The United States Supreme Court’s 2006-07 term represented a continuation of the Court’s increased interest in questions of antitrust law. The four decisions issued by the Court during the past term generally stand for a more restrictive view of the role of antitrust law in managing economic competition. A sense of the Court’s shift from past practice can be gained from the fact that all four decisions either reversed or vacated circuit court rulings, and in none of the cases did the Court purport to be resolving a circuit split. However, while much popular commentary on these decisions intimated that this was a result of recent changes in the Court’s composition, a closer look reveals this was too facile an explanation, with three of the four cases being decided unanimously or by seven vote majorities.1 This suggests that the current trend in the Court’s antitrust jurisprudence is unlikely to change significantly for possibly a decade or more absent legislative action by Congress.
Tighter Standards for Pleading in Antitrust Cases:
Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (May 21, 2007).
As the Supreme Court itself acknowledged, the Twombly case is not precisely a substantive antitrust case in the sense of analyzing the outcome of a Sherman Act or other antitrust claim, but rather “present[ed] the antecedent question of what a plaintiff must plead in order to state a claim under § 1 of the Sherman Act.” The Twombly case arose from allegations that the regional Bell operating companies or “Incumbent Local Exchange Carriers” (“ILECs”) were failing to meet their obligations under the Telecommunications Act of 1996 to provide “Competitive Local Exchange Carriers” (“CLECs”) access to existing telephone networks, as well as deliberately failing to compete with one another.2 The plaintiffs, representing a putative class of telephone service customers, brought Sherman Act Section 1 claims (15 U.S.C. § 1) against the ILECs for conspiring to “engage in parallel conduct” to prevent CLECs from gaining access to the ILECs’ networks on commercially attractive terms and also by failing to “meaningfully pursue” business opportunities in competing ILECs’ territories.
The trial court dismissed the claims on a Rule 12(b)(6) motion, concluding that the plaintiffs’ allegations of merely parallel behavior without pleading additional facts that would demonstrate the ILECs were engaging in superficially economically irrational behavior or other conduct which could give rise to an inference of a conspiracy were insufficient to state a claim. The Second Circuit Court of Appeals reversed, concluding that antitrust plaintiffs were not actually required to plead facts affirmatively supporting a finding of a conspiracy, but rather that it was sufficient to plead facts suggesting a conspiracy was “plausible.” However, in a 7-to-2 decision, the Supreme Court reversed the Second Circuit’s ruling.
The Supreme Court began its analysis by reviewing its Sherman Act Section 1 jurisprudence. The Court noted that it has long been established that a plaintiff cannot prevail on a Section 1 conspiracy claim by simply proving parallel behavior by businesses, but rather “proof of a § 1 conspiracy must include evidence tending to exclude the possibility of independent action . . . .” With this standard in mind, the Court proceeded to consider what facts must be necessarily pled by a plaintiff to state a Sherman Act Section 1 claim capable of surviving a motion to dismiss. While it acknowledged that Rule 8(a)(2) of the Federal Rules of Civil Procedure requires only a “plain statement” showing that “the pleader is entitled to relief,” the Court explained that, in light of the standard for proving a Section 1 conspiracy, an “allegation of parallel conduct . . . gets the complaint close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of ‘entitlement to relief.’” This, combined with concerns about the costly nature of antitrust litigation and the threat of disrupting innocent business activities, led the Court to conclude that such claims must be pled in a manner that makes them “plausible” rather than merely “conceivable.” The Court concluded that the Twombly plaintiffs had not met that burden and reversed the decision of the appellate court.
In a sharply worded dissent, Justice Stevens, joined by Justice Ginsburg, pointed out that the majority had avoided a key point – that the conduct alleged in the complaint would still likely have been found to be unlawful if the plaintiffs had ultimately been able to present evidence demonstrating an underlying conspiracy. Justice Stevens argued that the majority’s concerns about the impact of allowing the litigation to proceed on sketchy allegations could have been addressed through the use of limited discovery to probe for some evidence of an unlawful agreement between the ILECs before permitting full-scale discovery to commence.
