STAFF DISCUSSION DRAFT:
FOR PURPOSES OF DEBATE AND DISCUSSION ONLY
This discussion draft, prepared by a member of FTC staff, does not necessarily reflect the views of the Commission, any Commissioner, or any other FTC staff. Responses to this draft may be submitted either by electronic mail to "jventures@ftc.gov or, captioned "Comment on Issues Relating to Joint Venture Project -- Per Se Illegality/Truncated Rule of Reason," addressed to Donald S. Clark, Office of the Secretary, Federal Trade Commission, Sixth Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580
PER SE ILLEGALITY AND TRUNCATED RULE OF REASON: THE SEARCH FOR A FORESHORTENED ANTITRUST ANALYSIS
William E. Cohen*
Deputy Director, Policy Planning
Federal Trade Commission
November 1997
For most of the 107 years of Sherman Act jurisprudence, the analysis of horizontal restraints under Section 1(1) has been divided into conduct deemed illegal per se and conduct assessed under the rule of reason, i.e., assessed in light of its character and effects under the given circumstances. The dichotomy has evolved continuously, and its appropriate contours and consequences remain topics of debate.
Underlying that evolution is a fundamental tension inherent in per se analysis -- a basic trade-off between absolute accuracy on the one hand and clarity, predictability, and resource conservation on the other. Under the per se rule, some conduct may be condemned that on a closer look would not have been found anticompetitive. As offsets to this possibility of error, the per se rule eases administrative burdens, provides greater clarity of business guidance, and deters behavior that in the heavy preponderance of circumstances is anticompetitive.
This paper explores the ways that the courts have dealt with this trade-off, focusing in particular on the efforts in recent years to give greater attention to potential business justifications for conduct within traditional per se categories. It seeks to distill the fundamental lessons from past experience and to evaluate the pros and cons of various alternative formulations for application in the future.
I. THE PER SE CATEGORY: BACKGROUND
Following some early, and somewhat contradictory, cases,(2) the Supreme Court in 1911 adopted a "rule of reason" for Section 1 analysis. In Standard Oil Co. v. United States, 221 U.S. 1 (1911), the Court stated that the generic nature of Section 1's prohibitions necessarily leaves it "to be determined by the light of reason, guided by the principles of law and the duty to apply and enforce the public policy embodied in the statute, in every given case whether any particular act or contract was within the contemplation of the statute." Id. at 63-64. Stated simply, "[T]he rule of reason becomes the guide."(3)
Nonetheless, in ensuing years the Court reserved certain practices as unlawful per se, that is, it determined that certain categories of practices should be conclusively presumed unlawful. The Court acted first with regard to price fixing. In United States v. Trenton Potteries Co., 273 U.S. 392 (1927), the Court reasoned that "The aim and result of every price-fixing agreement, if effective, is the elimination of one form of competition," and concluded that price fixing can be condemned without determining whether a particular fixed price is unreasonable. Id. at 397-98. Thirteen years later, in United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940), the Court amplified its analysis to make it clear that the per se rule applies to "[a]ny combination which tampers with price structures." Id. at 221. "Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se." Id. at 223.
In later years, the Supreme Court extended per se analysis to other forms of conduct. These have included territorial/customer allocations(4) and certain group boycotts.(5) Resale price maintenance, which involves vertical price fixing agreements between manufacturers and dealers, and, with several caveats, tied sales, which involve arrangements between a single seller and its customers, are also per se unlawful, but typically do not involve competitor collaborations and are beyond the scope of this paper.
B. Meaning and Consequences of Per Se Status
The courts have attached varying consequences to per se status. From earliest application, the term has been used to mean that restraints can be condemned without need to demonstrate unreasonable results (such as unreasonably high prices). Of greater interest, however, per se status has also been understood to permit condemnation of restraints (i) without need to demonstrate market power or anticompetitive effects or (ii) without need to consider a defendant's justifications.(6) These latter formulations warrant particular attention. The first relieves plaintiff of the burden of proving actual or probable anticompetitive effects. In contrast, the second deprives defendant of the ability to overcome plaintiff's prima facie showing of competitive harm.
