Review

In the last post, I went over the basics of the Second Circuit’s 2-1 antitrust ruling against Apple in United States v. Apple, Inc., No. 13-3741-cv (2d Cir. June 30, 2015).

Apple, you will recall, served as the hub of a hub-and-spoke conspiracy that had five spokes — each of them a book publisher — to raise prices on e-books in late 2009 and early 2010.

To review:

• The spokes settled before the trial, but the hub — Apple — insisted that it had done nothing wrong and that it had instead done competition a service by breaking the e-book monopoly of Amazon.com.
• Despite urging that no wrong did it do, Apple agreed to pay state and private plaintiffs $450 million if it lost its appeal and $70 million if it won.
• All three of the court of appeals panel members accepted that Apple “orchestrated” the conspiracy (majority) or “enable[d]” it (dissent).

Which brings us to the topic we promised to discuss this time.

The per se melee

That far more consequential part of the majority opinion — and the focus of the dissent — dealt with whether the per se rule of Sherman Act liability for price-fixers extends to entities that orchestrate (or enable) the price-fixing conspiracy but do not occupy the same level of distribution as the other participants in the conspiracy do. As we will see at the bottom of this post, the per se rule simplifies antitrust claims, makes them less costly to prosecute, and renders them more suitable for class treatment.

Majority

Circuit Judges Debra Ann Livingston and Raymond Lohier opined that Apple’s “vertical” relationship with the publishers did not absolve it of per se liability. As Judge Livingston wrote:

“The true test of legality” under § 1 of the Sherman Act “is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.”   Bd. of Trade of City of Chi. v. United States, 246 U.S. 231, 238 (1918) (emphasis 5 added).   By agreeing to orchestrate a horizontal price‐fixing conspiracy, Apple committed itself to “achiev[ing] [that] unlawful objective,” Monsanto [Co. v. Spray‐Rite Serv. Corp., 465 U.S. [752,] 764 [(1984)] (internal quotation marks omitted): namely, collusion with and among the Publisher Defendants to set ebook prices.  This type of agreement, moreover, is a restraint “that would always or almost always tend to restrict competition and 10 decrease output.”  Leegin [Creative Leather Prods., 15 Inc. v. PSKS, Inc.], 551 U.S. [877,] 886 [(2007)] (internal quotation marks omitted).

The response, raised by Apple and our dissenting colleague, that Apple engaged in “vertical conduct” that is unfit for per se condemnation therefore misconstrues the Sherman Act analysis.  It is the type of restraint Apple agreed to impose that determines whether the per se rule or the rule of reason is appropriate. These rules are means of evaluating “whether [a] restraint is unreasonable,” not the reasonableness of a particular defendant’s role in the scheme.  Atl. Richfield [Co. v. USA Petroleum Co.], 495 U.S. [328,] 342 [(1990)] (emphasis added) (internal quotation marks 18 omitted); see also Nat’l Collegiate Athletic Ass’n v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85, 103 (1984) (“Both per se rules and the Rule of Reason are employed to form a judgment about the competitive significance of the restraint.” (internal quotation marks omitted)).

Id. at 72-73.

Dissent

The dissenter, Circuit Judge Dennis Jacobs, wrote that “[t]his appeal turns on whether purely vertical participation in and facilitation of a horizontal price-fixing conspiracy gives rise to per se liability.” United States v. Apple, Inc., No. 13-3741-cv, slip op. at 14 (2d Cir. June 30, 2015) (Jacobs, J., dissenting). Judge Jacobs regarded the majority’s view of the question old-timey and maybe quaint:

A vertical relationship that facilitates a horizontal price conspiracy does not amount to a per se violation. In another age, the Supreme Court treated such a hub-and-spokes conspiracy as a per se violation. See Interstate Circuit, Inc. v. Paramount Pictures Distrib. Co., 306 U.S. 208, 226-27 (1939). But the per se rule has been in steady retreat.

Id. at 16.

