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Review Chapter 49 of the course textbook.
Coed Theatres (Coed), a Cleveland area movie theater booking agent, began seeking customers in southern Ohio. Shortly thereafter, Superior Theatre Services (Superior), a Cincinnati booking agent, began to solicit business in the Cleveland area. Later, however, Coed and Superior allegedly entered into an agreement not to solicit each other’s customers. The Justice Department prosecuted them for agreeing to restrain trade in violation of § 1 of the Sherman Act. Under a government grant of immunity, Superior’s vice president testified that Coed’s vice president had approached him at a trade convention and threatened to start taking Superior’s accounts if Superior did not stop calling on Coed’s accounts. He also testified that at a luncheon meeting he attended with officials from both firms, the presidents of both firms said that it would be in the interests of both firms to stop calling on each other’s accounts. Several Coed customers testified that Superior had refused to accept their business because of the agreement with Coed. The trial court found both firms guilty of a per se violation of the Sherman Act, rejecting their argument that the rule of reason should have been applied and refusing to allow them to introduce evidence that the agreement did not have a significant anticompetitive effect.
Should the rule of reason have been applied in this case? Explain why or why not.
Your initial response should be a minimum of 200 words. APA format. please cite references and avoid the use of direct quotes.
Prenkert, J.D., Barnes, A.J., Perry, J.E., Haugh, T, & Stemler, A.R. (2022). Business law: The ethical, global, and digital environment (18th ed.). Retrieved from https://www.vitalsource.com CHAPTER 49
Antitrust: The Sherman Act
X
YZ Inc. manufactures widgets and sells them through various wholesale dealers. Several
other firms also manufacture widgets. Of course, XYZ wishes to conduct its business within the
bounds of the law, including the rules of antitrust law. As you study this chapter, consider the
following questions regarding possible courses of action and their treatment under antitrust law:
• Would XYZ violate antitrust law if XYZ deliberately causes its prices to match those of a
competing widget manufacturer?
• If XYZ and a competing widget manufacturer agree that each will charge no more than a
certain agreed amount for their widgets (i.e., a maximum price), is there an antitrust violation?
What if XYZ and its competitor agree to set a minimum price in order to avoid what each sees
as the potentially ruinous consequences of a price-cutting war?
• Is there an antitrust violation if XYZ and its wholesale dealers agree that the dealers will adhere
to an established maximum sale price when they sell to retailers? What if the agreement
between XYZ and the dealers is that the dealers will adhere to a certain minimum price when
they sell to retailers?
• If XYZ and its wholesale dealers agree on exclusive sales territories within which each dealer
will operate, is there an antitrust violation?
• Is there an antitrust problem if XYZ informs its dealers that it will not sell them widgets unless
they also buy a certain unrelated product from XYZ, and the dealers, wanting to preserve their
widget dealerships, agree to this provision?
• Would there be an antitrust violation if XYZ and some of the other widget manufacturers agree
that each manufacturer has an exclusive geographic area of business operation?
• Is there an antitrust violation if XYZ and some of the other widget manufacturers agree not to
purchase, from a certain supplier, materials used in making widgets?
• If XYZ’s widgets acquire a public reputation for being high in quality and this perception leads,
over time, to XYZ’s holding a market share so large that XYZ effectively holds monopoly
status, has XYZ run afoul of antitrust law?
Regardless of the legal treatment given to the behaviors referred to in the above questions, consider
the ethical questions suggested by such conduct.
page 49-2
LO
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
49-1Describe the role an interstate or foreign commerce connection plays in the application of the federal
antitrust laws.
2.
49-2Identify the respective types of antitrust cases that may be initiated by the government and by private
parties who have standing to sue.
3.
49-3Explain the role of the concerted action versus unilateral action distinction in determining whether
Sherman Act § 1 has been violated.
4.
49-4Explain the difference between per se analysis and rule of reason analysis in Sherman Act § 1 cases.
5.
49-5Describe what horizontal price-fixing is and identify the type of analysis (per se or rule of reason) that
such behavior receives when courts determine whether it is unlawful.
6.
49-6Describe what vertical price-fixing is and identify the type of analysis (per se or rule of reason) that such
behavior receives when courts determine whether it is unlawful.
7.
49-7Describe what a horizontal division of markets is and explain the approaches courts take in determining
whether such behavior is unlawful.
8.
49-8Describe what a vertical restraint on distribution is and identify the type of analysis (per se or rule of
reason) that such behavior receives when courts determine whether it is unlawful.
9.
49-9Explain the approaches courts take in determining the legality or illegality of group boycotts and similar
refusals to deal.
10.
49-10Identify and explain the elements of a prohibited tying agreement.
11.
49-11Identify the elements of monopolization for purposes of Sherman Act § 2.
12.
49-12Explain what courts take into account in determining the relevant market for purposes of a
monopolization case.
13.
49-13Describe what courts consider when they determine whether a defendant accused of monopolization
possessed the requisite intent to monopolize.
14.
49-14Explain what is necessary for the attempted monopolization prohibited by Sherman Act § 2.
THE POST—CIVIL WAR EMERGENCE and growth of large industrial combines and trusts
significantly altered the business environment of earlier years. A major feature of this phenomenon
was the tendency of various large business entities to acquire dominant positions in their industries
by buying up smaller competitors or engaging in practices aimed at driving those competitors out
of business. This behavior led to public demands for legislation to preserve competitive market
structures and prevent the accumulation of great economic power in the hands of a few firms.
Congress responded in 1890 with the Sherman Act. It supplemented this response by enacting
the Clayton Act in 1914 and the Robinson—Patman Act in 1936. In enacting the antitrust statutes,
Congress adopted a public policy in favor of preserving and promoting free competition as the
most efficient means of allocating social resources. The Supreme Court summarized, in TimesPicayune Co. v. United States, 254 U.S. 594 (1953), the rationale for this faith in competition’s
positive effects:
Basic to faith that a free economy best promotes the public weal is that goods must stand the cold test of competition; that the
public, acting through the market’s impersonal judgment, shall allocate the nation’s resources and thus direct the course its
economic development will take.
Congress thus presumed that competition was more likely to exist in an industrial structure
characterized by a large number of competing firms than in concentrated industries dominated by
a few large competitors.
Despite this long-standing policy in favor of competitive market structures, the antitrust laws
have not been very successful in halting the trend toward concentration in American industry.
Today’s market structure in many important industries is oligopolistic, with the bulk of production
accounted for by a few dominant firms. Traditional antitrust concepts are often difficult to apply
to the behavior of firms in these highly concentrated markets. Recent years have witnessed the
emergence of new ideas that challenge long-standing antitrust policy assumptions.
The Antitrust Policy Debate
Antitrust enforcement necessarily reflects fundamental public policy judgments about the
economic activities to be allowed and the industrial structure best suited to foster desirable
economic activity. Given the importance of such judgments to the future of the American
economy, it is not surprising that antitrust policy spurs vigorous public debate.
page 49-3
Chicago School Theories During the past four decades, traditional antitrust assumptions have
faced an effective challenge from commentators and courts advocating the application of
microeconomic theory to antitrust enforcement. These methods of antitrust analysis are commonly
called Chicago School theories because many of their major premises were advanced by scholars
affiliated with the University of Chicago.
Chicago School advocates view economic efficiency as the primary, if not sole, goal of
antitrust enforcement. They are far less concerned with the supposed effects of industrial
concentration than are traditional antitrust thinkers. Even highly concentrated industries, they
argue, may engage in significant forms of nonprice competition, such as competition in
advertising, styling, and warranties. They also point out that concentration in a particular industry
does not necessarily preclude interindustry competition. For example, a concentrated glass
container industry may still face significant competition from the makers of metal, plastic, and
fiberboard containers. Chicago School advocates are also quick to point out that many markets
today are international in scope so that concentrated domestic industries may, nonetheless, face
effective foreign competition. Moreover, they argue that the technological developments necessary
for American industry to compete more effectively in international markets may require the great
capital resources that result from domestic concentration.
According to the Chicago School viewpoint, the traditional antitrust focus on the structure of
industry has improperly emphasized protecting competitors instead of protecting competition.
Chicago School theorists argue that antitrust policy’s primary thrust should
feature anticonspiracy efforts rather than anticoncentration efforts. In addition, most of these
theorists take a lenient view toward vertically imposed restrictions on price and distribution that
have been traditionally seen as undesirable because they believe that such restrictions can promote
efficiencies in distribution. Thus, they tend to be tolerant of attempts by manufacturers to control
resale prices or establish exclusive distribution systems for their products.
Traditional Antitrust Theories Traditional antitrust thinkers, however, contend that even
though economic efficiency is important, antitrust policy has historically embraced political as
well as economic values. Concentrated economic power, they argue, is undesirable for a variety
of noneconomic reasons. It may lead to antidemocratic concentrations of political power.
Moreover, it may stimulate greater governmental intrusions into the economy in the same way that
the post—Civil War activities of the trusts led to the passage of the antitrust laws. According to
the traditional view, lessening concentration enhances individual freedom by reducing the barriers
to entry that confront would-be competitors and by ensuring broader input into economic decisions
having important social consequences. Judge Learned Hand summed up this perspective on
antitrust policy:
Great industrial consolidations are inherently undesirable, regardless of their economic results. Throughout the history of [the
Sherman Act] it has been constantly assumed that one of [its] purposes was to perpetuate and preserve, for its own sake and in spite
of possible cost, an organization of industry in small units which can effectively compete with each other. 1
Impact of Chicago School Despite the initial intentions behind antitrust policy, the Chicago
School has had a significant impact on the course of antitrust enforcement in recent decades. The
Supreme Court and many presidential appointees to the lower federal courts, the Department of
Justice, and the Federal Trade Commission have given credence to Chicago School economic
arguments during the past 30-plus years. The presence on the federal bench of so many judges who
are receptive to Chicago School ideas means that those views are likely to continue to have an
impact on the shape of antitrust law.
