Supreme Court Shortens The Reach Of Antitrust

Thursday, June 1, 2006 - 01:00

Read literally, the Sherman Act would seem to outlaw virtually all conduct that in any way restrains competition. In addition to chilling purely pro-competitive behavior, such an interpretation would prohibit competitive restraints that, on balance, benefit consumers.

Thankfully, the courts and enforcement agencies have fashioned analyses that strike an appropriate balance by protecting consumer welfare without unduly chilling pro-competitive conduct. These tests have evolved, but common themes are the need to determine the appropriate level of scrutiny to apply to the challenged conduct, to define the market at issue, and to assess the relative competitive power of the firms in that market. The Supreme Court recently issued three decisions that significantly affect each of these areas and continue the trend to shorten the reach of the federal antitrust laws.

Per Se vs. Rule Of Reason

The "rule of reason" has been the analytical framework typically applied to alleged violations of the Sherman Act. Per se treatment originated as a shortcut to avoid lengthy and costly review of cases where the anticompetitive effects of the conduct obviously outweighed any potential pro-competitive benefits. The use of the per se rule obviated the need to present evidence of market power, or evidence of actual anticompetitive effects.

For a time, per se treatment seemed only to expand to include an ever-growing list of offenses. Eventually, the Court intervened and has spent much of the past 20 years narrowing the scope of the per se rule. Texaco Inc. v. Dagher is another step along this path.

In 1998, Texaco and Shell Oil joined forces to create Equilon Enterprises, a joint venture for refining and selling gasoline in the western United States. Texaco and Shell contributed all of their refining and retail assets to Equilon, and exited the downstream market. Equilon, however, continued to sell gasoline under the Texaco and Shell brand names. Texaco and Shell service station owners sued, alleging that Equilon's decision to set a single price for both brands of gasoline amounted to price-fixing by Texaco and Shell and, thus, was per se illegal.

The Ninth Circuit agreed. On appeal, the Supreme Court reversed and held that, when an economically integrated joint venture sets the price of its own products, the joint venture does not engage in a per se violation of the Sherman Act. Texaco Inc. v. Dagher, Slip Op. (Feb 28, 2006). The Court's reasoning was simple - following the formation of the joint venture, Texaco and Shell no longer competed for the sale of gasoline in the western United States. The conduct was seen as little more than price setting by a single entity: "[w]hen persons who would otherwise be competitors pool their capital and share the risk of loss as well as the opportunities for profitsuch joint ventures [are] regarded as a single firm competing with other sellers in the market." Dagher at 4.

The Court also considered the ancillary restraints doctrine: the lawfulness of the conduct hinges on whether the restraint at issue is "naked," in which case it is unlawful, or "ancillary," in which case it is not. The Court dismissed the use of the doctrine in this case because it necessarily applied to nonventure activities. According to the Court, setting the price of the gasoline sold by Equilon was a core activity of the joint venture.

The decision is significant in several respects. First, it narrows the scope of per se liability - reaffirming that such treatment is generally reserved for price-fixing and similarly extreme conduct. Next, it provides comfort to joint venture partners that want to price their products without undue fear of antitrust liability. Finally, it clarifies that antitrust liability under the ancillary restraints doctrine is largely limited to non-venture activities.

Market Analysis

A rule of reason analysis requires a comparison of the anticompetitive effects of a restraint against its pro-competitive benefits. Essential to a proper evaluation of competitive effects under the rule of reason is the analysis of the market at issue. Two critical components in a market analysis are market definition and an assessment of the relative economic power of the firms in the market. The decisions in Volvo Trucks and Illinois Tool mark further steps by the Court to shorten the reach of the antitrust laws based on these factors.

Market Definition

The Robinson-Patman Act (the "Act") prohibits a seller from discriminating in price between different buyers in a way that adversely affects competition. 15 U.S.C. 13(a). While the focus of the Act is different from that of the Sherman and Clayton Acts, they all share common analyses for factors such as market definition. The Act has garnered much scrutiny both for its sloppy drafting and because of its suspect economic underpinnings. Indeed, the Court has on more than one occasion criticized the Act as vague and unintelligible. Nevertheless, the Act remains in force and is seen by many as an effective tool to deter and remedy market power abuses by large and powerful buyers.

In Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc., the Court was presented with an opportunity to interpret the scope of the Act. Reeder-Simco ("Reeder") was a Volvo dealer that sold trucks to retail customers through a competitive bidding process, where customers provided specifications and invited bids from various dealers (often representing various manufacturers). When a dealer received the specifications, it would request from the manufacturer a variety of concessions or discounts from the wholesale price. The dealer with the successful bid then ordered the truck from the manufacturer, who then built the truck according to the customer's specifications.

