopolize any part of the trade or commerceamong the several
States, or with foreign nations, shall bedeemed guilty of a
felony.
4. The search was conducted on November 10, 1992 employingthe
key term "Essential Facility" and its derivatives.
5. The Court's use of a rule-of-reason analysis is consistent
withlower court decisions that have employed a similar
approach[See, e.g.. Allied International. Inc. v. International
Longshore-men's Association. AFL-CIO 1981; Eliason Corporation v.
Na-tional Sanitation Foundation 1980; Kreuzer v. American Acad-emy
of Periodontology 1984; M & H Tire Co. v. Hoosier Rac-ing Tire
Corporation 1984],
6. In this case AT&T refused to interconnect MCI with the
distri-bution facilities for AT&T's local operating companies.
Thecourt concluded that AT&T's conduct was governed by the
es-sential facility doctrine and provided a four-element test for
itsapplication: (I) control of the essential facility by a
monopo-list, (2) a competitor's inability practicably or reasonably
to du-plicate the essential facility, (3) the denial of the use of
the fa-cility to a competitor; and (4) the feasibility of providing
the fa-cility Ipp. 1132-3].
7. Though reversed on appeal, the FTC has steadfastly
maintainedthat arbitrary refusals to deal violate the antitrust
laws Lsee Gen-eral Motors Corporation v. FTC 1982, slating that
"until andunless it is repudiated by the Supreme Court we hold to
our in-terpretation of the case law on arbitrary refusals to deal
by mo-nopolists," p. 580, n. 45].
8. This particular point is important in the context that we
con-trast the essential facility doctrine with the basic tenets of
com-petitive advantage. In the event that a "strict" monopoly
(i.e.,single firm within a relevant market) were required, such a
stan-dard would limit the doctrine's contrast to competitive
advan-tage to those circumstances of market entry.
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