"ANTITRUST AND TRADE ASSOCIATIONS
AT THE FTC"
COMMISSIONER ROSCOE B. STAREK, III
FEDERAL TRADE COMMISSION
THE ANTITRUST COMMITTEE AND
THE TRADE ASSOCIATION COMMITTEE
CHICAGO BAR ASSOCIATION
APRIL 16, 1997
Thank you and good afternoon. I'm pleased to have the opportunity to discuss how the Federal Trade Commission prosecutes and adjudicates horizontal restraint-of-trade cases. I will begin with a description of some "first principles" and an explanation of how the Commission has interpreted these principles to develop its current analytical framework for horizontal restraints. I will then characterize the Commission's application of this framework.(1)
Antitrust law has long recognized that agreements among competitors can be anticompetitive, procompetitive, or competitively neutral. Thus, although Section 1 of the Sherman Act literally prohibits "every contract, combination, or conspiracy . . . in restraint of trade,"(2) the Supreme Court decided long ago that Section 1 prohibits only "unreasonable" restraints.(3) The reasonableness of a restraint depends solely on its actual or likely effect on competition.(4) And as the Court reminded us in Sharp, "[t]he term 'restraint of trade' . . . refers not to a particular list of agreements, but to a particular economic consequence."(5)
As you all know, courts historically have applied one of two methods of analysis -- depending on the type of restraint at issue -- to determine whether an agreement unreasonably restrains competition. Some types of agreements among competitors -- such as naked price-fixing, bid-rigging, market or customer allocation, and certain types of boycotts -- are condemned per se upon proof of the existence of an agreement. That is, they are conclusively presumed to restrain trade unreasonably. Under the per se rule, the court simply proceeds to judgment for the plaintiff without considering evidence of actual effects or asserted business justifications.
Nevertheless, over the last two decades, the Supreme Court has stated repeatedly that the rule of reason is "the standard traditionally applied for the majority of anticompetitive practices challenged under § 1 of the [Sherman] Act."(6) Stated simply, the rule of reason entails a balancing of the perceived threat of harm to competition from the challenged conduct against the likelihood that it will yield procompetitive efficiencies. In Northwest Wholesale Stationers, the Court reminded us that the "presumption in favor of a rule-of-reason standard"(7) for analyzing restraints is rebutted only by a showing that the challenged restraint is of a type that can be conclusively condemned because of its "pernicious effect on competition and lack of any redeeming virtue."(8) This presumption plays an important role in the Commission's determination of when it should apply the per se rule versus the rule of reason in the analysis of particular horizontal restraints.
In the late 1970s, the Supreme Court began to exercise caution in applying the per se rule to restraints that appeared to fall within traditionally proscribed categories -- for instance, "price-fixing" -- but lacked obvious anticompetitive effects. For example, in BMI,(9) NCAA,(10) Northwest Wholesale Stationers,(11) and Indiana Federation of Dentists,(12) the Court established certain guiding principles that for more than a decade have provided the basic framework for the courts' as well as the Commission's approach to analyzing horizontal restraints.
First, the Court emphasized that, before applying the per se rule, courts and enforcement agencies should examine whether, on balance, the conduct at issue is of the type that always (or virtually always) results in significant anticompetitive effects. As the Court put it in BMI, application of the per se rule to a particular practice is limited to instances in which "the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output," rather than "one designed to 'increase economic efficiency and render markets more, rather than less, competitive.'"(13) If the practice is not of a type that almost always restricts output, then courts should examine evidence relating to its likely effect on competition before determining its reasonableness. The Supreme Court reminded us in NCAA that "the criterion to be used in judging the validity of a restraint on trade [under the Sherman Act] is its impact on competition."(14)
Second, the Court established that the rule of reason and the per se rule do not delineate rigid, mutually exclusive categories. As the Court stated in NCAA, "there is often no bright line separating per se from Rule of Reason analysis. Per se rules may require considerable inquiry into market conditions before the evidence justifies a presumption of anticompetitive conduct."(15) BMI, NCAA, and other cases establish a truncated rule-of-reason analysis at the convergence of the two traditional standards.