The consequences of per se status have varied by type of suspect conduct. For example, in the context of at least some group boycotts, unless plaintiffs demonstrate either market power or "exclusive access to an element essential to effective competition," review is conducted under the rule of reason.(7) In contrast, in the context of price fixing and market divisions, the per se rule frees plaintiffs from any need to show market power or specific anticompetitive effects.(8) Historically, in these settings, the per se rule has also permitted condemnation of practices without reference to defendants' justifications.(9) In essence, once a restraint was categorized as price fixing or a market division, the case was over and done.
Modern case law, however, has been more willing to attend to business justifications in determining whether to characterize even joint price-setting practices as per se unlawful. This enhances the accuracy of decision making with some sacrifice in clarity of guidance and predictability of result. The evolution is well illustrated by a comparison between the Supreme Court's opinions in United States v. Topco Assocs., 405 U.S. 596 (1972), and Broadcast Music, Inc. v. Columbia Broadcasting System, 441 U.S. 1 (1979) ("BMI").
Topco favored clarity and predictability over accuracy. That case involved a joint venture among 25 small and medium-sized supermarket chains for purchasing items for distribution under Topco-owned private labels. At issue was a restraint preventing members from selling Topco-brand products outside designated territories. Topco argued that by ensuring exclusivity, the territorial divisions gave its members the private-label tool they needed to compete with larger chains; that is, Topco contended that although its horizontal agreement may have restricted intrabrand competition among stores selling Topco-brand goods, it enhanced interbrand competition between stores selling Topco-brand goods and the larger chains who had their own private-label products. 405 U.S. at 604-06. Reasoning (i) that the Sherman Act mandates independent rather than joint choices between interbrand and intrabrand competition and (ii) that the courts are ill-equipped to make the complex economic assessments required in weighing one form of competition against another, the Supreme Court rejected Topco's justification. It concluded that the restraint was a horizontal territorial restriction and therefore per se illegal.(10)
Just seven years later, in 1979, the Court's BMI opinion took a very different approach.(11) That case involved the legality of joint pricing for blanket licenses to an entire collection of copyrighted musical compositions that two associations issued on behalf of thousands of musical copyright owners. The associations set fees for the blanket licenses. CBS sued, alleging that the blanket licenses constituted price fixing and were illegal per se under the Sherman Act.
The Supreme Court agreed that the associations had literally fixed price, but held that this alone did not mandate per se status. The Court explained:
[T]his is not a question simply of determining whether two or more potential competitors have literally "fixed" a "price." As generally used in the antitrust field, "price fixing" is a shorthand way of describing certain categories of business behavior to which the per se rule has been held applicable. . . . When two partners set the price of their goods or services they are literally "price fixing," but they are not per se in violation of the Sherman Act.441 U.S. at 8-9. The Court noted that the blanket license was not a naked restraint of trade but rather accompanied an integration of sales, monitoring, and enforcement against unauthorized copyright use. Id. at 20. It saw that blanket licenses substantially lowered costs and served an aggregating function beneficial to both sellers and buyers. The Court concluded that the blanket licenses did not warrant automatic condemnation under the per se rule, but rather required more discriminating examination under the rule of reason. Id. at 19-21, 24.
Thus, in a setting where the potential business justifications were clear and the possibility of error was high, the Court traded off the clarity and predictability of literalness in order to obtain greater accuracy.(12) To place this development in its overall context, the following section discusses how the Court has articulated the costs and benefits of the per se rule.
C. The Rationale for Per Se Analysis -- Its Costs and Benefits
The Supreme Court's opinion in Northern Pacific Ry. v. United States, 356 U.S. 1 (1958), provides a classic statement of the rationale underlying per se analysis:
[T]here are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. This principle of per se unreasonableness not only makes the type of restraints which are proscribed by the Sherman Act more certain to the benefit of everyone concerned, but it also avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable -- an inquiry so often wholly fruitless when undertaken.