Jurisdiction, Types of Cases, and Standing
LO49-1
Describe the role an interstate or foreign commerce connection plays in the application of the federal
antitrust laws.
Jurisdiction The Sherman Act outlaws monopolization, attempted monopolization, and
agreements in restraint of trade. Because the federal government’s power to regulate business
originates in the Commerce Clause of the U.S. Constitution (discussed in Chapter 3), the federal
antitrust
laws
apply
only
to
behavior
having
some
significant
impact
on interstate or foreign commerce. Given the interdependent nature of our national economy, it is
normally fairly easy to demonstrate that a challenged activity either involves interstate commerce
(the “in commerce” jurisdiction test) or has a substantial effect on interstate commerce (the “effect
on commerce” jurisdiction test). Various cases indicate that a business activity may have a
page 49-4 substantial
effect on interstate commerce even if the activity occurs solely within the
borders of one state. Activities that are purely intrastate in their effects, however, are outside the
scope of federal antitrust jurisdiction and must be challenged under state law.
The federal antitrust laws have been extensively applied to activities affecting the international
commerce of the United States. The conduct of American firms operating outside U.S. borders
may be attacked under our antitrust laws if it has an intended effect on our foreign commerce.
Likewise, foreign firms “continuously engaged” in our domestic commerce are subject to federal
antitrust jurisdiction. An international transaction that has a direct, substantial, and intended effect
on domestic commerce may subject the firms involved to U.S. antitrust law and the jurisdiction of
U.S. courts. (United States v. Hsiung, which appears later in the chapter, deals in part with such
issues.) Determining the full extent of the extraterritorial reach of our antitrust laws often involves
courts wading through difficult questions of antitrust exemptions and immunities (to be discussed
in Chapter 50). The extraterritorial reach issue also suggests the troubling political prospect that
aggressive expansion of antitrust law’s applicability may create tension between our antitrust
policy and our foreign policy in general.
Types of Cases and the Role of Pretrial Settlements
LO49-2
Identify the respective types of antitrust cases that may be initiated by the government and by private
parties who have standing to sue.
Sherman Act violations may give rise to criminal prosecutions and civil litigation instituted by the
federal government (through the Department of Justice), as well as to civil cases filed by private
parties. A significant percentage of the antitrust cases brought by the Department of Justice are
settled without trial through nolo contendere pleas in criminal cases and consent decrees in civil
cases. Although a defendant who pleads nolo contendere technically has not admitted guilt, the
sentencing court is free to impose the same penalty that would be appropriate in the case of a guilty
plea or a conviction at trial. Consent decrees involve a defendant’s consent to remedial measures
aimed at remedying the competitive harm resulting from his actions. Because neither a nolo plea
nor a consent decree is admissible as proof of a violation of the Sherman Act in a private plaintiff’s
later civil suit, these devices are often attractive to antitrust defendants.
LOG ON
For considerable background material dealing with antitrust law (including what is meant to be a consumerfriendly explanation of antitrust enforcement), go to the website of the U.S. Department of Justice,
at www.justice.gov/atr/antitrust-laws-and-you.
Criminal Prosecutions The Sherman Act provides that individuals criminally convicted of
violating it may be fined up to $1 million per violation and may be imprisoned for as long as 10
years. The Act also states that corporations convicted of violating it may be fined as much as $100
million per violation. These maximum penalties reflect the past decade’s statutory amendments,
in which Congress significantly increased the previous penalty limits. However, the Alternative
Fine Statute allows the maximum fine amounts just noted to be exceeded in certain instances in
which the convicted defendant derived “pecuniary gain” from the offense or the offense caused
“pecuniary loss” to someone else. In such situations, the defendant “may be fined not more than
the greater of twice the gross gain or twice the gross loss,” even if the amount so calculated exceeds
the usual maximum figures for antitrust offenses. The Hsiung case, which appears later, provides
an illustration. In that case, a corporation convicted of price-fixing was fined $500 million under
the Alternative Fine Statute.
Before an individual may be found criminally responsible under the Sherman Act, however,
the government must prove an anticompetitive effect flowing from the challenged activity, as well
as criminal intent on the defendant’s part. The level of criminal intent required for a violation is a
“knowledge of [the challenged activity’s] probable consequences” rather than a specific intent to
violate the antitrust laws.2 Civil violations of the antitrust laws may be proved, however, through
evidence of either an unlawful purpose or an anticompetitive effect.
Civil Litigation The federal courts have broad injunctive powers to remedy civil antitrust
violations. Courts may order convicted defendants to divest themselves of the stock or assets of
acquired companies, to divorce themselves from a functional level of their operations (e.g.,
ordering a manufacturer to sell its captive retail outlets), to refrain from particular conduct in the
future, and to cancel existing contracts. In extreme cases, courts may also enter a dissolution
decree ordering a defendant to liquidate its assets and cease business operations. Private
individuals and page 49-5 the Department of Justice may seek such injunctive relief regarding
antitrust violations.
Treble Damages for Private Plaintiffs Section 4 of the Clayton Act discussed in detail
in Chapter 50 gives private parties a significant incentive to enforce the antitrust laws by providing
that private plaintiffs injured by Sherman Act or Clayton Act violations are entitled to recover
treble damages plus court costs and attorney fees from the defendant. This means that once antitrust
plaintiffs have demonstrated the amount of their actual losses (such as lost profits or increased
costs) resulting from the challenged violation, this amount is tripled. The potential for treble
damage liability plainly presents a significant deterrent threat to potential antitrust violators.
Standing Private plaintiffs who seek to enforce the antitrust laws must first demonstrate that they
have standing to sue. This means that they must show a direct antitrust injury as a result of the
challenged behavior. An antitrust injury results from the unlawful aspects of the challenged
behavior and is of the sort Congress sought to prevent. For example, in Brunswick Corp. v. Pueblo
Bowl-o-Mat, Inc., 429 U.S. 477 (1977), the operator of a chain of bowling centers (Pueblo)
challenged a bowling equipment manufacturer’s (Brunswick’s) acquisition of various competing
bowling centers that had defaulted on payments owed to Brunswick for equipment purchases. In
essence, Pueblo asserted that if Brunswick had not acquired them, the failing bowling centers
would have gone out of business—in which event Pueblo’s profits would have increased. The
Supreme Court rejected Pueblo’s claim because its supposed losses flowed from Brunswick’s
having preserved competition by acquiring the failing centers. Allowing recovery for such losses
would be contrary to the antitrust purpose of promoting competition.
The antitrust injury requirement contemplates a showing that competition has been harmed,
not merely a showing of harm to a particular competitor. For further discussion of this important
point, see the Suture Express case, which appears later in the chapter.
Importance of Direct Injury Proof that an antitrust injury is direct is critical because the Supreme
Court has held that indirect purchasers lack standing to sue for antitrust violations. In Illinois Brick
Co. v. State of Illinois, 431 U.S. 720 (1977), the state of Illinois and other governmental entities
sought treble damages from concrete block suppliers who, they alleged, had illegally fixed the
price of block used in the construction of public buildings. The plaintiffs acknowledged that the
builders hired to construct the buildings had actually paid the inflated prices for the blocks but
argued that these illegal costs probably had been passed on to them in the form of higher prices for
building construction. The Supreme Court refused to allow recovery, holding that granting
standing to indirect purchasers would create a risk of duplicative recoveries by purchasers at
various levels in a product’s chain of distribution. The Court also observed that affording standing
to indirect purchasers would lead to difficult problems of tracing competitive injuries through
several levels of distribution and assessing the extent of an indirect purchaser’s actual losses.
A number of state legislatures responded to Illinois Brick by enacting statutes allowing
indirect purchasers to sue under state antitrust statutes. The Supreme Court has held that the Illinois
Brick holding does not preempt such statutes.
Section 1–Restraints of Trade
LO49-3
Explain the role of the concerted action versus unilateral action distinction in determining whether
Sherman Act § 1 has been violated.
Concerted Action Section 1 of the Sherman Act states that “[e]very contract, combination in
the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several
states, or with foreign nations is declared to be illegal.” A “contract” is any agreement, express or
implied, between two or more persons or business entities to restrain competition. A combination
is a continuing partnership in restraint of trade. When two or more persons or business entities join
for the purpose of restraining trade, a conspiracy occurs.
The above statutory language makes obvious the conclusion that § 1 of the Sherman
Act is aimed at concerted action (i.e., joint action) in restraint of trade. Purely unilateral
action by a competitor, on the other hand, cannot violate § 1. This statutory section
reflects the public policy that businesspersons should make important competitive
decisions on their own, rather than in conjunction with competitors. In his famous
book The Wealth of Nations (1776), Adam Smith acknowledged both the danger to
competition posed by concerted action and the tendencies of competitors to engage in
such action. Smith observed that “[p]eople of the same trade seldom meet together, even
for merriment and diversion, [without] the conversation end[ing] in a conspiracy against
the public, or in some contrivance to raise prices.”
Section 1’s concerted action requirement poses two major problems. First, how
separate must two business entities be before their joint activities are subject to the act’s
prohibitions? It has long been held that a corporation cannot conspire with itself or its
employees and that a page 49-6 corporation’s employees cannot be guilty of a conspiracy
in the absence of some independent party. What about conspiracies, however, among
related corporate entities? In decisions several decades ago, the Supreme Court
appeared to hold that a corporation could violate the Sherman Act by conspiring with a
wholly owned subsidiary. However, in Copperweld Corp. v. Independence Tube Corp.,
467 U.S. 752 (1984), the Court repudiated the “intra-enterprise conspiracy doctrine.”
The Court held that a parent company is legally incapable of conspiring with a wholly
owned subsidiary for Sherman Act purposes because an agreement between parent and
subsidiary does not create the risk to competition that results when two independent
entities act in concert. It remains to be seen whether this approach extends to corporate
subsidiaries and affiliates that are not wholly owned. Copperweld’s logic would appear,
however, to cover any subsidiary in which the parent firm has a controlling interest.