The Supreme Court’s decision in Leegin Creative Leather, Judge Jacobs felt, signaled the doom of hub-and-spoke conspiracies as foundations for per se liability of the hub. He wrote:

The most recent and explicit signal is given in Leegin, which explains that “the Sherman Act’s prohibition on ‘restraints of trade’ evolves to meet the dynamics of present economic conditions,” such that “the boundaries of the doctrine of per se illegality should not be immovable.” 551 U.S. at 899-900 (alterations omitted). Leegin held that a manufacturer did not commit a per se violation of § 1 when it agreed with several retailers on a minimum price that the retailers could charge–a holding that overruled a century-old principle articulated in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). See Leegin, 551 U.S. at 881. Leegin reasoned that Dr. Miles had “treated vertical agreements a manufacturer makes with its distributors as analogous to a horizontal combination among competing distributors,” but that, “[i]n later cases, . . . the Court rejected the approach of reliance on rules governing horizontal restraints when defining rules applicable to vertical ones.” Leegin, 551 U.S. at 888. Dr. Miles was held to be inconsistent with “[o]ur recent cases[,] [which] formulate antitrust principles in accordance with the appreciated differences in economic effect between vertical and horizontal agreements, differences the Dr. Miles Court failed to consider.” Id.

Although the express holding of Leegin does not extend beyond the overruling of Dr. Miles, the Court’s analysis reinforces the doctrinal shift that subjects an ever-broader category of vertical agreements to review under the rule of reason. The Court first stated the subsisting scope of per se liability: 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. Leegin, 551 U.S. at 893. The Court then rejected per se liability for hub-and-spokes agreements, in wording that prescribes rule-of-reason review of vertical dealings that facilitate per se unlawful horizontal agreements (the type of agreement that the district court found Apple had undertaken): To the extent a vertical agreement setting minimum resale prices is entered upon to facilitate either type of cartel [among 17 manufacturers or among retailers], it, too, would need to be held unlawful under the rule of reason. Id. (emphasis added). After Leegin, we cannot apply the per se rule to a vertical facilitator of a horizontal price-fixing conspiracy; such an actor must be held liable, if at all, “under the rule of reason.” Id.

Significance

The ultimate outcome of United States v. Apple on the per se v. rule of reason issue — whether in the Second Circuit or the Supreme Court — will affect antitrust law in three principal ways.

First, a per se case is simpler, costs millions of dollars less to try, and has greater odds of success with a judge or jury. Why? Because, unlike the rule of reason, per se:

• does not require an economist to opine about the relevant product and geographic markets;
• obviates the need to prove that the defendants had market (or monopoly) power or that their conduct was anticompetitive;
• simplifies proof of damages; and
• precludes defendants from claiming, and presenting evidence, that their agreement enhanced competition.

Second, a per se case stands a much better chance of meeting the requirements of Rule 23(b)(3), which allows certification of claims to recover damages on a class-wide basis. The irrebuttable presumption of unlawfulness prevents defendants from injecting “pro-competitive” justifications and other complicating issues that may affect different class members differently and may therefore lead to the conclusion that issues common to class members do not, as Rule 23(b)(3) requires, “predominate” over individual questions.

Finally, a win for Apple on the per se issue would lend credence to the dissenting judge’s claim that “the per se rule has been in steady retreat” since the 1970s, notably (according to the dissent) in Leegin. The idea of a trend against per se treatment might encourage courts to question all of the traditional per se categories (including price-fixing, customer and market allocation, and agreements to limit supply).

As we know from Chief Justice John Marshall, “the power to tax involves the power to destroy”, McCulloch v. Maryland, 17 U.S. (4 Wheat) 416, 431 (1819), and converting antitrust cases from per se to rule of reason would impose a tax that would make them much harder to afford, more difficult to win, less likely to qualify for class treatment, and generally scarcer.

What do you think about that possibility? Does the prospect of weakening enforcement of antitrust law sound like a good thing to you or a bad thing? Or do you believe that the dissent has the better argument about the proper scope of the per se shortcut?