Antitrust as Antiracist

Antitrust as Antiracist

The federal antitrust laws—three statutes enacted over a century ago—are in the spotlight. The year 2020 brought a new reckoning with corporate power and a resurgent interest in using antitrust law as a force for populist change. The “hipster antitrust” movement argues that the focus of antitrust policy should not be limited to market power and consumer welfare. Rather, antitrust can and should be a remedy for a suite of societal ills, from workers’ rights to campaign finance and income inequality.

The year 2020 also marked an awakening to racial injustice in America. The deaths of George Floyd, Breonna Taylor, and Ahmaud Arbery sparked nationwide outrage and demands to reform institutions built on systemic racism. Yet the recent plans for antitrust reform—which primarily focus on monopolies in tech—ignore the fact that the antitrust status quo perpetuates racial injustice.

But it doesn’t have to be this way. This blog identifies consolidation in healthcare and vertical restraints in franchising as two examples of how lax antitrust enforcement has disproportionately harmed people of color. It also argues that by dusting off existing antitrust tools, antitrust enforcement can be antiracist.

Background: The Antitrust Toolbox

Congress enacted the federal antitrust laws to check the power of massive corporations run amuck. These laws—the Sherman Act, the Federal Trade Commission (FTC) Act, and the Clayton Act—were originally designed to control corporate power, protect individual economic freedom, and ensure a fair and equal society.

But beginning in the 1970s when Robert Bork published the still-influential “Antitrust Paradox,” courts slowly narrowed the focus of antitrust law to protecting consumer welfare. Today, antitrust enforcement prioritizes preventing the anticompetitive acquisition, exercise, or maintenance of market power that threatens consumer welfare and competition—a much narrower goal than its populist origins.

Dusting Off the Tools

Recent years have seen bipartisan interest in reining in powerful corporations with more aggressive antitrust enforcement. One of the few agency voices calling for an antiracist approach to antitrust is Rebecca Slaughter, the acting chair of the FTC. Slaughter has recently spoken out about using antitrust enforcement to “right the wrongs of systemic racism.” She challenges what she views to be a faulty premise of antitrust law: “that antitrust can and should be value-neutral, and therefore social justice problems like racism do not have a role in antitrust enforcement.”

Slaughter argues that antitrust has never been and never will be value-neutral. Antitrust addresses market structures, and racism is entrenched in the historic and current market structures in the United States. When agencies make decisions about how to deploy antitrust tools, they can choose whether to reinforce these structural inequities or to dismantle them.

Healthcare and franchising are two examples of how a shift in antitrust enforcement from “value-neutral” to antiracist can break down market structures that perpetuate racial injustice.

Honing in on Healthcare Monopolies 

Consolidation in the healthcare industry is a driving force behind the sky-high cost of medical care and pharmaceutical drugs. Due to a wave of healthcare mergers, most hospital markets in the United States are dominated by a single corporate entity. The lack of competition means the dominant hospital is free to exercise market power by raising prices and restricting output. Recent studies of prices for hospital and outpatient treatment report that healthcare mergers have resulted in large networks charging private insurers 2.5 to 3 times more than Medicare rates for the same patient care. These rising costs lead to higher insurance premiums paid by employers and individuals.

Artificially inflated healthcare costs disproportionately burden people of color and create a barrier to accessing quality care. Black families spend a greater share of their household income on health care premiums and out-of-pocket costs than the average American family. And of the thirty million uninsured individuals in the United States, half are people of color. The COVID-19 pandemic has put this health inequity in sharp focus: racial and ethnic minority groups are more likely to contract the virus, get severely ill, and die from coronavirus infections.

What can antitrust do? First, antitrust merger review can be antiracist. Mergers between competitors are scrutinized under Section 7 of the Clayton Act, which prohibits mergers that may substantially lessen competition or create a monopoly. When determining whether a merger lessens competition, the FTC, Department of Justice (DOJ), and courts consider the likelihood of anticompetitive effects. An antiracist application of the Clayton Act would consider racially disparate outcomes like health care costs, insurance premiums, and the quality of care provided as anticompetitive effects.

Business practices that perpetuate systemic racism are anticompetitive because they exclude people of color from full participation in the market. And this exclusion is expensive: a study by Citigroup estimates that discrimination cost the U.S. economy $16 trillion since 2000. Moreover, there is precedent for applying a broad conception of anticompetitive effects in merger review. In Brown Shoe Co. Inc. v. United States, the Supreme Court held that a meager 7.2 percent combined market share of two merging shoe manufacturers was unhealthy market concentration under the Clayton Act. Chief Justice Earl Warren acknowledged that concentration in the shoe industry might offer some efficiencies and lower prices for consumers, but “the protection of viable, small, locally owned businesses” was a priority. Therefore, agencies can and should argue that mergers that reinforce racial inequity substantially lessen competition.