In the American Needle case, which follows, the Supreme Court considers whether
concerted action existed for purposes of a § 1 claim when conduct alleged to have
violated the statute was that of an entity established by the National Football League
and its member teams to market and license the teams’ intellectual property.
The American Needle Court also comments on the nature of rule of reason analysis, a
subject to be addressed in an upcoming portion of this chapter.
A second–and more difficult–problem frequently accompanies attempts to enforce
§ 1. This problem arises when courts are asked to infer, from the relevant circumstances,
the existence of an agreement or conspiracy to restrain trade despite the lack of any
overt agreement by the parties. Should parallel pricing behavior by several firms be
enough, for instance, to justify the inference that a price-fixing conspiracy exists?
Courts have consistently held that proof of pure conscious parallelism, standing alone,
is not enough to establish a § 1 violation. Other evidence must be presented to show
that the defendants’ actions stemmed from an agreement, express or implied, rather than
from independent business decisions. It therefore becomes quite difficult to
attack oligopolies (a few large firms sharing one market) under § 1 because such firms
may independently elect to follow the pricing policies of the industry “price leader”
rather than risk their large market shares by engaging in vigorous price competition.
American Needle, Inc. v. National Football League
560 U.S. 183 (2010)
The National Football League (NFL) is an unincorporated association that includes 32 separately owned professional football
teams. Each team has its own name, colors, and logo and owns related intellectual property. Prior to 1963, each NFL team made
its own arrangements for licensing its intellectual property and marketing trademarked items such as caps and jerseys. In 1963,
the teams formed National Football League Properties (NFLP) to develop, license, and market their intellectual property. Most,
but not all, of the substantial revenues generated by NFLP have been shared equally among the teams.
Between 1963 and 2000, NFLP granted nonexclusive licenses to a number of vendors, permitting them to manufacture and
sell apparel bearing team insignias. American Needle, Inc. was among those licensees. In December 2000, the teams voted to
authorize NFLP to grant exclusive licenses. NFLP then granted Reebok International Ltd. a 10-year exclusive license to
manufacture and sell trademarked headwear for all 32 teams. NFLP thereafter declined to renew American Needle’s nonexclusive
license.
American Needle filed suit in federal district court, alleging that the agreements among the NFL, its teams, and NFLP
violated § 1 of the Sherman Act. In their answer to the complaint, the defendants contended that the teams, the NFL, and NFLP
were incapable of concerted action within the meaning of § 1 because they were a single economic enterprise. The district court
agreed and granted summary judgment in favor of the defendants. The U.S. Court of Appeals for the Seventh Circuit affirmed. The
U.S. Supreme Court granted American Needle’s petition for certiorari. (In the following edited version of the Supreme Court’s
opinion, the Court often refers to the defendants as “the NFL respondents.”)
Stevens, Justice
As the case comes to us, we have only a narrow issue to decide: whether the NFL respondents are capable of engaging in a “contract,
combination… , or conspiracy” as defined by § 1 of the Sherman Act, or, as we have sometimes phrased it, whether the alleged
activity by the NFL respondents “must be viewed as that of a single enterprise for purposes of § 1.” Copperweld Corp. v.
Independence Tube Corp., 467 U.S. 752, 771 (1984). Taken literally, the applicability of § 1 to “every contract, combination… or
conspiracy” could be understood to cover every conceivable agreement, whether it be a group of competing firms fixing prices or
a single firm’s chief executive telling her subordinate how to price their company’s product. But even though, “read literally,” § 1
would address “the entire body of private contract,” that is not what the page 49-7 statute means. [Citation omitted.] Not every
instance of cooperation between two people is a potential “contract, combination… , or conspiracy, in restraint of trade.”
The meaning of the term “contract, combination… or conspiracy” is informed by the basic distinction… “between concerted
and independent action” that distinguishes § 1 of the Sherman Act from § 2. Copperweld, 467 U.S. at 767. Section 1 applies only
to concerted action that restrains trade. Section 2, by contrast, covers both concerted and independent action, but only if that action
monopolizes or threatens actual monopolization. Congress used this distinction between concerted and independent action to deter
anticompetitive conduct and compensate its victims, without chilling vigorous competition through ordinary business operations.
The distinction also avoids judicial scrutiny of routine, internal business decisions.
We have long held that concerted action under § 1 does not turn simply on whether the parties involved are legally distinct
entities. Instead, we have eschewed such formalistic distinctions in favor of a functional consideration of how the parties involved
in the alleged anticompetitive conduct actually operate. As a result, we have repeatedly found instances in which members of a
legally single entity violated § 1 when the entity was controlled by a group of competitors and served, in essence, as a vehicle for
ongoing concerted activity. We have similarly looked past the form of a legally “single entity” when competitors were part of
professional organizations or trade groups.
Conversely, there is not necessarily concerted action simply because more than one legally distinct entity is involved.
Although, under a now-defunct doctrine known as the “intraenterprise conspiracy doctrine,” we once treated cooperation between
legally separate entities as necessarily covered by § 1, we now embark on a more functional analysis. We reexamined the
intraenterprise conspiracy doctrine in Copperweld, and concluded that it was inconsistent with the “basic distinction between
concerted and independent action.” Considering it “perfectly plain that an internal agreement to implement a single, unitary firm’s
policies does not raise the antitrust dangers that § 1 was designed to police,” we held that a parent corporation and its wholly owned
subsidiary “are incapable of conspiring with each other for purposes of § 1 of the Sherman Act.” We explained that although a
parent corporation and its wholly owned subsidiary are “separate” for the purposes of incorporation or formal title, they are
controlled by a single center of decisionmaking and they control a single aggregation of economic power. Joint conduct by two
such entities does not “depriv[e] the marketplace of independent centers of decisionmaking,” and as a result, an agreement between
them does not constitute a “contract, combination… or conspiracy” for purposes of § 1.
As Copperweld exemplifies, “substance, not form, should determine whether a[n]… entity is capable of conspiring under §
1.” This inquiry is sometimes described as asking whether the alleged conspirators are a single entity. That is perhaps a
misdescription, however, because the question is not whether the defendant is a legally single entity or has a single name; nor is
the question whether the parties involved seem like one firm or multiple firms in any metaphysical sense. The key is whether the
alleged “contract, combination… , or conspiracy” is concerted action–that is, whether it joins together separate decisionmakers.
The relevant inquiry, therefore, is whether there is a “contract, combination… or conspiracy” amongst “separate economic actors
pursuing separate economic interests,” such that the agreement “deprives the marketplace of independent centers of
decisionmaking,”… and thus of actual or potential competition.
The NFL teams do not possess either the unitary decisionmaking quality or the single aggregation of economic power
characteristic of independent action. Each of the teams is a substantial, independently owned, and independently managed business.
“[T]heir general corporate actions are guided or determined” by “separate corporate consciousnesses,” and “[t]heir objectives are”
not “common.” Copperweld, 467 U.S. at 771. The teams compete with one another, not only on the playing field, but to attract
fans, for gate receipts, and for contracts with managerial and playing personnel.
Directly relevant to this case, the teams compete in the market for intellectual property. To a firm making hats, the New
Orleans Saints and the Indianapolis Colts are two potentially competing suppliers of valuable trademarks. When each NFL team
licenses its intellectual property, it is not pursuing the common interests of the whole league but is instead pursuing interests of
each corporation itself; teams are acting as separate economic actors pursuing separate economic interests, and each team therefore
is a potential independent center of decisionmaking. Decisions by NFL teams to license their separately owned trademarks
collectively and to only one vendor are decisions that deprive the marketplace of independent centers of decisionmaking, and
therefore of actual or potential competition.
In defense, the NFL respondents argue that by forming NFLP, they have formed a single entity, akin to a merger, and market
their NFL brands through a single outlet. But it is not dispositive that the teams have organized and own a legally separate entity
that centralizes the management of their intellectual property. An ongoing § 1 violation cannot evade § 1 scrutiny simply by giving
the ongoing violation a name and label.
The NFL respondents may be similar in some sense to a single enterprise that owns several pieces of intellectual property
and licenses them jointly, but they are not similar in the relevant functional sense. Although NFL teams have common interests
such as promoting the NFL brand, they are still separate, profit-maximizing entities, and their interests in licensing team trademarks
are not necessarily aligned.
page 49-8
The NFL respondents argue that nonetheless, as the Court of Appeals held, they constitute a single entity because without
their cooperation, there would be no NFL football. It is true that the clubs that make up a professional sports league are not
completely independent economic competitors, as they depend upon a degree of cooperation for economic survival. But the Court
of Appeals’ reasoning is unpersuasive. The justification for cooperation is not relevant to whether that cooperation is concerted or
independent action. A “contract, combination… or conspiracy” that is necessary or useful to a joint venture is still a “contract,
combination… or conspiracy” if it deprives the marketplace of independent centers of decisionmaking. Any joint venture involves
multiple sources of economic power cooperating to produce a product. And for many such ventures, the participation of others is
necessary. But that does not mean that necessity of cooperation transforms concerted action into independent action; a nut and a
bolt can only operate together, but an agreement between nut and bolt manufacturers is still subject to § 1 analysis. Nor does it
mean that once a group of firms agree to produce a joint product, cooperation amongst those firms must be treated as independent
conduct.
As discussed later, necessity of cooperation is a factor relevant to whether the agreement is subject to the Rule of Reason. In
any event, it simply is not apparent that the alleged conduct was necessary at all. Although two teams are needed to play a football
game, not all aspects of elaborate interleague cooperation are necessary to produce a game. Moreover, even if league-wide
agreements are necessary to produce football, it does not follow that concerted activity in marketing intellectual property is
necessary to produce football.