Third, the Supreme Court established that courts must be very cautious in expanding the categories of conduct to which the per se rule may be applied. The Court observed that "'[i]t is only after considerable experience with certain business relationships that courts classify them as per se violations . . . '"(16) For example, in IFD the Court clearly cautioned against "extend[ing] per se analysis to restraints imposed in the context of business relationships where the economic impact . . . is not immediately obvious."(17) And in Sylvania -- a case involving vertical rather than horizontal restraints -- the Court warned that "departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than . . . upon formalistic line drawing."(18) The Court has thus made it very clear that lower courts and enforcement agencies must carefully avoid elevating judicial economy to such a level that they risk summarily condemning economically beneficial activity.
Fourth, applying its own principles, over the last two decades the Court has narrowed -- rather than expanded -- the circumstances in which application of the per se rule is justified, with regard to both horizontal and vertical restraints.(19)
Thus, when confronted with conduct falling outside the traditionally per se illegal categories, the Supreme Court has instructed the lower courts (and of course the Commission) to consider the inherent nature of a challenged restraint, its possible efficiency rationales, and its effect on competition before determining whether it is appropriate to apply the per se rule. In some circumstances, where the adverse effect is obvious and countervailing procompetitive benefits are nonexistent, a full-blown rule-of-reason analysis is not required. In any case, regardless of the standard used, "the essential inquiry remains the same"(20) -- to assess the effect on competition.
II. FROM MASS. BOARD TO CDA AND BEYOND
In Massachusetts Board of Registration in Optometry(21) -- which until last year served as the Commission's framework for the analysis of horizontal restraints -- the Commission concluded that these Supreme Court decisions laid the foundation for a truncated rule-of-reason approach to those restraints.(22) The analysis set forth in Mass. Board was designed to identify cases in which a full rule-of-reason inquiry is not necessary to condemn a restraint as unreasonable. The Commission applied this approach in making both enforcement and adjudicative decisions under Section 5 of the Federal Trade Commission Act.(23)
In Mass. Board, the Commission condemned a state optometry board's regulations restricting several types of truthful, non-deceptive advertising, including advertising of price discounts. In assessing the reasonableness of the restrictions, the Commission asked a series of questions regarding the nature and effect of each restriction. The first question is whether the restriction is "inherently suspect" -- that is, does the restriction "appear likely, absent an efficiency justification, to 'restrict competition and decrease output'?"(24) If the answer is "no," the restriction is analyzed under the full rule of reason.
But if the restriction is inherently suspect, the Commission then asks the next question -- whether the restraint has a plausible efficiency justification. If it does not, the inherently suspect restriction can be condemned without further analysis. Finally, if the inherently suspect restriction does have a plausible efficiency justification, the Commission asks whether that efficiency is valid in the particular case. If sound evidence fails to suggest that the efficiency is reasonably related to the restriction in the particular case, the efficiency claim may be rejected and the restriction condemned. Thus, under Mass. Board, if a restraint was not inherently suspect, or if it was inherently suspect but had a valid efficiency justification, its legality had to be determined under the full rule of reason.
The Commission found that the Optometry Board's advertising restrictions were inherently suspect, lacked a plausible efficiency justification, and were therefore unlawful without a full rule-of-reason analysis. The Commission applied the "Mass. Board approach" in a number of subsequent decisions, with similar results. For example, in Detroit Auto Dealers Association,(25) decided the year after Mass. Board, the Commission held unlawful an agreement among car dealers to restrict showroom hours. And in New England Motor Rate Bureau,(26) the Commission struck down a transport association's joint formulation and filing of collective rates.
I have had previous opportunities to address in detail the meaning of "inherently suspect" as that term was used in Mass. Board,(27) and I do not plan to dwell on the concept today. Instead, I will discuss how the Commission has moved away from Mass. Board as its basic framework for appraising horizontal restraints, adopting in its place the analysis set forth in last spring's California Dental Association (or "CDA") opinion(28) and reiterated just two months ago in the Commission's decision in International Association of Conference Interpreters.(29) CDA is on appeal before the Court of Appeals for the Ninth Circuit, so I will simply discuss the views articulated in the majority and dissenting opinions in that case -- matters of public record.
