Richard Nixon’s Attorney General John Mitchell famously declared: “Watch what we do, not what we say.” When that was done to him, he wound up in prison. A similar lesson applies to understanding the courts.
Academics can debate whether cartels can contribute positively to consumer welfare under some (unlikely) circumstances. Indeed, Penn law professor Herbert Hovenkamp has made the argument that the Trans-Missouri and Joint Traffic cartels were of that sort and a similar proof exists to justify the sewer pipe cartel found illegal in Addyston Pipe. Yet I suspect that no one in the antitrust community thinks that the courts should invite litigation on the merits of cartels. A defendant in a criminal cartelistic market allocation case recently got a trial judge to open that door, but the Tenth Circuit slammed it shut again.
My starting point is that antitrust law is not, especially Section 1, concerned with the ultimate consequences. It sets rules for conduct focused on the kinds of conduct that will be allowed. The well-known analogy is how nations set rules of the road. Arguably it could be more efficient to drive on the other side of the street at some times, but it must not be done!
In a recent essay titled “Against Efforts to Simplify Antitrust,” Iowa law professor Sean Sullivan tracks the words courts use and not what they do. He is correct that if you look at what courts say about antitrust law doctrine it is complex and confusing. The rhetoric of courts is one of consequentialism (i.e., whether the result is likely to be substantively good or bad), and that opens the door to an infinite array of claims. Simplifying such concerns only invites further confusion.
My view of the complexity problem is that one should not look at what courts say but what they do, given the facts that they find. If we look at what courts do in applying Sherman 1, with the exception of one type of agreement—to which I will return—they condemn absolutely (per se) what Taft, Bork, Steve Ross and I call “naked restraints,” ones that only function to create, allocate or exploit the market. Such restraints pre-empt the function of the market and confer control of that public activity on private parties. This is the case even when the restraint is “vertical” as the recent McDonald’s decision reaffirmed. All such restraints are always illegal (again one type of case may be an exception but rarely is). Despite academic commentary, almost no lawyer defends a cartel on its merits. The defense is always that there was no “agreement” or “conspiracy,” and the cases focus on that element. When the agreement is “tacit,” there is no remedy. Indeed, that is why plaintiffs ought to focus on what the defendants did agree to do and show that that agreement is itself anticompetitive and remediable. But what is central here is that the underlying framework is clear—a purely anticompetitive agreement is illegal regardless of potential contribution to “consumer welfare.” More generally, what I claim is that the “per se” cases fall in a functional category that differentiates them from other cases involving agreements among competitors, e.g., CBS v BMI.
The aforementioned exception comes when there is market failure because of the lack of standards or other necessary regulation of market conduct. As Lande and Marvin pointed out in their article titled “Three Types of Collusion: Fixing Prices, Rivals, and Rules,” most such regulatory agreements create social costs and are not justified. A good example is the Cal Dental case (the FTC failed to call the economist who would have documented these effects). Contrary to the Indiana Federation of Dentists, the Court in Cal Dental assumed that there was a legitimate role for dentists in self-regulation. Indeed, this might have been plausible if there was no state regulation. But as in Indiana, California has a full set of regulations including those governing advertising. This crucial fact was not, as far as I can tell, brought to the Court’s attention. Indeed, Cal Dental is part of a group of cases, which if you look at what courts do, not what they say, stand for the proposition that some private regulatory agreements can be lawful under the Sherman Act. In an article titled “The Per Se Legality of Some Naked Restraints: A (Re)Conceptualization of the Antitrust Analysis of Cartelistic Organizations,” Bett Roth and I have identified the criteria that we think courts are using in fact. I would also observe that most of the time the courts reject the claim of a right to regulate competition.
As Taft point out in Addyston Pipe, it is different when the restraint is a functional incident to a primary transaction or venture involving the parties to the restraint. Again, when such ancillarity is apparent in a case, courts are usually reluctant to intervene without some compelling reason. Hence, the usual “rule of reason” case involves an arguably ancillary restraint which the court treats as presumptively legal. Yes, it can get difficult to determine what rebuts that presumption. But when you look at what courts do and not what they say, there has to be either evidence of substantial market power or evidence that the claim is pretextual before the court will examine the “reasonableness” of the restraint.