The question whether NFLP decisions can constitute concerted activity covered by § 1 is closer than whether decisions made
directly by the 32 teams are covered by § 1. This is so both because NFLP is a separate corporation with its own management and
because the record indicates that most of the revenues generated by NFLP are shared by the teams on an equal basis. Nevertheless
we think it clear that for the same reasons the 32 teams’ conduct is covered by § 1, NFLP’s actions also are subject to § 1, at least
with regard to its marketing of property owned by the separate teams. NFLP’s licensing decisions are made by the 32 potential
competitors, and each of them actually owns its share of the jointly managed assets. Apart from their agreement to cooperate in
exploiting those assets, including their decisions as the NFLP, there would be nothing to prevent each of the teams from making
its own market decisions relating to purchases of apparel and headwear, to the sale of such items, and to the granting of licenses to
use its trademarks.
Thirty-two teams operating independently through the vehicle of the NFLP are not like the components of a single firm that
act to maximize the firm’s profits. The teams remain separately controlled, potential competitors with economic interests that are
distinct from NFLP’s financial well-being. Unlike typical decisions by corporate shareholders, NFLP licensing decisions
effectively require the assent of more than a mere majority of shareholders. And each team’s decision reflects not only an interest
in NFLP’s profits but also an interest in the team’s individual profits. The 32 teams capture individual economic benefits separate
and apart from NFLP profits as a result of the decisions they make for the NFLP. NFLP’s decisions thus affect each team’s profits
from licensing its own intellectual property. In making the relevant licensing decisions, NFLP is therefore an instrumentality of the
teams. [For the reasons stated here,] decisions by the NFLP regarding the teams’ separately owned intellectual property constitute
concerted action.
Football teams that need to cooperate are not trapped by antitrust law. The special characteristics of this industry may provide
a justification for many kinds of agreements. The fact that NFL teams share an interest in making the entire league successful and
profitable, and that they must cooperate in the production and scheduling of games, provides a perfectly sensible justification for
making a host of collective decisions. But the conduct at issue in this case is still concerted activity under the Sherman Act that is
subject to § 1 analysis.
When “restraints on competition are essential if the product is to be available at all,” per se rules of illegality are inapplicable,
and instead the restraint must be judged according to the flexible Rule of Reason. [Citation omitted.] In such instances, the
agreement is likely to survive the Rule of Reason. And depending upon the concerted activity in question, the Rule of Reason may
not require a detailed analysis; it “can sometimes be applied in the twinkling of an eye.” [Citation omitted.]
Other features of the NFL may also save agreements amongst the teams. We have recognized, for example, “that the interest
in maintaining a competitive balance” among athletic teams “is legitimate and important.” National Collegiate Athletic Association
v. Board of Regents, 468 U.S. 85, 117 (1984). While that same interest applies to the teams in the NFL, it does not justify treating
them as a single entity for § 1 purposes when it comes to the marketing of the teams’ individually owned intellectual property. It
is, however, unquestionably an interest that may well justify a variety of collective decisions made by the teams. What role it
properly plays in applying the Rule of Reason to the allegations in this case is a matter to be considered on remand.
Court of Appeals decision reversed; case remanded for further proceedings.
Per Se versus Rule of Reason Analysis
LO49-4
Explain the difference between per se analysis and rule of reason analysis in Sherman Act § 1 cases.
Per Se Analysis Although § 1’s language condemns “every” contract, combination, and
conspiracy in restraint of trade, the Supreme Court has long held that the Sherman Act applies only
to behavior that unreasonably restrains competition. In addition, the Court has developed two
fundamentally different approaches to analyzing behavior challenged under § 1. According to the
Court, some actions always have a negative effect on competition–an effect that cannot be excused
or justified. Such actions are classified as per se unlawful. If a particular behavior falls under the
per se heading, it is conclusively presumed to violate § 1. Per se rules are thought to provide
reliable guidance to business. They also simplify otherwise lengthy antitrust litigation because if
per se unlawful behavior is proven, the defendant cannot assert any supposed justifications in an
attempt to avoid liability.
Per se rules, however, are frequently criticized on the ground that they oversimplify complex
economic realities. Recent decisions reveal that for various economic activities, the Supreme Court
and the lower federal courts are moving away from per se rules and instead adopting rule of reason
analysis. This trend is consistent with courts’ increased inclination to consider economic theories
that seek to justify behavior previously held to be per se unlawful.
Rule of Reason Analysis Behavior not classified as per se unlawful is judged under the rule of
reason. This approach requires a detailed inquiry into the actual competitive effects of the
defendant’s actions. It includes consideration of any justifications that the defendant may advance.
If the court concludes that the challenged activity had a significant anticompetitive effect that was
not offset by any positive effect on competition or other social benefit such as enhanced economic
efficiency, the activity will be held to violate § 1. On the other hand, if the court concludes that the
justifications advanced by the defendant outweigh the harm to competition resulting from the
defendant’s activity, there is no § 1 violation. For a brief discussion of the nature of rule of reason
analysis, see the American Needle decision, which appears earlier.
In recent years, courts have sometimes employed a so-called quick-look analysis instead of a
full-fledged rule of reason analysis. Quick-look analysis may be described as an intermediate type
of analysis that falls somewhere between the black-and-white per se approach and the more
complicated rule of reason approach. Courts may be inclined to employ quick-look analysis when
they believe the behavior at issue could have both anticompetitive and procompetitive effects that
can be weighed against each other without the extensive market analyses that may be necessary
under full rule of reason treatment. In this sense, quick-look analysis serves as a toned-down
version of the rule of reason approach.
The following subsections of this chapter examine some of the behaviors that may or will be
held to violate § 1. The legal analysis given to the respective behaviors is also considered.
Horizontal Price-Fixing
LO49-5
Describe what horizontal price-fixing is and identify the type of analysis (per se or rule of reason) that
such behavior receives when courts determine whether it is unlawful.
An essential attribute of a free market is that the price of goods and services is determined by the
free play of the impersonal forces of the marketplace. Attempts by competitors to interfere with
market forces and control prices–called horizontal price-fixing–have long been held per se
unlawful under § 1. Horizontal price-fixing may take the form of direct agreements among
competitors about the price at which they sell or buy a particular product or service. It may also be
accomplished by agreements on the quantity of goods to be produced, offered for sale, or bought.
In one famous case, an agreement by major oil refiners to purchase and store the excess production
of small independent refiners was held to amount to price-fixing because the purpose of the
agreement was to affect the market price for gasoline by artificially limiting the available supply.3
Some commentators have suggested that agreements among competitors to
fix maximum prices should be treated under a rule of reason approach rather than the harsher per
se standard because, in some instances, such agreements may result in savings to consumers. In
addition, lower courts have occasionally sought to craft exceptions to the rule that horizontal pricefixing triggers per se treatment. It is important to note, however, that the Supreme Court continues
to adhere to the long-standing rule of per se illegality for any form of horizontal price-fixing.
In U.S. v. Hsiung, which follows, a federal court of appeals rejects individual and corporate
defendants’ argument that the court should apply rule of reason treatment to the horizontal pricefixing conspiracy at issue in the case.
In recent years, the federal government has devoted significant regulatory attention
to price-fixing. For instance, the Justice Department conducted a 2014 investigation
into whether price-fixing and other collusive activity occurred in apparent attempts to
manipulate benchmark rates (most notably LIBOR, the London interbank offered rate).
Such rates are used in setting interest rates globally. Earlier in 2014, Bridgestone Corp.
pleaded guilty to a charge of conspiring to fix prices of rubber car parts and agreed to
pay a $425 million fine. In 2012 and 2013, 20 foreign companies pleaded guilty to
charges of price-fixing regarding car parts and were fined hundreds of millions of
dollars. Various executives of those companies were also charged, convicted, and
sentenced to prison. Of course, criminal proceedings by the government do not bar civil
actions by private parties (or the government) in regard to the same conduct that formed
the basis of the criminal case.
United States v. Hsiung758 F.3d 1074 (9th Cir. 2014)
AU Optronics Corporation (AUO) is a Taiwanese company. Its wholly owned subsidiary, AU Optronics Corporation of America
(AUOA), serves as AUO’s retailer and maintains offices in Texas and California. AUO, AUOA, and two AUO executives, Hsuan
Bin Chen (president and chief operating officer) and Hui Hsiung (executive vice president), were defendants in a criminal antitrust
case brought by the U.S. government in the U.S. District Court for the Northern District of California. The government alleged that
the defendants participated in an international conspiracy to fix prices for display panels known as TFT-LCDs. TFT-LCD, which
is an abbreviation for thin-film-transistor liquid-crystal display, is a display technology used in flat-panel computer monitors,
notebook computers, flat-panel televisions, and other devices.
The government based its case on meetings that took place in Taiwan from October 2001 to January 2006 and involved
representatives from six leading TFT-LCD manufacturers. Some of these manufacturers were Taiwanese firms; others were Korean
firms. The meetings were designed, the government alleged, to “set the target price” and “stabilize the price” of TFT-LCDs, which
were sold in the United States principally to Dell, Hewlett-Packard (HP), Compaq, Apple, and Motorola for use in consumer
electronics. This series of meetings, in which Chen, Hsiung, and other AUO employees participated extensively, came to be known
as the Crystal Meetings.
Following each Crystal Meeting, the participating companies produced “Crystal Meeting Reports.” These reports provided
pricing targets for TFT-LCD sales, which, in turn, were used by retail branches of the companies as price benchmarks for selling
panels to wholesale customers. More specifically, AUOA used the Crystal Meeting Reports that AUO provided to negotiate prices
for the sale of TFT-LCDs to U.S. customers, including HP, Compaq, ViewSonic, Dell, and Apple. AUOA employees and
executives routinely traveled to the offices of Dell, Apple, and HP in Texas and California to discuss TFT-LCD pricing based on
the targets coming out of the Crystal Meetings. Chen and Hsiung played especially important roles in settling price disputes with
executives at Dell.
Crystal Meeting participants stood to make enormous profits from TFT-LCD sales to U.S. technology retailers. During the
period of the alleged conspiracy, the United States comprised approximately one-third of the global market for personal computers
incorporating TFT-LCDs, and sales of panels by Crystal Meeting participants to the United States generated more than $600 million
in revenue. The conspiracy ended when the FBI raided AUOA’s Texas office.