356 U.S. at 5. A rule that condemns practices with "pernicious effect[s] on competition and lack of any redeeming virtue" is clearly desirable, but actual business conduct may not be so black and white. More recently, the Court rephrased its rationale in terms better suited to a world of shadings and gradations:
Per se rules thus require the Court to make broad generalizations about the social utility of particular commercial practices. . . . Cases that do not fit the generalization may arise, but a per se rule reflects the judgment that such cases are not sufficiently common or important to justify the time and expense necessary to identify them.(13)Consequently, the cost of employing a per se rule is the possibility that in some instances harmless, and even beneficial, conduct will be condemned. The potential significance of that cost depends on whether the per se rule merely frees plaintiff from the burden of demonstrating market power or actual anticompetitive effects or in addition bars consideration of competitive benefits. For example, consider an agreement on price between two small competitors in an unconcentrated market. Absent market power, the agreement would cause no lasting competitive harm; consumers could readily buy substitute products elsewhere, and defendants would either have to return their price to competitive levels or see their business decline. A per se rule freeing the plaintiff of the need to demonstrate market power would condemn this agreement notwithstanding an absence of competitive harm.
The cost of such condemnation is small, however, unless the suspect agreement also confers some competitive benefit. As Areeda's treatise observes, "[T]he defendants have little moral standing to demand proof of power or effect when the most they can say for themselves is that they tried to harm the public but were mistaken in their ability to do so."(14)
By contrast, if the joint pricing were necessary for the defendants to produce and market an improved product based on the firms' complementary expertise, condemning the agreement would deprive consumers of the product improvement. Thus, a per se rule that forecloses consideration of an arrangement's benefits in some instances might impose significant costs.
On the other side of the ledger, per se analysis offers a number of potential benefits. Rule of reason litigation can be very expensive for both the judicial system and the litigating parties. From a social perspective, this expense is essentially wasted when the challenged conduct is unlikely to yield any benefits, and per se condemnation saves resources. Moreover, indecisive and protracted condemnation lacks deterrent value, an issue of some consequence when a practice in most instances is likely to result in competitive harm. In contrast, a categorical rule creates clarity for businesses and is more likely to be observed. As the Supreme Court has concluded, "[P]er se rules tend to provide guidance to the business community and to minimize the burdens on litigants and the judicial system of the more complex rule-of-reason trials . . . ."(15)
Thus, even while acknowledging that per se rules may not achieve total precision, the Court has seen value in the deterrence, guidance, and resource savings that they provide. "For the sake of business certainty and litigation efficiency, we have tolerated the invalidation of some agreements that a fullblown inquiry might have proved to be reasonable."(16) Section II explores various mechanisms for making this trade-off and for fixing the boundaries of per se status in such a manner that exceptions to its "broad generalizations about . . . social utility" are indeed "not sufficiently common or important to justify the time and expense necessary to identify them."
* The author would like to thank Karen E. Berg for her contribution in researching and preliminarily drafting portions of this paper.
1. Section 1 of the Sherman Act, 15 U.S.C.A. § 1, provides, "Every 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 . . . ."
2. In United States v. Trans Missouri Freight, 166 U.S. 290 (1897), the Court stressed that, by its express language, Section 1 prohibited all contracts in restraint of trade, not merely contracts in unreasonable restraint of trade. One year later, in United States v. Joint-Traffic Ass'n, 171 U.S. 505, 567-78 (1898), the Court re-introduced flexibility into the analysis by allowing room for interpretation as to what constitutes a restraint of trade and focusing on the extent to which the restraint "directly" restricts competition and commerce.
3. Standard Oil, 221 U.S. at 66. The classic description of the rule of reason in Board of Trade of Chicago v. United States, 246 U.S. 231, 238 (1918), gives a sense of its potential breadth:
The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts.Subsequently, in National Soc'y of Professional Eng'rs v. United States, 435 U.S. 679, 688 (1978), the Court clarified that, rather than extending to "any argument . . . that may fall within the realm of reason," the rule-of-reason inquiry "focuses directly on the challenged restraint's impact on competitive conditions."
4. United States v. Topco Assocs., 405 U.S. 596 (1972); United States v. Sealy, Inc., 388 U.S. 350 (1967).
5. United States v. General Motors Corp., 384 U.S. 127, 145-48 (1966); Klor's, Inc. v. Broadway-Hale Stores, 359 U.S. 207 (1959).
6. 7 Phillip E. Areeda, Antitrust Law ¶ 1510a (1986).
