Every so often a case finds its way to the Seventh Circuit Court of Appeals, which provides Judge Richard Posner, the noted antitrust scholar and jurist, with a vehicle to discuss the contours of a particular antitrust doctrine. Recently, In re Sulfuric Acid Antitrust Litigation[46] provided Judge Posner with the opportunity to examine the bedrock antitrust principle that price fixing is illegal per se – or is it? True, the Supreme Court in United States v. Socony-Vacuum Oil, 310 U.S. 150, 221 (1940), held that "any combination which tampers with price structures is engaged in an unlawful activity." But perhaps a more nuanced look at the rule is required given that Socony is "72 years old and showing its age."[47]

Shutdown Agreements

The In re Sulfuric Acid Antitrust Litigation case involved the U.S. and Canadian markets for sulfuric acid. The principal defendants are Noranda, Inc. and Falconbridge Ltd., Canadian mining companies that in 2005, after the period of the alleged antitrust violations (1988–2002), merged to form a single company named Xstrata Canada.[48] They produce sulfuric acid as a byproduct of the smelting of nonferrous minerals, such as nickel and copper. In an effort to end the overproduction of sulfuric acid in Canada,[49] the Canadian companies convinced U.S. producers and distributors of sulfuric acid to enter into "shutdown agreements." The shutdown agreements required the U.S. companies to curtail their own production and distribution of sulfuric acid. Instead, the U.S. companies agreed to devote their distribution facilities to the Canadian sulfuric acid and be compensated by the difference between what the Canadian companies would charge for their sulfuric acid and what the U.S. companies could resell it for to U.S. customers. In addition, the U.S. companies were granted exclusive territories.[50] The scheme works because the Canadian sulfuric acid is much cheaper than U.S. sulfuric acid and the exclusive territories insulated the U.S. firms from competition at the distribution level.[51]

The U.S. customers, chemical companies that purchase sulfuric acid as an input into the production of their chemicals, brought a class action challenging the agreements. In their view, the shutdown agreements were "garden variety" price fixing agreements that raised the market price, restricted output and were therefore per se illegal.[52] The district court disagreed and shortly before trial ruled that the case should proceed only on a rule of reason basis. When the plaintiffs refused to continue on that basis the case was appealed[53] to the Seventh Circuit to decide whether to affirm the district court's ruling that the rule of reason standard applied at trial.[54]

The Abiding Puzzle

For Judge Posner, "the abiding puzzle to the plaintiffs' appeal is why the lawyers for the class, having spent almost nine years litigating the case … refused to go to trial."[55] The plaintiffs' answer to the riddle during oral argument was that a rule of reason case is "radically different" than a per se case.[56] In a per se case, plaintiffs need only prove that the defendants fixed prices and damages. However, in a rule of reason case, the plaintiff must also prove that the defendants have market power to raise price or restrict output and that their behavior was unreasonable.[57] If the plaintiffs can succeed with their prima facie case, the burden then shifts to the defendant who then has "the burden of showing that appearances are deceptive and really the behavior that the plaintiffs have challenged is not anticompetitive."[58] In other words, defendants may offer a legitimate procompetitive business rationale for behavior that is collusive on its face.

In short, "[t]he rule of reason directs an assessment of the total economic effects of a restrictive practice that is plausibly argued to increase competition or other economic values on balance."[59] While this is more work for the parties, it is, according to Posner, "probably less than they think."[60] Perhaps the correct answer to the riddle is that plaintiffs expected that a jury would have found that the shutdown agreements were reasonable.[61]

Judging the Judge

The preceding does not tell us if the trial court was correct in mandating a rule of reason trial; it only describes the parties' burdens once the judge decides how the trial will proceed. Given that indisputably "the shutdown agreements are in effect a form of price fixing,"[62] three principles should guide an antitrust trial court's selection of whether per se or rule of reason is the proper mode of analysis: (i) judicial experience with the restraint, and whether the restraint (ii) viewed when adopted (iii) promotes enterprise and production.