Following a criminal indictment and a jury trial, AUO, AUOA, Chen, and Hsiung were convicted of conspiracy to fix prices
in violation of the Sherman Act. The jury also found that the “combined gross gains derived from the conspiracy by all the
participants in the conspiracy” were “$500 million or more.” The district court sentenced Hsiung and Chen to 36 months of
imprisonment and assessed a $200,000 fine on each of them. The court sentenced the corporate defendants to a three-year term of
probation with conditions. In addition, relying on a law known as the Alternative Fine Statute, the court imposed a $500 million
fine on AUO. All of the defendants appealed their convictions to the U.S. Court of Appeals for the Ninth Circuit. AUO also
appealed its sentence.
McKeown, Circuit Judge
The defendants’ appeal raises complicated issues of first impression regarding the reach of the Sherman Act in a globalized
economy. The defendants contend that the rule of reason applies to this price-fixing conspiracy because of its foreign character.
[According to the defendants, the] foreign involvement [should] override the longstanding rule that a horizontal price-fixing
conspiracy is subject to per se analysis under the antitrust laws. They also urge that… the nexus to United States commerce was
insufficient [to violate] the Sherman Act.
page 49-11
As a preliminary matter, [however,] the defendants appeal on the basis of improper venue [i.e., that the Northern District of
California was not an appropriate location for the case to be brought]. The indictment alleged that the charged conspiracy “was
carried out, in part, in the Northern District of California.” Trial testimony established that AUO employees negotiated prices for
TFT-LCDs with HP in Cupertino, California. “It is by now well settled that venue on a conspiracy charge is proper where… any
overt act committed in furtherance of the conspiracy occurred.” [Citation omitted.] In addition to the HP negotiations, the
government introduced evidence that AUOA representatives negotiated sales of price-fixed TFT-LCDs with Apple in the Northern
District of California and that AUOA maintained offices in the Northern District of California from which it conducted price
negotiations by e-mail and phone. This evidence is sufficient to establish… that overt acts in furtherance of the conspiracy occurred
in the Northern District of California. Thus, venue was proper.
The Supreme Court’s seminal case on antitrust and foreign conduct is Hartford Fire Insurance v. California, 509 U.S. 764
(1993), in which the Court held that “the Sherman Act applies to foreign conduct that was meant to produce and did in fact produce
some substantial effect in the United States.” Id. at 796. The district court instructed the jury to this effect:
To convict the defendants you must find beyond a reasonable doubt one or both of the following: (A) that at least one member of
the conspiracy took at least one action in furtherance of the conspiracy within the United States, or (B) that the conspiracy had a
substantial and intended effect in the United States.
Before trial, the defendants moved to dismiss the indictment on the basis that it did not allege adequately the Hartford
Fire “substantial and intended effects” test. At the jury instructions conference, the defendants urged the district court to give
the Hartford Fire instruction, while also claiming that part A of the instruction was erroneous because it permitted the jury to
convict on the basis of one domestic act. As to part A of the instruction, the defendants objected on the basis that it “would
render Hartford Fire entirely nugatory, as, having proven the most minimal act in furtherance of a charged agreement, the
government would never have to prove an intended and substantial effect on U.S. commerce.” Although the defendants contested
part A, they all concurred that part B “is a correct statement of the Hartford Fire requirements for establishing extraterritorial
jurisdiction over foreign anticompetitive conduct, and should be given.”
“In reviewing jury instructions, the relevant inquiry is whether the instructions as a whole are misleading or inadequate to
guide the jury’s deliberation.” [Citation omitted.] Immediately following the [above-quoted] Hartford Fire instruction, the district
court instructed the jury that it must find the following beyond a reasonable doubt:
[T]hat the members of the conspiracy engaged in one or both of the following activities:
(A) fixing the price of TFT-LCD panels targeted by the participants to be sold in the United States or for delivery to the United
States; or
(B) fixing the price of TFT-LCD panels that were incorporated into finished products such as notebook computers, desktop
computer monitors, and televisions, and that this conduct had a direct, substantial, and reasonably foreseeable effect on trade or
commerce in those finished products sold in the United States or for delivery to the United States. In determining whether the
conspiracy had such an effect, you may consider the total amount of trade or commerce in those finished products sold in the United
States or for delivery to the United States; however, the government’s proof need not quantify or value that effect.
The effect of foreign conduct in the United States was a central point of controversy throughout the trial. Nonetheless, the conduct
always was linked, as in the above instruction, to targeting for sale or delivery in the United States. Part A of the [above] instruction
required the jury to find that the defendants fixed the prices of TFT-LCDs “targeted” for sale or delivery in the United States. This
“targeting” language subsumed intentionality. See Oxford English Dictionary 642 (2d ed. 1989) (defining “targeted” as
“[d]esignated or chosen as a target”). There is no way that the defendants could have unintentionally designated or chosen the
United States market as a target of the conspiracy. Viewing the instructions as a whole, nothing misled the jury as to its task.
Having determined that the prosecution was not barred by an extraterritoriality defense, we address the appropriate standard
for judging liability in this price-fixing scheme. For over a century, courts have treated horizontal price-fixing as a per se violation
of the Sherman Act. See, e.g., United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 218 (1940). [I]n recent years, the Supreme
Court reiterated this principle. The directive in Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 893 (2007), is
unequivocal: “A horizontal cartel among competing manufacturers or competing retailers that decreases output or reduces
competition in order to increase price is, and ought to be, per se unlawful.”
Consistent with Supreme Court precedent, the district court treated this price-fixing case as governed by the per se rule. The
defendants claim that the district court erred by not adopting the rule of reason as the benchmark and that the indictment, jury
instructions, and proof were deficient under rule of reason analysis. page 49-12 We hold that the price-fixing scheme as alleged
and proven is subject to per se analysis under the Sherman Act.
According to the defendants, this is not a per se case because under Metro Industries v. Sammi Corp., 82 F.3d 839 (9th Cir.
1996), “application of the per se rule is not appropriate where the conduct in question occurred in another country.” This approach
invites us to read our circuit precedent in Metro Industries as out of sync with the well-established tradition of analyzing pricefixing under the per se rule and recent Supreme Court precedent emphasizing that price-fixing ought to be analyzed under the per
se rule. We decline the invitation. Although the language from Metro Industries may have created some ambiguity based on the
unusual facts of that case, we do not read the case as controlling. In any event, the Supreme Court’s subsequent confirmation that
courts should continue to treat horizontal price-fixing as a per se violation of the Sherman Act laid to rest any uncertainty. See
United States v. Golden Valley Elec. Ass’n, 689 F.3d 1108, 1112 (9th Cir. 2012).
Invoking the language in Metro Industries to suggest that price-fixing cases involving foreign conduct always should be
analyzed under the rule of reason is “clearly irreconcilable” with Supreme Court precedent. See id. To begin, Metro Industries was
not a price-fixing case; rather, it involved a horizontal market division for stainless steamers by a group of Korean companies. [We
noted in Metro Industries] that because the market division at issue was “not a classic horizontal market division agreement,” the
rule of reason applied. We then went on to write that even if [the conduct at issue] was a market division that would ordinarily be
treated as a per se violation of the Sherman Act, the rule of reason applied because the allegedly unlawful conduct occurred in a
foreign country. This broad statement, which was wholly superfluous, and unnecessary to the holding, has not been repeated in
subsequent cases and appears to be limited to the unique facts of [Metro Industries]. Not surprisingly, this statement also has been
the subject of scholarly criticism.
Unlike Metro Industries, this case centers on a classic horizontal price-fixing scheme subject to the per se rule. See Leegin
Creative, 551 U.S. at 893. Also unlike Metro Industries, in which there was “no evidence of actual injury to competition in the
United States,” the voluminous evidence here documents substantial effects on the United States. The conduct here did not occur
in a solely foreign bubble. Although the agreement to fix prices occurred in Taiwan, the sale of price-fixed TFT-LCDs occurred in
large part in the United States.
In reiterating the applicability of the per se rule for horizontal price-fixing, a result that Supreme Court precedent compels,
we also join the reasoning of other circuits. The district court was bound to apply the per se rule and appropriately rejected the rule
of reason defense.
The final basis for the defendants’ appeal is the $500 million fine the district court imposed on AUO pursuant to the
Alternative Fine Statute, [which] provides: “If any person derives pecuniary gain from the offense, or if the offense results in
pecuniary loss to a person other than the defendant, the defendant may be fined not more than the greater of twice the gross gain
or twice the gross loss.…” 18 U.S.C. § 3571(d). The jury found that the collective gain to the conspiracy members was over $500
million. We [must consider] whether the fine was improper because it was based on the collective gains to all members of the
conspiracy rather than the gains to AUO alone. [This is an issue] of first impression.
Whether “gross gains” under § 3571 means gross gains to the individual defendant or to the conspiracy as a whole is an issue
of statutory interpretation that we review de novo. The district court instructed the jury as follows:
In determining the gross gain from the conspiracy, [the jury] should total the gross gains to the defendants and the other participants
in the conspiracy from affected sales of (1) TFT-LCD panels that were manufactured abroad and sold in the United States or for
delivery to the United States; or (2) TFT-LCD panels incorporated into finished products such as notebook computers and desktop
computer monitors that were sold in the United States or for delivery to the United States. Gross gain is the additional revenue to
the conspirators from the conspiracy.
This instruction was proper because the statute unambiguously permits a “gross gains” calculation based on the gain
attributable to the entire conspiracy. The statute does not require that the gain derive from the defendant’s “own individual conduct,”
as AUO reads it. Indeed, AUO’s interpretation reads additional provisions into the statute. AUO relies on United States v. Pfaff, 619
F.3d 172, 175 (2d Cir. 2010), which held that the jury must find the gain or loss amount to impose a fine beyond the limits set by
§ 3571. Pfaff is not instructive because it was not a conspiracy case; it did not address whether gross gains could include gains to
all coconspirators. Nor has AUO pointed to any case that supports its suggested interpretation, which is contrary to the plain text
of the statute.