7. Compare Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 296-98 (1985) (requiring rule of reason treatment for analysis of expulsion from a joint buying arrangement "[u]nless the cooperative possesses market power or exclusive access to an element essential to effective competition"), with FTC v. Superior Court Trial Lawyers Ass'n, 493 U.S. 411, 432-36 (1990) ("SCTLA") (finding group boycott that achieved its price-fixing goal per se unlawful, without elaborate inquiry into market power). The Court's Northwest Wholesale opinion did not make clear whether or to what extent justifications would be heard if plaintiffs did show market power or the required exclusive access. Lower courts have included an absence of plausible justifications as an additional requirement for per se condemnation of some group boycotts. See, e.g., Thompson v. Metropolitan Multi-List, Inc., 934 F.2d 1566, 1579-80 (11th Cir. 1991), cert. denied, 506 U.S. 903 (1992); Hahn v. Oregon Physicians' Service, 868 F.2d 1022, 1030 (9th Cir. 1988), cert. denied, 493 U.S. 846 (1989).
8. See, e.g., Socony-Vacuum, 310 U.S. at 224 n.59 (power to fix prices unnecessary for proof of a price-fixing conspiracy under Section 1 of the Sherman Act); Trenton Potteries, 273 U.S. at 397 (agreements that create power to fix prices may be held unreasonable "without the necessity of minute inquiry whether a particular price is reasonable or unreasonable as fixed").
9. See, e.g., Arizona v. Maricopa County Medical Soc'y, 457 U.S. 332, 351 (1982) ("The anticompetitive potential inherent in all price-fixing agreements justifies their facial invalidation even if procompetitive justifications are offered for some."); Socony-Vacuum, 310 U.S. at 224 n.59 ("Whatever economic justification particular price-fixing agreements may be thought to have, the law does not permit an inquiry into their reasonableness. They are all banned because of their actual or potential threat to the central nervous system of the economy.") (dictum).
10. Topco, 405 U.S. at 608-12. Sealy, 388 U.S. 350, raised similar issues. There the Court considered a horizontal relationship among some 30 mattress manufacturers licensed to sell under the Sealy name. The Court found per se unlawful a system allocating exclusive Sealy territories among the members in a context also involving the fixing of retail prices.
11. The new approach had been foreshadowed by the Court's opinion in Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977). In determining that non-price vertical restraints should be analyzed under the rule of reason, the Court stressed that "departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than . . . upon formalistic line drawing." Id. at 58-59. Though recognizing that "[t]he market impact of vertical restrictions is complex because of their potential for a simultaneous reduction of intrabrand competition and stimulation of interbrand competition," the Court was willing to undertake the inquiry. Id. at 51 (footnotes omitted), 57 n.27.
12. This evolution of the case law has been mirrored by legal scholarship. By 1986 Phillip Areeda viewed per se illegality as little more than stare decisis, so that courts will not hear justifications "previously considered and rejected as illegitimate in principle" but are not precluded from "future thought about new matters which have not previously been considered." Areeda, supra note 6, at ¶ 1510a. Similarly, Herbert Hovenkamp concludes:
[E]ven under the per se rule some justifications can be considered. More importantly, the court must consider claimed justifications in determining whether the conduct falls inside or outside the per se rule.Herbert Hovenkamp, Federal Antitrust Policy 230 (1994). Thomas Krattenmaker and Thomas Piraino carry the argument a step farther. Krattenmaker concludes that "there is no such thing as a per se offense," but rather only "defenses or justifications that are per se inadmissible or impermissible." Thomas G. Krattenmaker, Per Se Violations in Antitrust Law: Confusing Offenses with Defenses, 77 Geo. L.J. 165, 178 (1988). Piraino urges that the consequence of per se status should be merely a rebuttable presumption of illegality, so that the defendant would remain free to offer justifications. Thomas A. Piraino, Jr., Making Sense of the Rule of Reason: A New Standard for Section 1 of the Sherman Act, 47 Vand. L. Rev. 1753 (1994).
13. Sylvania, 433 U.S. at 50 n.16; see also National Collegiate Athletic Ass'n v. Board of Regents of the Univ. of Oklahoma, 468 U.S. 85, 103-04 (1984) ("NCAA") ("Per se rules are invoked when surrounding circumstances make the likelihood of anticompetitive conduct so great as to render unjustified further examination of the challenged conduct.").
14. Areeda, supra note 6, at ¶ 1509.
15. Sylvania, 433 U.S. at 50 n.16.
16. Maricopa, 457 U.S. at 344.