Reeder sued Volvo under the Robinson-Patman Act, alleging that Volvo had discriminated against Reeder in the discounts that Volvo offered as compared to the discounts offered to other Volvo dealers. Reeder argued that, through persistent price discrimination, Volvo injured both Reeder and competition in the sale of Volvo trucks. In order to show discrimination at Reeder's level (known as "secondary line" discrimination), Reeder was required to show that it competed against a buyer that received a discriminatory price, that the price difference was substantial, and that the price difference existed over time.

The Court disagreed with Reeder, stating that the Robinson-Patman Act addresses price discrimination involving competition between different purchasers for resale of the same purchased product. The Court found that each bidding transaction by which Volvo trucks were sold constituted its own relevant market. Because Reeder had not competed with an alleged favored purchaser in the same (single-transaction) relevant market, the Court found that Reeder could not establish the competitive injury required under the Act.

Assessing the competitive effects of an alleged restraint of trade typically starts with the definition of the relevant market. While the focal point of the Court's opinion was the scope of the Robinson-Patman Act, its analysis of the relevant market is of particular interest because of its implications beyond the Robinson-Patman Act. Among other things, the decision suggests that markets involving bids or negotiated transactions may be susceptible to a narrow market definition. This is significant because too small a geographic area might overstate the effect of a restraint without taking into account outside factors that constrain a firm's ability to raise prices. Similarly, too large a product market definition may improperly attribute competition among products where there is none.

Market Power

The Supreme Court has wrestled with a practice called "tying" for nearly a century. Tying involves conditioning the sale of one product on the purchase of another.

In the case of Illinois Tool Works, the tie involved the requirement by Illinois Tool that customers purchasing its patented print heads (the tying product) also purchase and use only its ink (the tied product). Illinois Tool Works Inc. v. Independent Ink, Slip Op. (March 1, 2006). Independent Ink manufactured an ink formula that was compatible with Illinois Tool print heads. However, due to Illinois Tool's contracts, print head customers were not able to purchase or use Independent Ink's products. Independent Ink sued, claiming that the patent held by Illinois Tool for its print heads gave it de facto market power and thus the tie was per se illegal. The district court and the Federal Circuit agreed, and found for Independent Ink.

Independent Ink's assertion of market power based on the patent was not a novel claim. In 1947, and again in 1962, the Supreme Court held that a patent in the tying market gave the holder market power and allowed it to stifle competition in the market for the tied product. See International Salt Co. v. U.S., 332 U.S. 392 (1947); U.S. v. Loews, 371 U.S. 38 (1962). The courts, and economic theory, have moved away from the presumption of market power conferred by patents in tying cases. Indeed, in virtually every other tying setting, the Court has required proof of market power in the market of the tying product.

Illinois Tool provided the Court with the opportunity to clarify whether a presumption of market power can be derived from a patent. "[In] all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product." Slip Op. at 16. The Court did not hold that a patent may never confer market power, simply that a presumption of market power is not warranted. The Court remanded the case so that the district court could fully evaluate Illinois Tool's power in the market for print heads.

Market power has typically been defined as "the ability to raise prices above those that would be charged in a competitive market." NCAA v. Board of Regents, 468 U.S. 109 n.38 (1984). Proof of market power in a relevant market is an absolute prerequisite in order for a plaintiff to prevail under a rule of reason analysis. Much like the short-cut analyses that have been spawned by the difficulty of performing a full rule of reason analysis, so, too, have courts fashioned abbreviated analyses of market power in certain situations.

The Court's holding in Illinois Tool Works was fairly narrow, as it had already required proof of market power in the tying product in all non-patent cases. Thus, patent holders now enjoy the same freedoms as other firms to sell a patented product in conjunction with other products and services. However, simply because the patent presumption is not available does not mean that market power is absent, and firms must be sure that they do not enjoy such market power lest they run afoul of the antitrust laws.

Conclusion

Individually, each of the Supreme Court's last three antitrust opinions were unremarkable and did not surprise those who have followed the development of antitrust law over the past 20 years. Together, however, the cases affirm the Court's continuing trend to limit the reach of the federal antitrust laws.

Bernard A. Nigro is a Partner practicing civil and criminal antitrust law with the law firm of Willkie Farr & Gallagher LLP. Mr. Nigro wishes to thank Benjamin Jackson for his assistance in preparing this article. The statements in this article should not be construed as the position of the law firm or any client of the law firm.

Please email the author at bnigro@willkie.com with questions about this article.