Tried and trusted

The first US antitrust statute, the Sherman Antitrust Act, was passed in 1890. Hailed as a “consumer welfare prescription” by the US Supreme Court, the US antitrust laws were enacted to protect the competitive processes of the US economy by discouraging the consolidation of market power, which tends to increase prices and stunt innovation, and by promoting competition, which tends to decrease prices and encourage innovation.

These goals have guided US courts in interpreting the Sherman Act and subsequent legislation. While too broad an interpretation could deter healthy competition and seriously harm the US economy, an overly narrow reading could permit anticompetitive behaviour to go unpunished.

The Sherman Act
The Sherman Act is the most significant US antitrust statute. Brought about by the widespread belief that a few wealthy individuals and private companies were wielding their power at the public’s expense, the act empowered the US Department of Justice to imprison or fine offenders and gave private individuals the right to seek treble damages from violators.

The act’s most important provisions are Sections 1 and 2. Section 1 makes unlawful “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce”.

Read literally this would prohibit virtually every contract, since virtually all contracts restrain trade to some degree. Courts have narrowed that language to mean only “unreasonable” contracts and have divided potentially illegal restraints of trade into two categories. The first category, activities that are per se illegal, includes practices that are so inherently anticompetitive that they are presumed to be “unreasonable” and hence violate Section 1 – such as price-fixing. To prevail on a violation, a plaintiff must prove only that the defendant committed the act. All other potential restraints of trade fall into the second category, the ‘rule of reason’ test. Under this test, a plaintiff must prove that the challenged activity imposes an unreasonable restraint on competition.

Section 2 prohibits monopolisation of any part of commerce, as well as attempts and conspiracies to monopolise. While the act does not define the specific elements of a monopolisation claim, the Supreme Court has held that a plaintiff must establish that the defendant has monopoly power in the relevant market and wilfully acquired or maintained that monopoly. Defining the ‘relevant market’ has become a focal point of Section 2 litigation, where the plaintiff argues for a narrow definition (including, ideally, only the defendant’s product or service) and the defendant urges a broad definition (including any alternative products or services that consumers may use as a substitute). Market definition has two aspects:

  • The ‘product market’, which looks at the products that the defendant’s product competes against; and
  • The ‘geographic market’, which defines the geographic area in which the defendant competes.

    Together these two aspects of the relevant market determine the outcome in many antitrust cases.

    Antitrust and securities law
    The US Supreme Court has granted certiorari in four antitrust cases this term, a significant number in a single term. Perhaps the most important antitrust case currently before the Supreme Court is Billing v Credit Suisse First Boston, in which the court will consider whether, and to what extent, the securities laws pre-empt the antitrust laws.

    In Billing, the plaintiffs sued 10 major financial institutions, alleging that their practice of forming syndicates to underwrite securities offerings constituted price-fixing in violation of numerous federal and state antitrust laws. The district court dismissed the suit, finding that the antitrust laws were implicitly pre-empted by the comprehensive set of regulations governing securities offerings promulgated by the US Securities and Exchange Commission (SEC).

    The Court of Appeals for the Second Circuit reversed, finding no indication that Congress intended to shield securities transactions from antitrust scrutiny. In addition to the defendant’s petition for certiorari, the Solicitor General filed a brief on behalf of the Bush Administration, asking the Supreme Court to hear the case to address the important issues facing both antitrust and securities jurisprudence. The Solicitor General proposed a modified approach, arguing that the securities laws should only partially pre-empt the antitrust laws.

    If left undisturbed, the Court of Appeals’ decision could expand vastly antitrust suits and have dramatic effects on US securities markets.

    Pleading requirements under Section 1
    In Bell Atlantic Corporation v Twombly, the court will decide what a plaintiff must plead to state a claim for horizontal price-fixing under Section 1, and specifically whether it is sufficient to allege mere parallel conduct by defendants. In Twombly, the plaintiff sued five major telecommunications companies, alleging that they conspired to thwart low-cost companies’ efforts to enter the market. The plaintiff’s complaint relied on a bare allegation of conspiracy, supported only by allegations of ‘parallel conduct’ between the defendants, ie that defendants were acting as though they had made an agreement. Defendants moved to dismiss the suit, arguing that the plaintiffs had failed to allege any facts to support the existence of a conspiracy. The lower court dismissed the complaint, holding that the plaintiff was required to plead a ‘plus factor’, suggesting that the parallel conduct was the result of a conspiracy. Such plus factors include evidence of motive or conduct that suggests that an agreement was made.

    The Court of Appeals for the Second Circuit reversed the decision, rejecting the plus factor requirement and holding that antitrust cases were subject to the same minimum pleading standard as most other civil cases. Accordingly, the plaintiff was entitled to take discovery and to attempt to prove its case.

    The court’s decision in Twombly will affect greatly the number and type of Section 1 cases. If the Court of Appeals’ decision is affirmed, plaintiffs will be able to proceed to costly discovery even if they have little or no evidence of collusive activity. From a defendant’s perspective, this could make even meritless antitrust claims very expensive to defend. On the other hand, a reversal might make it too difficult for some plaintiffs to bring a valid claim – because most illegal agreements are made in secret, plaintiffs may not have the information necessary to plead a specific agreement before taking any discovery.

    Standards for anticompetitive behaviour
    In the final two cases the court will determine the proper standard to apply to particular types of anticompetitive behaviour. In PSKS v Leegin Creative Leather Products, the court will decide whether the per se or rule of reason test applies to manufacturers that refuse to deal with retailers that sell products below a price suggested by the manufacturer.

    Although the court previously held in 1911 that this refusal to deal was illegal, it has agreed to revisit its holding in light of modern antitrust analysis.

    In Weyerhaeuser v Ross-Simmons Hardwood Lumber, the court will decide how to evaluate claims of ‘predatory buying’ under Sherman Act Section 2. Most claims involving predatory market behaviour involve ‘predatory pricing’, where a would-be monopolist sells their product below cost in an attempt to drive competitors out of the market. Because healthy price-cutting can be confused with predatory pricing, courts approach such claims cautiously. The question in Weyerhaeuser is whether courts should follow the same approach when a defendant is accused of overbidding for production inputs in the hope of keeping them out of their competitors’ hands.

    The Supreme Court will issue its decisions on these cases some time in the coming months.

    Karin DeMasi is a partner at Cravath Swaine & Moore