AUO’s offense is the conspiracy to fix prices for TFT-LCDs. The jury found $500 million in gross gains from that offense.
The unambiguous language of the statute permitted the district court to impose the $500 million fine based on the gross gains to
all the coconspirators.
Convictions and sentences of defendants affirmed.
A Note on United States v. Apple
When Apple entered the e-book market in 2010, it collaborated with five book publishers to essentially raise the price of e-books
above Amazon’s then price of $9.99 per book. Under the terms of Apple’s agreement with publishers, publishers were allowed to
set their own prices for their books instead of the retailer (e.g., Amazon). Apple called this practice “agency pricing” and suggested
that it was an innovative business model. Apple also required publishers to use an agency pricing model–including with Amazon.
This additional requirement opened the door to publishers, allowing them to essentially eliminate Amazon’s $9.99 pricing.
The agreement between Apple and the publishers caused prices of e-books across the board to rise, and in 2012 the
Department of Justice brought a case accusing Apple of horizontal price-fixing. [Note that the publishers ended up settling with
the Department of Justice for their behavior through consent decrees.] A federal district court found that Apple had orchestrated a
horizontal price-setting conspiracy and that the agreement was an unreasonable restraint on trade. In 2015, by a 2-to-1 vote, the
U.S. Court of Appeals for the Second Circuit in United States v. Apple, Inc., 791 F.3d 290 (2d Cir. 2015), upheld the district court’s
ruling, and the Supreme Court refused to grant certiorari to review the appellate court ruling. As a result, the appellate court’s ruling
stood, and Apple was required to provide $400 million in cash and credits to customers and $50 million to attorneys involved in
the case.
Throughout the litigation, Apple argued, in part, that even if its conduct did amount to a horizontal price-fixing conspiracy,
its conduct should not be condemned as a per se violation and instead the application of the rule of reason should be applied and
its conduct deemed lawful. While acknowledging that there has been a shift in jurisprudence away from per se illegality for vertical
restraints, the appellate court noted that the same is not true for horizontal restraints. As stated by the court, “horizontal price-fixing
conspiracies traditionally have been, and remain, the ”archetypal example’ of a per se unlawful restraint on trade.”
Vertical Price-Fixing
LO49-6
Describe what vertical price-fixing is and identify the type of analysis (per se or rule of reason) that
such behavior receives when courts determine whether it is unlawful.
Attempts by manufacturers or suppliers to control the price of their products may also fall within
the scope of § 1. This behavior is called vertical price-fixing or resale price maintenance. In
determining whether vertical price-fixing occurred, the first question is whether there was only
unilateral action on the part of the manufacturer or whether there was instead the concerted action
contemplated by § 1. A manufacturer may lawfully state a suggested retail price for its products–
an action that is unilateral and therefore not a violation of § 1. Illegality may be present, however,
when there is a manufacturer–dealer agreement (express or implied) obligating the dealer to resell
at a price dictated by the manufacturer.
Unilateral Refusals to Deal In United States v. Colgate & Co., 250 U.S. 300 (1919), the Supreme
Court held that a manufacturer could unilaterally refuse to deal with those who failed to follow
the manufacturer’s suggested resale prices. The rationale underlying this rule was that a single firm
may deal or not deal with whomever it chooses without violating § 1 because unilateral action is
not the joint action prohibited by the statute. Subsequent decisions, however, have narrowly
construed the Colgate doctrine. Depending upon the facts, circumstances, and effects,
manufacturers may be held to have violated § 1 if they enlist the aid of dealers who are not pricecutting to help enforce their (the manufacturers’) pricing policies, or if they engage in other
concerted action to further those policies. “May be held to have violated § 1” is important language
in the previous sentence, in view of the mode of analysis now required by the Supreme Court in
cases of alleged resale price maintenance.
The Shift to Rule of Reason For a considerable number of years, Supreme Court decisions
established that all forms of vertical price-fixing were per se violations of § 1. With per se treatment
being given to such cases, defendants were not permitted to offer justifications for their behavior.
Chicago School theorists argued, however, that many of the same reasons held to justify rule of
reason analysis of vertical nonprice restraints on distribution (discussed later in this chapter) were
equally applicable to vertical price-fixing agreements. In particular, these critics argued that
vertical restrictions limiting the maximum price at which a dealer can resell may prevent dealers
with dominant market positions from exploiting consumers through price-gouging. In State Oil
Co. v. Khan, 522 U.S. 3 (1997), the Supreme Court agreed with the critics and overruled a longstanding precedent that had required per se treatment for vertical maximum price-fixing. The Court
held in Khan that such behavior should instead be evaluated under the rule of reason, given that
consumers could benefit when manufacturers and dealers jointly set maximum prices. The Court
also recognized that there could be other sound page 49-14 business justifications for such
agreements between manufacturers and dealers and that defendants alleged to have engaged in
vertical maximum price-fixing should be given an opportunity to offer those justifications.
For 10 years after Khan was decided, vertical minimum price-fixing continued to be governed
by the per se rule. Arguments for rule of reason analysis continued to resonate, however. In a 5–4
decision issued in 2007, the Supreme Court overruled a 96-year-old precedent and held that
vertical minimum price-fixing would be judged under the rule of reason rather than the per se
approach. The 2007 decision, Leegin Creative Leather Products v. PSKS, Inc., appears below.
After Khan and Leegin, all forms of vertical price-fixing now receive rule of reason analysis.
Leegin Creative Leather Products v. PSKS, Inc.
551 U.S. 877 (2007)
Leegin Creative Leather Products Inc. designs, manufactures, and distributes leather goods and accessories. In 1991, Leegin began
to sell belts under the “Brighton” brand name. The Brighton brand has since expanded into a variety of women’s fashion
accessories. It is sold across the United States in more than 5,000 retail establishments. PSKS, Inc. operates Kay’s Kloset, a
women’s apparel store that, in 1995, began purchasing Brighton goods from Leegin for retail sale. Brighton became the store’s
most important brand and once accounted for 40 to 50 percent of its profits.
In 1997, Leegin instituted the “Brighton Retail Pricing and Promotion Policy.” Under this policy, Leegin refused to sell to
retailers that discounted Brighton goods below suggested prices. Leegin adopted the policy to give its retailers sufficient margins
to enable them to provide customers the service central to its distribution strategy. It also expressed concern that discounting harmed
Brighton’s brand image and reputation. In 1998, Leegin implemented a “Heart Stores” policy, under which retailers were given
incentives to become Heart Stores and, in return, pledged to adhere to Leegin’s suggested prices. Kay’s Kloset became a Heart
Store but later lost that status when a Leegin representative concluded that the store was physically unattractive. Kay’s Kloset
continued, however, to purchase Brighton products for resale at the store.
In December 2002, Leegin discovered that Kay’s Kloset had been marking down the entire Brighton line by 20 percent.
Kay’s Kloset contended that it did so in order to compete with nearby retailers who also were undercutting Leegin’s suggested
prices. Leegin requested that Kay’s Kloset cease discounting, but Kay’s Kloset refused. Leegin then stopped selling to the store.
The loss of the Brighton brand had a considerable negative impact on Kay’s Kloset’s revenues.
PSKS sued Leegin in federal district court, claiming that Leegin had violated Sherman Act § 1 by “enter[ing] into agreements
with retailers to charge only those prices fixed by Leegin.” Leegin planned to introduce expert testimony describing the
procompetitive effects of its pricing policy. The district court excluded the testimony, however, because longstanding Supreme
Court precedent extended per se treatment to vertical minimum price-fixing. At trial, PSKS argued that the Heart Store program,
among other things, demonstrated that Leegin and its retailers had agreed to fix prices. Leegin responded that it had established a
lawful unilateral pricing policy rather than engaging in the concerted action required for a violation of § 1. The jury agreed with
PSKS and awarded it $1.2 million in damages. The district court trebled the damages and ordered reimbursement of PSKS for its
attorney fees. In its appeal to the U.S. Court of Appeals for the Fifth Circuit, Leegin did not dispute that it had entered into vertical
price-fixing agreements with its retailers. Rather, it contended that the rule of reason should have been applied to those agreements.
Rejecting this argument because it considered itself bound by Supreme Court precedent, the Fifth Circuit affirmed the district
court’s decision. The U.S. Supreme Court granted Leegin’s petition for a writ of certiorari.
Kennedy, Justice
In Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), the Court established the rule that it is per se illegal
under § 1 of the Sherman Act for a manufacturer to agree with its distributor to set the minimum price the distributor can charge
for the manufacturer’s goods. The question presented by the instant case is whether the Court should overrule the per se rule and
allow resale price maintenance agreements to be judged by the rule of reason, the usual standard applied to determine if there is a
violation of § 1.
Section 1 prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or
commerce among the several States.” While § 1 could be interpreted to proscribe all contracts,… the Court has repeated time and
again that § 1 “outlaw[s] only unreasonable restraints.” State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). The rule of reason is the
accepted standard for testing whether a practice restrains trade in violation of § 1. “Under this rule, the factfinder weighs all of the
circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable page 4915 restraint on competition.” Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 49 (1977). Appropriate factors to take into
account include “specific information about the relevant business” and “the restraint’s history, nature, and effect.” Khan, [522
U.S.]at 10. Whether the businesses involved have market power is a further, significant consideration. In its design and function
the rule distinguishes between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating
competition that are in the consumer’s best interest.
The rule of reason does not govern all restraints. Some types are deemed unlawful per se. The per se rule, treating categories
of restraints as necessarily illegal, eliminates the need to study the reasonableness of an individual restraint in light of the real
market forces at work. [I]t must be acknowledged [that] the per se rule can give clear guidance for certain conduct. Restraints that
are per se unlawful include horizontal agreements among competitors to fix prices or to divide markets.