CDA involved restrictions promulgated and enforced by a state dental association and its local component societies against certain forms of price and non-price advertising by California dentists. I agreed with the three other Commissioners who found CDA's restraints on advertising unlawful,(30) but I differed with them over how to reach that result.
The Commission majority condemned CDA's price advertising restraints as per se illegal, and also invalidated both the restrictions on price advertising and those on non-price advertising under the rule of reason. Under their application of the per se rule, the majority equated restraints on the advertising of prices with the direct fixing of prices. The majority stated:
CDA's restrictions on advertising "low" or "reasonable" fees, and its extensive disclosure requirement for discount advertising, effectively preclude its members from making low fee or across-the-board discount claims regardless of their truthfulness. Such a ban on significant forms of price competition is illegal per se regardless of the manner in which it is achieved.(31)
I disagreed with the rationale adopted by the majority, primarily because they were far too swift to condemn the price advertising rules as per se illegal. My separate opinion reviewed the basis for the creation of a per se rule in the early years of antitrust and the Supreme Court's frequently repeated warning against too hastily applying per se condemnation to restraints with which we lack sufficient familiarity. In my view the whole thrust of Supreme Court jurisprudence over the last two decades in the area of both horizontal and vertical restraints has been to reinforce this note of caution. The cases that I discussed earlier -- most prominently, BMI, NCAA, and Indiana Federation of Dentists -- exemplify the Court's reluctance (one might even say risk-aversion) to extend per se treatment without adequate confidence that the restraints at issue deserve such summary disposition.
I considered the majority's analogy between CDA's price advertising rules and classic price-fixing to be strained. Condemning classic price-fixing as per se illegal rests in large part on our certainty, after many years' experience, that such behavior is virtually always pernicious. I viewed it as an unwarranted stretch to accord the same peremptory treatment to price advertising restrictions, whose economic implications are not always obvious. Although the majority labored to draw an analogy between price-fixing and the restraints at issue, their analysis of CDA's price advertising rules -- involving an examination of competitive consequences that the per se rule is supposed to obviate -- made clear why restraints on price advertising should not be labeled per se illegal. And moving to a more general consideration of rules that some future Commission might "analogize" to price-fixing, I am concerned that CDA signals a trend toward identifying conduct that warrants per se treatment with less than the cautious, narrow precision mandated by the Supreme Court. Such a trend is fraught with problems, including the difficulty and arbitrariness of distinguishing agreements that directly fix prices (and are thus per se illegal) from seemingly ancillary agreements that merely have an indirect effect on price. Because of their potential procompetitive impact, these restraints are due consideration under the rule of reason.
Despite my disagreement with their reasoning, I did agree with the CDA majority that both the price and the non-price advertising restrictions could be found unlawful. Unlike my colleagues, however, I followed the Mass. Board approach to reach that conclusion: I determined that CDA's restraints on advertising were inherently suspect and lacking in plausible efficiency justifications. I reached a finding of illegality with the same speed and efficiency as my colleagues who applied the per se rule, with one critical difference: I at least entertained the possibility that CDA's price advertising rules, which in my view could not be comfortably analogized to naked price-fixing, might have some justification meriting the Commission's scrutiny.
Last February's Commission decision in the Conference Interpreters case(32) seems to have borne out the concern I expressed in CDA. In Conference Interpreters, the Commission used the "category"-based approach of CDA to analyze various restraints that respondents imposed on members' pricing and other competitive behavior. Although I agreed with the Commission majority as to which rules should be declared illegal and what remedy to prescribe, I noted that Mass. Board -- in contrast to the approach followed by my colleagues in CDA and Conference Interpreters -- continues to furnish a dependable framework for the analysis of horizontal restraints that is consistent with the direction of Supreme Court jurisprudence in this area over the last two decades.
The Mass. Board approach to horizontal restraints served the Commission well in numerous cases in the eight years between its formulation and the CDA majority's virtual -- if not explicit -- abandonment of it. I do not expect the present Commission to resurrect Mass. Board, now that it has decided that per se treatment can be extended with an ease that might have surprised the Justices who joined in BMI and NCAA. But I hope that the Commission and the courts will proceed cautiously with any efforts to extend the per se rule to practices that might turn out to have competitive justifications when examined under the more discerning lens of the Mass. Board approach.
