In June 2007, in its Leegin Creative Leather Prod., Inc. v. PSKS, Inc. (Leegin)[1] decision, the Supreme Court of the United States overruled its century-old rule applying per se illegality to vertical agreements to fix minimum resale prices. They are now subject to the rule of reason analysis.
Some anticipated that the Leegin decision would catalyze the proliferation of resale price maintenance (RPM) agreements nationwide. However, because some states still consider RPM agreements as per se violations of their respective antitrust statutes, this phenomenon has been largely unseen.[2] For instance, California courts continue to uphold per se condemnation under the Cartwright Act, the California antitrust statute[3]; this is unlikely to change soon.[4] Also, Maryland rejected the Leegin holding by statute.[5] And while New York state appellate courts have not addressed the issue, New York’s attorney general has challenged RPM agreements.[6] This suggests a willingness to continue to file such cases, leaving companies unsure about whether they should enter into RPM agreements. With this in mind, it is no surprise that companies have been unwilling to test the waters.
Still, following the Leegin decision, the federal courts have been asked to address the potential anticompetitive effects of vertical agreements that have horizontal effects in that they reduce competition among competitors. Leegin, of course dealt only with a purely vertical price restriction that existed to increase interbrand competition. Nevertheless, the Leegin Court recognized that RPM might harm consumers if it has a horizontal effect by facilitating cartels that reduce interbrand competition.[7] According to the Court:
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. [Citations]. To the extent a vertical agreement setting minimum resale prices is entered upon to facilitate either type of cartel, it, too, would need to be held unlawful under the rule of reason. This type of agreement may also be useful evidence for a plaintiff attempting to prove the existence of a horizontal cartel.[8]
But what exactly does this language mean? Section 1 of the Sherman Act bars unreasonable restraints, and the rule of reason typically applies to vertical agreements between entities at different levels. But what is the test for price restraints that do not fit neatly into the standard taxonomy because, while vertical in nature, they restrict competition between horizontal entities? (Vertical/Horizontal Hybrid Restrictions). [9] Are these vertical agreements still subject to the rule of reason under Leegin? Consider the following hypotheticals:
One: A retailer—call it Retailer A—wants to enter the ebook market. But Retailer A cannot compete at the below-cost prices offered by another retailer, Retailer B, which holds over 90 percent of the ebook market. To combat the below-cost price, the Retailer A approaches all of the ebook publishers to orchestrate a horizontal price-fixing agreement among them. Retailer A devises an elegant vertical agreement whereby the publishers convert their ebook retailers to an agency model. Through this new model, the publishers set the retail price of the ebooks, and Retailer A is guaranteed a 30 percent commission. The vertical agreements also include a provision that allows Retailer A to match the lowest price on the market for these books. In effect, this provision requires the publishers to enter into the same agency model with Retailer B, which the publishers accomplish in short order. Is Retailer A’s conduct of entering into vertical agreements to organize a horizontal price-fixing cartel subject to per se condemnation or will it be judged under the rule of reason?
Two: A franchisor-manufacturer of heavy-duty trucks grants franchises with non-exclusive territories. To assist its franchisees in competing with other brands, the franchisor offers transaction-specific discounts. One franchisee is selling the trucks with an additional discount in the non-exclusive territories of other franchisees. In response, the non-discounting franchisees pressure the franchisor to adopt a policy that denies the franchisor’s transaction-specific discounts to sales within other franchisees’ territories. This policy effectively stops the discounted sales into their territories. Are the franchisor’s vertical agreements with the non-discounting franchisees that facilitated a horizontal price-fixing cartel per se unlawful?
These hypotheticals represent the facts under which the Second Circuit and the Third Circuit decided this question. And they arrived at opposite conclusions. The Second Circuit in United States v. Apple, Inc. held that the vertical agreements were entered into as a part of the horizontal scheme, and thus the vertical participant must suffer the same per se fate as the horizontal colluders.[10] The Third Circuit in Toledo Mack Sales & Service, Inc. v. Mack Trucks, Inc. held that, under Leegin, the vertical agreements are subject to the rule of reason even when they are entered into to enforce a horizontal price-fixing cartel.[11] Which is correct?