Resort to per se rules is confined to restraints, like those mentioned, “that would always or almost always tend to restrict
competition and decrease output.” [Case citation omitted.] To justify a per se prohibition a restraint must have “manifestly
anticompetitive” effects and “lack… any redeeming virtue.” [Case citations omitted.] As a consequence, the per se rule is
appropriate only after courts have had considerable experience with the type of restraint at issue, and only if courts can predict with
confidence that it would be invalidated in all or almost all instances under the rule of reason. It should come as no surprise, then,
that “we have expressed reluctance to adopt per se rules with regard to restraints imposed in the context of business relationships
where the economic impact of certain practices is not immediately obvious.” Khan, [522 U.S.] at 10. [A]s we have stated, “a
departure from the rule of reason standard must be based upon demonstrable economic effect rather than upon formalistic linedrawing.” GTE Sylvania, [433 U.S.] at 58–59.
The Court has interpreted Dr. Miles as establishing a per se rule against a vertical agreement between a manufacturer and its
distributor to set minimum resale prices. In Dr. Miles, the plaintiff, a manufacturer of medicines, sold its products only to
distributors who agreed to resell them at set prices. The Court found the manufacturer’s control of resale prices to be unlawful. It
relied on the common-law rule that “a general restraint upon alienation is ordinarily invalid.” The Court then explained that the
agreements would advantage the distributors, not the manufacturer, and were analogous to a combination among competing
distributors, which the law treated as void.
The reasoning of the Court’s more recent jurisprudence has rejected the rationales on which Dr. Miles was based. By relying
on the common-law rule against restraints on alienation, the Court justified its decision based on “formalistic” legal doctrine rather
than “demonstrable economic effect” [quoting GTE Sylvania]. The Court in Dr. Miles relied on a treatise published in 1628, but
failed to discuss in detail the business reasons that would motivate a manufacturer situated in 1911 to make use of vertical price
restraints. The Court should be cautious about putting dispositive weight on doctrines from antiquity but of slight relevance. We
reaffirm that “the state of the common law 400 or even 100 years ago is irrelevant to the issue before us: the effect of the antitrust
laws upon vertical distributional restraints in the American economy today.” GTE Sylvania, [433 U.S.] at 53.
Dr. Miles, furthermore, treated vertical agreements a manufacturer makes with its distributors as analogous to a horizontal
combination among competing distributors. In later cases, however, the Court rejected the approach of reliance on rules governing
horizontal restraints when defining rules applicable to vertical ones. Our recent cases formulate antitrust principles in accordance
with the appreciated differences in economic effect between vertical and horizontal agreements, differences the Dr. Miles Court
failed to consider. The reasons upon which Dr. Miles relied do not justify a per se rule. As a consequence, it is necessary to examine,
in the first instance, the economic effects of vertical agreements to fix minimum resale prices, and to determine whether the per se
rule is nonetheless appropriate.
Though each side of the debate can find sources to support its position, it suffices to say here that economics literature is
replete with procompetitive justifications for a manufacturer’s use of resale price maintenance. The few recent studies documenting
the competitive effects of resale price maintenance also cast doubt on the conclusion that the practice meets the criteria for a per se
rule. The justifications for vertical price restraints are similar to those for other vertical restraints. Minimum resale price
maintenance can stimulate interbrand competition– the competition among manufacturers selling different brands of the same type
of product–by reducing intrabrand competition–the competition among retailers selling the same brand. The promotion of
interbrand competition is important because “the primary purpose of the antitrust laws is to protect [this type of]
competition.” Khan, [522 U.S.] at 15. A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price
competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the
manufacturer’s position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more
options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in
between.
Absent vertical price restraints, the retail services that enhance interbrand competition might be underprovided. This is
because discounting retailers can free ride on retailers who furnish page 49-16 services and then capture some of the increased
demand those services generate. Consumers might learn, for example, about the benefits of a manufacturer’s product from a retailer
that invests in fine showrooms, offers product demonstrations, or hires and trains knowledgeable employees. Or consumers might
decide to buy the product because they see it in a retail establishment that has a reputation for selling high-quality merchandise. If
the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing
a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than
consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem because it prevents the discounter
from undercutting the service provider. With price competition decreased, the manufacturer’s retailers compete among themselves
over services.
While vertical agreements setting minimum resale prices can have procompetitive justifications, they may have
anticompetitive effects in other cases; and unlawful price fixing, designed solely to obtain monopoly profits, is an ever-present
temptation. Notwithstanding the risks of unlawful conduct, it cannot be stated with any degree of confidence that resale price
maintenance always or almost always tend[s] to restrict competition and decrease output. Vertical agreements establishing
minimum resale prices can have either procompetitive or anticompetitive effects, depending upon the circumstances in which they
are formed. And although the empirical evidence on the topic is limited, it does not suggest efficient uses of the agreements are
infrequent or hypothetical. As the rule would proscribe a significant amount of procompetitive conduct, these agreements appear
ill suited for per se condemnation.
PSKS contends, nonetheless, that vertical price restraints should be per se unlawful because of the administrative convenience
of per se rules. That argument suggests per se illegality is the rule rather than the exception. This misinterprets our antitrust law.
Per se rules may decrease administrative costs, but that is only part of the equation. Those rules can be counterproductive. They
can increase the total cost of the antitrust system by prohibiting procompetitive conduct the antitrust laws should encourage. They
also may increase litigation costs by promoting frivolous suits against legitimate practices. Were the Court now to conclude that
vertical price restraints should be per se illegal based on administrative costs, we would undermine, if not overrule, the traditional
demanding standards for adopting per se rules. Any possible reduction in administrative costs cannot alone justify the Dr.
Miles rule.
PSKS also argues the per se rule is justified because a vertical price restraint can lead to higher prices for the manufacturer’s
goods. PSKS is mistaken in relying on pricing effects absent a further showing of anticompetitive conduct. For, as has been
indicated already, the antitrust laws are designed primarily to protect interbrand competition, from which lower prices can later
result. The Court, moreover, has evaluated other vertical restraints under the rule of reason even though prices can be increased in
the course of promoting procompetitive effects.
The rule of reason is designed and used to eliminate anticompetitive transactions from the market. This standard principle
applies to vertical price restraints. A party alleging injury from a vertical agreement setting minimum resale prices will have, as a
general matter, the information and resources available to show the existence of the agreement and its scope of operation. As courts
gain experience considering the effects of these restraints by applying the rule of reason over the course of decisions, they can
establish the litigation structure to ensure the rule operates to eliminate anticompetitive restraints from the market and to provide
more guidance to businesses.
For the foregoing reasons, we think that were the Court considering the issue as an original matter, the rule of reason, not a
per se rule of unlawfulness, would be the appropriate standard to judge vertical price restraints. We do not write on a clean slate,
[however,] for the decision in Dr. Miles is almost a century old. So there is an argument for its retention on the basis of stare decisis
alone. Even if Dr. Miles established an erroneous rule, “[s]tare decisis reflects a policy judgment that in most matters it is more
important that the applicable rule of law be settled than that it be settled right.” Khan, [522 U.S.] at 20. And concerns about
maintaining settled law are strong when the question is one of statutory interpretation.
Stare decisis is not as significant in this case, however, because the issue before us is the scope of the Sherman Act. Khan,
[522 U.S.] at 20 ( “[T]he general presumption that legislative changes should be left to Congress has less force with respect to the
Sherman Act”). From the beginning the Court has treated the Sherman Act as [if it were common law]. Just as the common law
adapts to modern understanding and greater experience, so too does the Sherman Act’s prohibition on “restraint[s] of trade” evolve
to meet the dynamics of present economic conditions. The case-by-case adjudication contemplated by the rule of reason has
implemented this common-law approach. Likewise, the boundaries of the doctrine of per se illegality should not be immovable.
For “[i]t would make no sense to create out of the single term ”restraint of trade’ a chronologically schizoid statute, in which a
”rule of reason’ evolves with new circumstance and new wisdom, but a line of per se illegality remains forever fixed where it was.”
[Case citation omitted.]
Stare decisis, we conclude, does not compel our continued adherence to the per se rule against vertical price restraints. As
discussed earlier, respected authorities in the economics literature suggest the per se rule is inappropriate, and there is now
widespread agreement that resale price maintenance can
page 49-17 have procompetitive effects. It is also significant that both the Department of Justice and the Federal Trade
Commission–the antitrust enforcement agencies with the ability to assess the long-term impacts of resale price maintenance–have
recommended that this Court replace the per se rule with the traditional rule of reason. In the antitrust context the fact that a decision
has been “called into serious question” justifies our reevaluation of it. Khan, [522 U.S.] at 21.
Other considerations reinforce the conclusion that Dr. Miles should be overruled. Of most relevance, “we have overruled our
precedents when subsequent cases have undermined their doctrinal underpinnings.” [Case citation omitted.] The Court’s treatment
of vertical restraints has progressed away from Dr. Miles’ strict approach. We have distanced ourselves from the opinion’s
rationales. This is unsurprising, for the case was decided not long after enactment of the Sherman Act when the Court had little
experience with antitrust analysis.
In more recent cases the Court… has continued to temper, limit, or overrule once strict prohibitions on vertical restraints. In
1977, the Court overturned the per se rule for vertical nonprice restraints, adopting the rule of reason in its stead. GTE Sylvania,
[433 U.S.] at 57–59. [I]n 1997, after examining the issue of vertical maximum price-fixing agreements in light of commentary and
real experience, the Court overruled a 29-year-old precedent treating those agreements as per se illegal. It held instead that they
should be evaluated under the traditional rule of reason. Khan, [522 U.S.] at 22. [O]ur recent treatment of other vertical restraints
justif[ies] the conclusion that Dr. Miles should not be retained.
The Dr. Miles rule is also inconsistent with a principled framework, for it makes little economic sense when analyzed with
our other cases on vertical restraints. If we were to decide the procompetitive effects of resale price maintenance were insufficient
to overrule Dr. Miles, then cases such as… GTE Sylvania… would be called into question. There is yet another consideration. A
manufacturer can impose territorial restrictions on distributors and allow only one distributor to sell its goods in a given region.