Novel or Old Business Practices

First, the presumptive standard for determining whether a restraint harms competition is the rule of reason.[63] In contrast, the per se rule is limited to certain restraints that through judicial experience[64] have been found to always, or almost always, restrict competition and decrease output.[65] "The per se rule is designed for cases in which experience has convinced the judiciary that a particular type of business practice has no (or trivial) redeeming benefits ever." [66] In contrast to the plaintiffs, Posner characterized the shutdown agreements as unique in the annals of the law. "[W]e have never seen or heard of an antitrust case quite like this, combining such elements as involuntary production and potential antidumping exposure. It is a bad idea to subject a novel way of doing business … to per se treatment under antitrust law."[67]

For Posner, therefore, this case was not a "rerun" of Socony as the plaintiffs' claimed, but was fundamentally different from Socony. True, the plaintiffs were correct that in Socony the big oil refiners were paying the small refiners not to sell their oil, just as the defendants here were paying U.S. producers of sulfuric acid not to produce sulfuric acid. However, the difference is that the only aim and effect of the price-fixing agreement in Socony-Vacuum were to raise price; in this case the aim was to facilitate entry into the U.S. market, which would … lower prices …[68]

Thus, the fact that the judiciary did not have experience with shutdown agreements militated in favor of affirming the trial court's decision.

Promotion of Enterprise and Productivity

Second, the rule of reason is appropriate "if the challenged practice when adopted could reasonably have been believed to promote 'enterprise and productivity.'"[69] This sentence is Posner's summary of a long line of Supreme Court cases holding that agreements that "'increase economic efficiency and render markets more, rather than less, competitive'" are properly evaluated under a reasonableness standard.[70]

New entry is almost always pro-competitive. New entry is "an unequivocally socially beneficial effect from an economic standpoint."[71] In Posner's view, the shutdown agreements facilitated new entry and doing so potentially increased economic efficiency and made the sulfuric acid market more competitive. Thus, if the defendants could prove at trial that the shutdown agreements facilitated entry, "their net effect on economic welfare may well have been positive, especially since the negative effects may have been few because of the high production costs of the U.S. companies."[72] This factor, therefore, also supports the trial court's decision to proceed on a rule of reason basis.

Viewed at the Time It Was Adopted

Third, the restraint should be analyzed from the perspective of "when adopted."[73] At the time the agreements were adopted they reasonably appeared to be a procompetitive solution to an unwanted oversupply in Canada and an overpriced supply in the United States. Without the shutdown agreements the risks of entry may have outweighed the opportunity. If the Canadian companies entered the U.S. market and the U.S. producers continued to produce native sulfuric acid, then supply would greatly exceed demand causing prices to plummet, making it unprofitable for the Canadians to stay in the market, which would result in an eventual increase in the price of sulfuric acid. Alternatively, the Canadians could sell its sulfuric acid below cost and risk a dumping action by the U.S. producers. Alternatively still, the U.S. producers might exit the sulfuric acid business entirely knowing they could not compete against the lower cost Canadian product.

The shutdown agreements rebalanced the scales in favor of opportunity over risk. On the one hand, by agreeing to distribute the Canadian sulfuric acid, the U.S. companies did not have to exit the market entirely, they remained in the market as distributors. On the other hand, the Canadians did not have to incur the risk and expense of developing a distribution network, or risk the threat of a dumping action. The shutdown agreements were procompetitive because they

"facilitated the entry of very low-cost producers into the U.S. market. That benefited U.S. chemical companies that use sulfuric acid as an input … and ultimately the consumers of the products that those companies make."[74]

Unlike the garden-variety price fixing agreement whose "only aim and effect" is to raise price, the aim of the shutdown agreements "was to facilitate entry into the U.S. market, which would (and eventually did …) lower prices and prevent the shutdown of Canadian smelting operations, which would have reduced output and raised the price of sulfuric acid in the United States. The overall effect was thus to lower rather than to raise price."[75]

Likewise, the grant of exclusive territories was procompetitive. The U.S. producers were also taking a big risk when they agreed to change their business model and become mere distributors. Curtailing competition at the distribution level was a procompetitive way of compensating the U.S. producers for this risk they undertook. "Exclusive territories reduce competition at the distributor level but can increase it at the producer level and in this case may well have done so by facilitating the Canadian producers' entry in the U.S. market."[76]

Conclusion

It might be argued that Sulfuric Acid Antitrust Litigation does not plow new ground. After all, the Supreme Court in Broadcast Music, already warned that "easy labels do not always supply ready answers" and "literalness is overly simplistic and often overbroad."[77] What Judge Posner has done, however, is to provide the roadmap to implement the Supreme Court's sometimes vague aphorisms.