Joel Klein, the Acting Assistant Attorney General in charge of the Antitrust Division, addressed the ABA's Antitrust Section last fall on the Division's approach to horizontal restraints.(33) Although the Division's analytical approach differs slightly from Mass. Board analysis, its "stepwise" formulation generally bears a strong -- and in my view welcome -- resemblance to Mass. Board. One of the clear messages in this speech is the Division's hesitancy to apply per se rules to conduct with which we lack adequate experience.(34) And on April 10, in an address at the Antitrust Section's Spring Meeting, Principal Deputy Assistant Attorney General Doug Melamed clearly reiterated this theme. Practitioners may want to note that the Commission and the Antitrust Division might be embarking on divergent approaches to the analysis of horizontal restraints -- a divergence that could result in the application of different legal rules to the same conduct and, perhaps, different outcomes.
To recapitulate: I consider application of the per se rule to be warranted only with respect to conduct that is defined with sufficient precision to minimize the risk of automatically condemning activities that may well be efficient. As to whether we should apply the per se rule to conduct with which we lack adequate experience, the Supreme Court has cautioned us against over-aggressive expansion of the rule beyond the traditionally defined conduct. That is how I believe the courts and the Commission understood the per se concept in the pre-CDA era. The rejection of the Mass. Board approach poses the danger that enforcers will arbitrarily expand the types of conduct labeled per se illegal, without appropriate consideration of possible efficiency justifications. Enforcement agencies have a duty to avoid this type of error: an unwarranted expansion of use of the per se label could be harmful to consumers and businesses if, as I expect, it is likely to over deter procompetitive behavior.
Despite my position on these issues, I of course recognize that the approach to horizontal restraints laid out by the majority in CDA and reiterated in Conference Interpreters is the analytical structure currently employed at the FTC. When counseling associations and their members, you would be well advised to read CDA and Conference Interpreters as a warning that the Commission may be increasingly comfortable analogizing certain types of conduct to the long-established "naked" forms of anticompetitive behavior, and to advise clients to tailor their conduct accordingly.
1. The views that I express here are my own and do not necessarily reflect the views of the Commission or of any other Commissioner.
2. 15 U.S.C. § 1.
3. Board of Trade of the City of Chicago v. United States, 246 U.S. 231 (1918); Standard Oil Co. v. United States, 221 U.S. 1, 66-70 (1911); accord, Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 723 (1988) ("Sharp"); Nat'l Collegiate Athletic Ass'n v. Board of Regents, 468 U.S. 85, 98 (1984) ("NCAA").
4. NCAA, 468 U.S. at 104; see also Sharp, 485 U.S. at 731.
5. Sharp, 485 U.S. at 731 (emphasis added).
6. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977) ("Sylvania").
7. Sharp, 485 U.S. at 726.
8. Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 289 (1985) (quoting Northern Pac. R. Co. v. United States, 356 U.S. 1, 5 (1958)).
9. Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979) ("BMI").
10. Supra n.3.
11. Supra n.8.
12. FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) ("IFD").
13. BMI, 441 U.S. at 19-20 (quoting United States v. United States Gypsum Co., 438 U.S. 422, 441 n.16 (1978)).
14. NCAA, 468 U.S. at 104 (footnote omitted).
15. Id. at 104 n.26.
16. BMI, 441 U.S. at 9-10 (quoting United States v. Topco Associates, Inc., 405 U.S. 596, 607-08 (1972)).
17. 476 U.S. at 458-59.
18. Sylvania, supra n.6, 433 U.S. at 58-59.
19. See, e.g., Sharp, supra n.3, and Sylvania, supra n.6 (refusal to apply per se rule to non-price vertical restraints, even though such restraints can have impact on price); Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984) (limiting circumstances in which coordinated activity of a parent and a wholly-owned subsidiary can constitute conspiracy); Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984) (limiting circumstances in which per se rule can be applied to tying); Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984) (limiting circumstances in which inference of a per se illegal resale price maintenance agreement is justified); BMI, supra n.9 (refusal to apply per se rule to horizontal conduct where restraint has effect of creating new product).
20. NCAA, 468 U.S. at 104.
21. 110 F.T.C. 549 (1988) ("Mass. Board").