Our cases have recognized, and the economics literature confirms, that these vertical nonprice restraints have impacts similar to
those of vertical price restraints; both reduce intrabrand competition and can stimulate retailer services. The same legal standard
(per se unlawfulness) applies to horizontal market division and horizontal price fixing because both have similar economic effect.
There is likewise little economic justification for the current differential treatment of vertical price and nonprice restraints.
Furthermore, vertical nonprice restraints may prove less efficient for inducing desired services, and they reduce intrabrand
competition more than vertical price restraints by eliminating both price and service competition.
For these reasons, the Court’s decision in Dr. Miles is now overruled. Vertical price restraints are to be judged according to
the rule of reason.
Fifth Circuit decision reversed, and case remanded for further proceedings.
Breyer, Justice, dissenting
The only safe predictions to make about today’s decision are that it will likely raise the price of goods at retail and that it will create
considerable legal turbulence as lower courts seek to develop workable principles. I do not believe that the majority has shown new
or changed conditions sufficient to warrant overruling a decision of such long standing. All ordinary stare decisis considerations
indicate the contrary. For these reasons, with respect, I dissent.
Horizontal Divisions of Markets
LO49-7
Describe what a horizontal division of markets is and explain the approaches courts take in
determining whether such behavior is unlawful.
It has traditionally been said that horizontal division of markets agreements–those agreements
among competing firms to divide up the available market by assigning one another certain
exclusive territories or certain customers– are illegal per se. Such agreements plainly represent
agreements not to compete. They result in each firm being isolated from competition in the affected
market.
In United States v. Topco Associates, Inc., 405 U.S. 596 (1972), the Supreme Court reaffirmed
this longstanding principle by striking down a horizontal division of markets agreement among
members of a cooperative association of local and regional supermarket chains. Topco was widely
criticized, however, on the ground that its per se approach ignored an important point: that the
defendants’ joint activities in promoting Topco brand products were aimed at enabling them to
compete more effectively with national supermarket chains. Critics argued that when page 4918 such horizontal restraints were ancillary to procompetitive behavior, they should be judged
under the rule of reason.
Naked Restraints and Ancillary Restraints Such criticism has had an impact. Several decisions
by lower federal courts have distinguished between “naked” horizontal restraints (those having no
other purpose or effect except restraining competition) and “ancillary” horizontal restraints (those
constituting a necessary part of a larger joint undertaking serving procompetitive ends). Although
these courts continue to apply the per se rule to naked horizontal restraints, they give rule of reason
(or at least quick-look) treatment to ancillary restraints. In determining whether ancillary restraints
are lawful, courts weigh the harm to competition resulting from such restraints against the alleged
offsetting benefits to competition.
Whether the Supreme Court ultimately will endorse such departures from Topco remains to
be seen. However, the Court’s post-Topco tendency to discard per se rules in favor of a rule of
reason approach in other areas strongly suggests that Topco’s critics eventually will prevail with
their arguments.
Vertical Restraints on Distribution
LO49-8
Describe what a vertical restraint on distribution is and identify the type of analysis (per se or rule of
reason) that such behavior receives when courts determine whether it is unlawful.
Vertical restraints on distribution (or vertical nonprice restraints) also fall within the scope of the
Sherman Act. A manufacturer has always had the power to unilaterally assign exclusive territories
to its dealers or to limit the dealerships it grants in a particular geographic area. However,
manufacturers may run afoul of § 1 by causing dealers to agree not to sell outside their dealership
territories or by placing other restrictions on their dealers’ right to resell their products.
The Supreme Court once held that vertical restraints on distribution were per se illegal when
applied to goods that the manufacturer had sold to its dealers. The Court changed course, however,
in Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977). In Sylvania, the Court
abandoned the per se rule in favor of a rule of reason approach to most vertical restraints on
distribution. The Court accepted many Chicago School arguments concerning the
potential economic efficiencies that could result from vertical restraints on distribution. Most
notably, such restraints were alleged to offer a chance for increased interbrand competition among
the product lines of competing manufacturers at the admitted cost of
restraining intrabrand competition among dealers in a particular manufacturer’s product. For
further discussion of Sylvania, see the Leegin decision, which appears earlier in the chapter.
Subsequent decisions on the legality of vertical restraints on distribution have emphasized the
importance of the market share of the manufacturer imposing the restraints. Restraints imposed by
manufacturers with large market shares are more likely to be found unlawful under the rule of
reason because the resulting harm to intrabrand competition is unlikely to be offset by significant
positive effects on interbrand competition.
Group Boycotts and Concerted Refusals to Deal Under the Colgate doctrine, a single
firm may lawfully refuse to deal with certain firms. The same is not true, however,
of agreements by two or more business entities to refuse to deal with others, to deal
with others only on certain terms and conditions, or to coerce suppliers or customers
not to deal with one of their competitors. Such agreements are joint restraints on trade.
Historically, they have been per se unlawful under § 1. For example, when a trade
association of garment manufacturers agreed not to sell to retailers that sold clothing or
fabrics with designs pirated from legitimate manufacturers, the agreement was held to
be a per se violation of the Sherman Act.4
Vertical Boycotts Recent antitrust developments, however, indicate that not all
concerted refusals to deal will receive per se treatment. If a manufacturer terminated a
distributor in response to complaints from other distributors that the terminated
distributor was selling to customers outside its prescribed sales territory, the
manufacturer will be held to have violated § 1 only if the termination resulted in a
significant harm to competition. This result follows logically from
the Sylvania decision. If vertical restraints on distribution are judged under the rule of
reason, the same standard should apply to a vertical boycott designed to enforce such
restraints.
Even distributors claiming to have been terminated as part of a vertical price-fixing
scheme have found recovery increasingly difficult to obtain in recent years.
In Monsanto v. Spray-Rite Service Corp., 465 U.S. 752 (1984), a page 49-19 manufacturer
had terminated a discounting distributor after receiving complaints from its other
distributors. The Supreme Court held that these facts would not trigger liability for
vertical price-fixing in the absence of additional evidence tending to exclude the
possibility that the manufacturer and the nonterminated distributors acted
independently. In Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717
(1988), the Court held that even proof of a conspiracy between a manufacturer and
nonterminated distributors to terminate a price-cutter would not trigger liability unless
it was accompanied by proof that the manufacturer and nonterminated dealers were also
engaged in an unlawful vertical price-fixing conspiracy.
Horizontal Boycotts It also appears that the Supreme Court is willing to relax the per se
rule for some horizontal boycotts. For instance, in Northwest Wholesale Stationers, Inc.
v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985), members of an office supply
retailers’ purchasing cooperative had expelled a member retailer that engaged in some
wholesale operations in addition to retail activities. The Court held that rule of reason
treatment should be extended to the alleged boycott at issue but declined to eliminate
the per se rule for all horizontal boycotts. The Court has offered only general guidance
for determining which horizontal boycotts trigger rule of reason analysis (or at least
quick-look analysis) and which ones amount to per se violations. The appropriate legal
treatment in a given case is therefore difficult to predict.
Tying Agreements Tying agreements occur when a seller refuses to sell a buyer a
certain product (the tying product) unless the buyer also agrees to purchase a different
product (the tied product) from the seller. For example, a fertilizer manufacturer refuses
to sell its dealers fertilizer (the tying product) unless they also agree to buy its line of
pesticides (the tied product). The potential anticompetitive effect of a tying agreement
is that the seller’s competitors in the sale of the tied product may be foreclosed from
competing with the seller for sales to customers that have entered into tying agreements
with the seller. To the extent that tying agreements are coercively imposed, they also
deprive buyers of the freedom to make independent decisions concerning their
purchases of the tied product. Tying agreements may be challenged under both § 1 of
the Sherman Act and § 3 of the Clayton Act.5
Elements of Prohibited Tying Agreements
LO49-10
Identify and explain the elements of a prohibited tying agreement.
Tying agreements are sometimes said to be per se illegal under § 1. However, because
a tying agreement must meet certain criteria before it is subjected to per se analysis, and
because evidence of certain justifications is fairly frequently considered in tying cases,
the supposed per se rule regarding tying agreements is at best a “soft” per se rule.
The Suture Express case, which follows, illustrates an apparent trend among courts:
increased willingness to apply rule of reason analysis to tying agreements.
Before a challenged tying agreement is held to violate § 1, these elements must be
demonstrated: (1) the agreement involves two separate and distinct items rather than
integrated components of a larger product, service, or system of doing business; (2) the
tying product cannot be purchased unless the tied product is also purchased; (3) the
seller has sufficient economic power in the market for the tying product (such as a large
market share) to appreciably restrain competition in the tied product market; and (4) a
“not insubstantial” amount of commerce in the tied product is affected by the seller’s
tying agreements.
Applying the above elements, a federal district court held in 2000 that Microsoft
Corporation violated § 1 by tying its Internet Explorer web browser to versions of its
Windows operating system. In a 2001 decision, however, a federal court of appeals
reversed that aspect of the district court’s decision and remanded the tying claim for
reconsideration under the rule of reason. The appellate court concluded that in the
context of software used as a platform for third-party applications, tying of the sort done
by Microsoft should not necessarily be presumed to have a pernicious effect on
competition. The court reasoned that in order to avoid discouraging platform softwarerelated innovation, weighing and balancing of the tying arrangement’s benefits and
anticompetitive effects should be undertaken. Only the rule of reason would provide the
opportunity for such weighing and balancing. The court stressed, however, that it was
not changing the controlling rules for tying agreements generally or for such
arrangements in computer-related settings not involving platform software. (Other
aspects of the appellate court’s Microsoft decision are addressed later in this chapter.)
The Suture Express case contains a discussion of the elements of prohibited tying
arrangements, with a focus on the third element: market power as to the tying
product. The case also underscores the importance of the antitrust injury requirement
discussed earlier in the chapter.
page 49-20
Suture Express, Inc. v. Owens & Minor Distribution, I…