Of the four antitrust decisions in this term, Twombly is likely to have the most far-reaching impact. The Twombly decision has already been applied and will continue to be applied outside of the antitrust context to the evaluation of the adequacy of pleadings in other substantive areas of law. Both Twombly and the Credit Suisse decision discussed further below reflect the Court’s concern with perceived manipulation of the litigation system and, particularly in Twombly, the in terrorem effects of the costs of discovery in antitrust litigation. These cases also reflect an explicit concern about the tendency of antitrust courts and juries to err, which again sparked strong dissent from Justice Stevens.
Resale Price Maintenance Agreements No Longer Per Se Unlawful:
Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (June 28, 2007).
The Leegin case concerned the legality of so-called “resale price maintenance agreements” (“RPMAs”) and challenged a nearly century-old principle of antitrust law. The case arose from allegations that the defendant, a manufacturer of leather goods, had required its retailers to agree to sell a particular brand of its goods at prescribed prices. The plaintiff, a clothing retailer which had stocked the defendant’s brand for several years, began offering the branded merchandise at a discount from the defendant’s stated prices. When the defendant learned of this action, it stopped selling the branded merchandise to the plaintiff. The plaintiff claimed the defendant’s enforcement of an RPMA with its retailers constituted a vertical price-fixing agreement, a per se violation of Section 1 of the Sherman Act (15 U.S.C. § 1) under the Supreme Court’s earlier Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) decision.
At the trial court level, the defendant attempted to present expert testimony demonstrating that the RPMA at issue was procompetitive, but the court excluded the expert’s testimony in light of the Dr. Miles ruling. After a jury trial, the defendant was found liable for violating Section 1 of the Sherman Act. The Fifth Circuit affirmed, again based on Dr. Miles, concluding that “rule of reason” analysis was inappropriate for the RPMA at issue and that the trial court correctly excluded the defendant’s expert testimony as irrelevant under Dr. Miles’ per se rule. The Supreme Court, while acknowledging that the Fifth Circuit’s ruling was correct under past precedent, reversed the appellate court’s decision, because it determined that the per se rule against all forms of vertical agreements relating to price represented by Dr. Miles was no longer supportable.
The Court began its analysis by reviewing the distinction between the “rule of reason” and per se violations of Section 1 of the Sherman Act. The rule of reason applies to most issues in antitrust and requires careful analysis of the competitive impact of otherwise allegedly anticompetitive conduct, weighing such factors as the nature of the market in question, the extent of the parties’ market power, and other highly contextual variables. Per se violations are limited to specific categories of conduct that the Supreme Court has determined “would always or almost always tend to restrict competition and decrease output.” To determine whether a particular practice merits being deemed a per se violation, the Court requires evidence of “demonstrable economic effect” and not merely “formalistic line drawing.”
Turning to the specific rule in Dr. Miles, which made “vertical agreement[s] between a manufacturer and its distributor to set minimum resale prices” a per se violation, the Court concluded that the rule was actually the sort of “formalistic line drawing” which it had condemned in other decisions. Dr. Miles had incorporated common law policy concerns into its rule, but the Leegin Court concluded that the interjection of common law rules into the realm of economic analysis which governs modern antitrust law was inappropriate. The Court also observed that Dr. Miles had conflated the effects of vertical and horizontal restraints on trade, but that subsequent Supreme Court decisions had increasingly distinguished the two practices, finding vertical restraints less harmful to competition. The Court concluded that in light of these problems, combined with economic analysis finding RPMAs could have substantial procompetitive effects, vertical price restraints should no longer be considered per se violations of the Sherman Act, but instead be analyzed pursuant to the rule of reason. Because the lower courts in the case had applied the per se rule from the now abrogated Dr. Miles decision, the Court reversed and remanded the case for further proceedings applying the rule of reason.
Justice Breyer, joined by Justices Stevens, Souter, and Ginsburg, dissented. Justice Breyer took issue with the majority’s economic analysis, noting among other facts that the Federal Trade Commission, which had conducted extensive price surveys during a period of several decades during which Dr. Miles was partially abrogated by statute, had found that RPMAs had the effect of raising prices to consumers. Principles of stare decisis also weighed strongly in favor of preserving the rule of Dr. Miles, Justice Breyer argued, because the rule had shaped business relationships for nearly a century and both the Supreme Court and Congress had relied on it in formulating other decisions or legislation. In contrast to Weyerhaeuser, discussed below, in Leegin, the Court shows more confidence in the ability of trial courts to separate wheat from chaff and make nuanced determinations of the balance between anti-competitive effects and pro-competitive justifications. In contrast to Twombly, in Leegin, the Court also shows its willingness to allow litigants to engage in expensive and protracted litigation on issues such as market definition and analysis of market impacts. The Court’s seeming bipolar approach to these fundamental questions about the role of antitrust litigation in shaping the economic playing field may say more about its strong belief that modern economic thinking has created such substantial questions about the continuing wisdom of the rule announced in Dr. Miles that other goals had to be sacrificed.