22. As with the other standards used in the evaluation of the reasonableness of a horizontal restraint, the Mass. Board analysis presumes proof of concerted action.
23. 15 U.S.C. § 45.
24. Mass. Board, 110 F.T.C. at 604 (quoting BMI, 441 U.S. at 20). Generally, an agreement is likely to restrict competition and reduce output when it restrains some significant aspect of interfirm rivalry. Kevin J. Arquit and Joseph Kattan, "Efficiency Considerations and Horizontal Restraints," 36 Antitrust Bull. 717 (1991).
25. 111 F.T.C. 417 (1989), aff'd in part and remanded, 955 F.2d 457 (6th Cir.), cert. denied, 506 U.S. 973 (1992), order modified, 5 Trade Reg. Rep. (CCH) ¶ 23,853 (FTC, June 20, 1995), consent agreement accepted as to remaining respondents, 5 Trade Reg. Rep. (CCH) ¶ 24,232 (FTC, Mar. 10, 1997).
26. 112 F.T.C. 200 (1989), enforced as modified, 908 F.2d 1064 (1st Cir.), order modified, 113 F.T.C. 1013 (1990).
27. "Horizontal Restraints Analysis at the Federal Trade Commission," Prepared Remarks of Commissioner Roscoe B. Starek, III, before the Chicago Bar Association (May 19, 1993).
28. California Dental Association, Docket No. 9259 (Mar. 25, 1996), 5 Trade Reg. Rep. (CCH) ¶ 24,007.
29. International Association of Conference Interpreters, et al., Docket No. 9270 (Feb. 19, 1997), 5 Trade Reg. Rep. (CCH) ¶ 24,235.
30. Commissioner Azcuenaga would have dismissed the complaint against CDA. She questioned the majority's application of the per se rule to CDA's price advertising restrictions, and she disagreed with the majority's conclusions that CDA had market power and that entry into the California dental market was difficult. Dissenting Opinion of Commissioner Mary L. Azcuenaga at 2-3 [5 Trade Reg. Rep. (CCH) ¶ 24,007 at 23,803]. "No anticompetitive effects having been shown," she concluded, "the complaint should be dismissed with respect to the conduct judged under the rule of reason." Id. at 3 [5 Trade Reg. Rep. (CCH) ¶ 24,007 at 23,803].
31. CDA, slip op. at 16-17 [5 Trade Reg. Rep. (CCH) ¶ 24,007 at 23,787]. Elsewhere, the majority said: "This effective prohibition on truthful and nondeceptive advertising of low fees and across-the-board discounts constitutes a naked attempt to eliminate price competition and must be judged unlawful per se. That it does so by the indirect means of suppressing advertising does not change that result. . . . Horizontal agreements suppressing broad categories of truthful and nondeceptive price advertising . . . effectively suspend a significant form of price competition." Slip op. at 19, 21 [5 Trade Reg. Rep. (CCH) ¶ 24,007 at 23,788-89].
After condemning the price advertising rules as per se unlawful, the majority then applied to CDA's restraints on both price and non-price advertising a rule-of-reason approach that differed from the truncated formula of Mass. Board. The conclusion was that both types of restraints were unlawful under the rule of reason. Id. at 37-39 [5 Trade Reg. Rep. (CCH) ¶ 24,007 at 23,796-97].
32. Supra n.29.
33. Joel I. Klein, "A Stepwise Approach to Antitrust Review of Horizontal Agreements," Remarks before the American Bar Association's Antitrust Section Semi-Annual Fall Policy Program (Nov. 7, 1996) ("A Stepwise Approach").
34. Discussing problems that stem from efforts to maintain a sharp dichotomy between the per se approach and full-blown rule-of-reason analysis, Klein noted that "adhering to such a dichotomy runs the risk of submerging thoughtful analysis in a battle over the selection of the proper mode of inquiry; and, consequently, . . . matters that are too complex for per se condemnation sometimes get shoe horned into that category, . . ." "A Stepwise Approach" at 5; see also id. at 10-11, 13 ("Since we're starting with an agreement that directly eliminates some competition on price or output, our only hesitation about striking it down should be our concern that, unlike what we've come to be confident about in per se cases, there may be something good going on in these other cases. And we should satisfy ourselves whether there is or there isn't.").