In some cases, however, the presumption is reversed. These are the “quick look” cases. The restraint looks pretty close to being naked, but there is at least a tenuous claim that it is ancillary to some transaction or venture. The advocate for such a restraint has the burden of showing the necessity for the restraint in terms of that transaction or venture. Cal Dental properly understood on its facts did not involve a classic quick look. It is involved the question of whether the association had the right to regulate advertising competition among dentists and, if so, whether the regulations were “reasonable.”
Thus, there is a framework, external to the language of the case law, that explains and identifies the legal issues and standards with limited complexity. Some famous cases are often misunderstood in term of their actual facts or outcome. For example, Topco is famous as a “per se” decision, but in fact the Supreme Court after remand upheld a modified territorial restraint of Topco members. The restraint was responsive to the claim by Topco of free riding on “house brands” if a competing member entered the territory of an existing member. Of course, this is nonsense because these are house brands! In operation, the decree lasted ten years and was never invoked even as Topco’s members increasingly competed with each other. Harry First and I wrote up this history. The initial absolute territorial restraint was unreasonable after only a quick look, but a greatly slimmed down restraint assuming that there was a risk of free riding could be justified. The government took only five minutes to put in its case at the initial trial and refused to add anything on remand. This left the implausible claim of a significant risk of free riding unrebutted.
My point here is that simplification works if you start with a coherent framework based on an understanding of what the law is supposed to do. In the case of Section 1 it aims, in my view, to limit the use of contracts and agreements to those that facilitate legitimate transactions and ventures. That frames the central issue and tells the parties and the court when further detail and assessment is necessary and what the proper focus of that assessment should be. Looked at this way, antitrust is a lot less complex in its legal dimension if one focuses on what courts do and not what they say. What creates complexity is trying to parse the confused and confusing lawyer and judge invocation of selective quotations from earlier court decisions. Both judges and lawyers have a deep concern not to appear to have an original thought. This approach to law obscures the relatively coherent and intelligible framework being employed. Let me add that factual issues can still be complex and require substantial inquiry especially if the challenge focuses on an arguably ancillary restraint.
With respect to Sullivan’s other example, merger law and the structural presumption, I would agree that here there is a problem of determining what the framework should be. A merger is by definition an agreement in restraint of trade, as it eliminates the freedom of the acquired party to operate freely in the market. Merger law, therefore, should be understood as a form of presumptive illegality of these restraints that are ancillary to what can be legitimate transactions. Much of the resulting case law is an unnecessarily complex and confused system based on the highly questionable premise that mergers among large corporations are likely to have good results. A growing body of empirical work shows that is rare indeed. Hence, thought of in error terms, a broad prohibition on mergers among (1) large firms engaged in related or directly competitive product or service lines, or (2) the combination of large firms operating at different levels of a market system, e.g., the food system, is unlikely to result in the loss of any significant efficiency or other social value. A presumption based on a basic review of the size and approximate market position of the firms should suffice. Below some boundary (see the various ones used from 1968 to the present in the Merger Guidelines), there is still a real possibility that the merger might have adverse effects on competition. However, the presumption is that mergers below that threshold are less likely to have adverse effect and the burden goes to the government or other challenger to prove that harm to competition is possible.
I am more than 50 years from doing a merger investigation for the government, but what I found then is that it is not hard to get a rough sense of the options for markets and the relative position of the firms. Mergers such as U.S. Foods/Sysco, Staples/Office Depot, Turbo Tax/ Tax Act, ought to have been decided easily without the need for great elaboration. But quick decisions based on presumptions invite reviewing courts, that cling to the myth of the efficient big merger, to allow such transactions. Hence, if a court is to have a basis to reject the merger, the challenger must produce lots of information and the judge needs to write voluminously about the transaction.
Professor Sullivan is correct in the sense that the incentives of the legal system are to complicate everything and extend the debate. Efforts to simplify will always invite complicating responses. Real reform starts with a better sense of what courts are doing (not just what they are saying) and identifying from that the analytic framework being using to test the legality of the conduct or merger (note monopoly is another can of doctrinal worms that could be simplified by a focus on the implicit and changing frameworks being applied). Real simplification can then come from either pointing up the errors in the underlying framework or in showing that the framework while desirable has been unduly complicated by judicial language that should be avoided.
Peter C. Carstensen is the Fred W & Vi Miller Chair in Law Emeritus University of Wisconsin Law School.