Second, antitrust enforcement actions can hone in on industries like healthcare where the anticompetitive effects are acutely felt by people of color. As California attorney general from 2011 to 2017, Vice President Kamala Harris prioritized taking on healthcare prices through antitrust. Her investigation laid the groundwork for California’s suit against Sutter Health for using its market power to raise prices and extort better deals from insurers, which resulted in a $575 million settlement. The DOJ and FTC should follow in California and Vice President Harris’s footsteps and crack down on healthcare, utilizing an antiracist approach.

Achieving Fairer Franchising

Franchising—a business form where a firm owning a brand outsources the delivery of goods or services to a separate firm or individual in exchange for a royalty off of gross sales—is a dominant mode of industrial organization in the United States. Because buying into a franchise bypasses the necessity of acquiring capital and working industry connections to get a business off the ground, economists have long lauded franchising as a straightforward path to economic independence. Franchising has become an important source of income and opportunity for minorities and immigrants. And in occupations like the restaurant industry, franchised businesses employ a significant share of workers of color.

Yet franchise contracts empower franchisors (the parent company) to hold franchisees (the individual business owners) and their employees in a vice-like grip. Under most franchise contracts, the parent company limits the franchisee’s ability to make decisions regarding prices, customers, and suppliers. Because the contract deprives franchisees of discretion over virtually every aspect of the business except for wages and hours, underpaying and overworking employees becomes the only way to maximize profits. Franchisors exacerbate this dynamic with “no-poach” clauses that prevent franchise operators from hiring employees of another operator within the same franchise business. No-poach clauses suppress wages because franchisees cannot compete for employees with better pay and working conditions.

At the same time that franchisors make it nearly impossible for franchisees and employees to prosper, they force franchisees to bear the risk if the venture fails. By using contract terms to reduce what franchisees can earn outside the franchise relationship relative to within it, parent companies induce their franchisees to work even harder than the value of the franchise contract warrants. Most franchise contracts include noncompete agreements, forum selection clauses that highly favor the franchisor, and a right of first refusal to any sale of the franchisee’s business. And most require franchisors to sign personal guarantees, which gives the franchisor a right to claim the franchisee’s personal assets in the event of bankruptcy or litigation.

Antitrust law labels these contractual limitations as “vertical restraints:” restrictions on competition agreed to by firms at different levels of the distribution process. Vertical restraints empower large corporations to control workers and reduce labor costs without taking on the traditional legal responsibilities for that control. And this control can be implemented on a discriminatory basis. In September 2020, fifty Black former franchisees sued McDonald’s for forcing them to operate in “economically depressed” communities and “dangerous locations” where profits were lower.

A shift in antitrust law is largely to blame for the proliferation of vertical restraints. Vertical restraints were once considered per se illegal restraints of trade under the Sherman Act. But in a series of decisions beginning with Continental Television v. GTE Sylvania in 1977 and culminating in Leegin Creative Leather Products v. PSKS in 1997, the Supreme Court held that vertical restraints were presumptively lawful and thus subject to a more searching and defendant-friendly rule of reason analysis. Since that shift, antitrust enforcement has largely stayed away from challenging restrictive franchise contracts.

An antiracist approach to antitrust would not shy away from challenging these exploitative business models. First, federal agencies could follow in the steps of states like Washington that investigated the use of restrictive no-poach clauses as per se illegal restraints of trade. The pressure created by Washington’s investigations led seven major fast-food chains to agree to end no-poach deals. An investigation by the FTC or DOJ into no-poach clauses and other anticompetitive vertical restraints common in franchising could have even more impact, given their national scope. Second, franchising demonstrates that antitrust reform should not narrowly focus on big tech monopolies. Instead, antitrust reform should include industries like franchising, where large corporations restrict the economic freedom of minority business owners and employees. Scrutinizing the use of vertical restraints in franchising is just as essential to preventing abuses of market power and would remedy a structural inequality that disproportionately harms people of color.

Conclusion

Antitrust enforcement is not a replacement for more aggressive reforms, and by nature can only address one transaction or firm at a time. Moreover, it is limited to fines rather than sweeping conduct remedies. But antitrust enforcement can put a dent in the structural problems driving the health care affordability crisis and the extortion of franchisees. And in doing so, it can leverage the power of the federal government to be actively race-conscious and to take actions to end racial inequities. Backed by the push to reform antitrust, the demands to dismantle structural racism, and a new Democratic administration, an antiracist approach to antitrust could dust off the toolbox and begin to dismantle the “value-neutral” antitrust status quo.

 

Dani Kritter: Associate Editor, California Law Review, and Berkeley Law Class of 2021.

Dani Kritter, Antitrust as Antiracist, Calif. L. Rev. Online (Mar. 2021),https://www.californialawreview.org/antitrust-as-antiracist.

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