Implicit Preemption of Antitrust Laws by Securities Laws:
Credit Suisse Securities (USA) LLC v. Billing, 127 S. Ct. 2383 (June 18, 2007).
The Credit Suisse case concerned the question of to what extent federal securities laws, particularly the Securities Act of 1933 and the Securities Exchange Act of 1934, may impliedly preempt antitrust laws. The case arose from allegations that securities underwriters conspired to refuse to sell stocks from initial public offerings (“IPOs”) unless buyers agreed to also either subsequently purchase additional shares of the same company at escalating prices, pay higher commissions on subsequent transactions, or purchase less desirable securities from the same underwriter. The plaintiffs, representing two putative classes of securities buyers, brought claims under the Sherman Act Section 1 (15 U.S.C. § 1), Clayton Act Section 2(c) (15 U.S.C. § 13(c)), and state antitrust laws against ten investment banks, alleging that the investment banks conspired to impose unfavorable terms on IPO purchasers, which also had the alleged effect of artificially inflating the prices of the securities at issue.
The trial court dismissed the action on the grounds that regulation pursuant to federal securities laws impliedly preempted antitrust laws in the context of the marketing of publicly traded securities. On appeal, the Second Circuit noted that past cases finding preemption of antitrust laws by securities laws had always involved actual regulatory action by the Securities Exchange Commission (“SEC”), which had approved or otherwise legitimated the allegedly anticompetitive conduct and, thus, clearly implicated a jurisdictional conflict. Here, the conduct was not approved by the SEC, and the SEC acknowledged in an amicus brief to the Second Circuit that application of antitrust laws in this case was unlikely to impair its authority. The appellate court, therefore, reversed the trial court’s ruling and reinstated the claims. The Supreme Court, however, reversed the Second Circuit’s decision in a 7-to-1 ruling, with Justice Kennedy not participating.
The Court reviewed a series of previous decisions in which it had found federal securities laws preempted the application of antitrust laws, even in the absence of express legislative carve-outs, and distilled four factors to consider in determining whether a finding of implicit preemption is appropriate: (1) existence of regulatory authority under the securities laws which encompasses the conduct at issue; (2) the administrative agency charged with enforcing the regulatory regime exercises that authority (although not necessarily with regard to the specific conduct at issue); (3) a “risk” that a conflict between the securities and antitrust laws may “produce conflicting guidance, requirements, duties, privileges, or standards of conduct;” and (4) the “possible conflict” involves practices “squarely within an area” of the financial markets subject to regulation under the securities laws.
The Court found that three of the four factors were clearly met in the Credit Suisse case. The only factor potentially subject to dispute was the existence of a “risk” of conflict. Analyzing the history of the SEC’s past regulatory efforts and the complex nature of the securities law questions at issue led the Court to conclude “there is no practical way to confine antitrust suits so that they challenge only activity of the kind the [plaintiffs] seek to target, activity that is presently unlawful and will likely remain unlawful under the securities law.” Finding that the “securities laws are ‘clearly incompatible’ with the application of the antitrust laws in this context,” the Court reversed.
Justice Stevens joined in the judgment but wrote a separate concurrence because he disagreed with the majority’s reasoning. On the record before the Court, Justice Stevens would have found “the defendants’ alleged conduct does not violate the antitrust laws, rather than holding that Congress has implicitly granted them immunity from those laws.”