This conflict presents an important question, the outcome of which will have a tremendous impact. If vertical participants in a scheme designed to fix prices or decrease output are subject to rule of reason analysis, it is possible that the very sine qua non of the price-fixing cartel gets off scot-free. In fact, this was the very outcome of the Third Circuit decision—the vertical participant was found not liable by the jury in a rule of reason trial. With these conflicting decisions, the antitrust plaintiff now faces a heightened standard to plead and prove a case alleging Vertical/Horizontal Hybrid Restrictions.
This article analyzes whether Leegin overruled a series of cases holding that where a vertical participant joins in the unlawful horizontal cartel, the vertical participant is also per se liable for a violation of Section 1 of the Sherman Act. The article also analyzes the standard that the antitrust plaintiff must now satisfy to plead and prove that a vertical participant should be liable per se in a case alleging Vertical/Horizontal Hybrid Restrictions. First, it will lay out the statutory scheme and historical trend toward the elimination of per se condemnation of vertical restraints. Second, this article outlines the Supreme Court’s case law in cases alleging Vertical/Horizontal Hybrid Restrictions. Third, it will set forth the facts and holdings of the conflicting decisions of the Third Circuit and the Second Circuit. Fourth, the article presents the argument for upholding the Supreme Court’s long history of treating both vertical and horizontal participants equally in a case alleging Vertical/Horizontal Hybrid Restrictions. Fifth, the article analyses recent decisions to articulate the burden that antitrust plaintiffs now have to meet to subject a vertical participant to per se liability.
The Sherman Act—per se V. Rule Of Reason AnalysisTo successfully plead a claim under § 1 of the Sherman Act, a plaintiff must plead evidentiary facts to show:
(1) a contract, combination or conspiracy among two or more persons or distinct business entities; (2) by which the persons or entities intended to harm or restrain trade or commerce among the several States, or with foreign nations; (3) which actually injures competition.[12]
It is now a legal axiom that a bare assertion of the existence of an unlawful agreement is not entitled to the presumption of truth.[13] Requiring proof of a potential agreement is essential to the claim.
In limited circumstances, certain conduct may be per se unlawful. Per se condemnation under the Sherman Act is reserved for “conduct that is manifestly anticompetitive . . . that is, conduct that would always or almost always tend to restrict competition and decrease output.”[14] Consequently, where a plaintiff proves facts that establish a business practice that has been declared per se unlawful, liability is established as a matter of law.
Because of the severity of per se condemnation, “most antitrust claims are analyzed under the rule of reason.”[15] Under this framework, “the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint's history, nature, and effect.”[16] Although the rule of reason has been synthesized from several past decisions, the contemporary rule of reason analysis has been "cast[] in terms of shifting burdens of proof."[17]Under the rule of reason:
The plaintiff bears the initial burden of showing that an agreement had a substantially adverse effect on competition. If the plaintiff meets this burden, the burden shifts to the defendant to come forward with evidence of the procompetitive virtues of the alleged wrongful conduct. If the defendant is able to demonstrate procompetitive effects, the plaintiff then must prove that the challenged conduct is not reasonably necessary to achieve the legitimate objectives or that those objectives can be achieved in a substantially less restrictive manner. Ultimately, if these steps are met, the harms and benefits must be weighed against each other in order to judge whether the challenged behavior is, on balance, reasonable.[18]
Needless to say, as a practical matter, it is far more cumbersome (and costly) to litigate an antitrust action judged under the rule of reason than under the per se rule. In the per se realm, a plaintiff need only establish that the conduct occurred—i.e., horizontal price-fixing cartel. Once the conduct is established, so is liability.
In the rule of reason...