Justice Thomas dissented, accusing the majority of ignoring the savings clauses included in both the Securities Act (15 U.S.C. § 77p(a)) and the Securities Exchange Act (15 U.S.C. § 78bb(a)). Those savings clauses stated that each Act was intended to provide rights and remedies “in addition” to existing legal and equitable rights and remedies. Because the Sherman Act had been passed decades prior to either of the statutory schemes concerning securities regulation, Justice Thomas concluded that the protections of federal antitrust law “certainly would have been thought of as ‘rights and remedies’ that existed ‘at law or in equity’ by the Congresses” which passed the later Acts. The savings clauses, in Justice Thomas’ view, would therefore have vitiated the conflict between the antitrust and securities law and thus the question of preemption did not even need to be reached.
Credit Suisse can be seen as a strong signal by the Court that antitrust law must give way where there is a strong, activist regulatory agency enforcing a broad regulatory scheme that addresses the conduct at issue. Nothing in the Court’s analysis of the interplay between regulation and antitrust restricts its applicability to the securities context. The Court found that antitrust must give way as “plainly incompatible” with regulatory schemes even where both prohibit the challenged conduct, so long as the imposition of antitrust liability might impair the regulator’s freedom in the future. The case thus represents a move to favor regulation over market competition enforced by antitrust rules, and represents a very significant shift for regulated industries.
Predatory Pricing Analysis Extended to “Predatory Bidding:”
Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S. Ct. 1069 (Feb. 20, 2007)
The Weyerhaeuser case concerned allegations that the defendant, a major sawmill operator and purchaser of alder “sawlogs,” deliberately injured competition by using its dominant position to increase prices in the alder sawlog market, thereby driving up input costs for its rivals and diminishing their profit margins. The plaintiff, a small mill operator which had been forced to close down after several consecutive years of rising costs, brought a Sherman Act Section 2 claim (15 U.S.C. § 2) based on a theory of “predatory bidding,” i.e., that the defendant had paid above market prices for alder sawlogs as part of a plan to drive competitors out of business.
The defendant attempted to argue that the Supreme Court’s test for antitrust claims predicated on predatory pricing adopted in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) should be used to evaluate “predatory bidding” claims. The trial court rejected this position and the plaintiff prevailed at trial. On appeal to the Ninth Circuit, the defendant reiterated its view that the Brooke Group test should be used, but the appellate court instead affirmed the trial court’s ruling, finding the test was inapplicable to allegations of demand-side price manipulation. A unanimous Supreme Court concluded otherwise and vacated the Ninth Circuit’s opinion.
The Supreme Court rejected the appellate court’s view that predatory pricing and predatory bidding were analytically different, instead finding them to be symmetrical practices, with predatory bidding “mirror[ing] predatory pricing in respects that we deemed significant to our analysis in Brooke Group.” The Court noted that, like predatory pricing, predatory bidding requires firms to calculate that taking a loss in the short run will permit the firm to earn supracompetitive profits in the long run. Also like predatory pricing, the central behavior involved in predatory bidding (paying higher prices for inputs) can have many innocent, and even pro-consumer, rationales and outcomes. Therefore, these “general theoretical similarities of monopoly and monopsony3 combined with the theoretical and practical similarities of predatory pricing and predatory bidding convince us that our two-pronged Brooke Group test should apply to predatory-bidding claims.”
As adapted to the predatory bidding context, the Brooke Group test contains two elements: (A) the plaintiff must show that “higher bidding [for inputs] . . . leads to below-cost pricing in the relevant output market;” and (B) “that the defendant has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power.” This “will require ‘a close analysis of both the scheme alleged by the plaintiff and the structure and conditions of the relevant market.’” Because the Weyerhauser plaintiff had not presented evidence which could support a finding under the Brooke Group test, the Court concluded that the jury’s verdict and the subsequent appellate court decision could not be supported.
The Weyerhaeuser decision can be seen as reflective of the Court’s oscillating embrace of clear, albeit wooden, rules for determining antitrust liability, compare Leegin, supra, and its concern over “false positives,” i.e., condemnation of business activity that may be well-intentioned and actually pro-competitive. It likely will have fairly limited impact on most businesses because of the rarity of the conduct at issue: predatory buying by a monopsonist. However, one aspect of the Weyerhaeuser decision stands out: it definitively elevates Brooke Group to the pantheon of essential decisions when advising on single firm conduct. It is quite possible that the Court will eventually conclude that other types of potentially predatory schemes should be judged against the high standards of Brooke, and thus will not be condemned absent a showing that the defendants profited above competitive levels.