The Supreme Court Awakens: Review of the Court’s 2005-Term Antitrust Decisions
May 23, 2006
© Robins, Kaplan, Miller & Ciresi L.L.P.
The Supreme Court’s 2005 Term presented the Court’s busiest antitrust docket in recent memory. The cases spanned a broad area of the law, encompassing price fixing, tying, and price discrimination. Although these decisions concern a broad range of topics, they share a common thread, as each demonstrates the Court’s increasing willingness to challenge established antitrust presumptions. They also continue a trend in antitrust law by focusing more on the competitive effects of various conduct and less on the classification of that conduct. Below we comment on three cases, Reeder-Simco v. Volvo, Illinois Tool Works v. Independent Ink, and Texaco v. Dagher, and flesh out some of the lessons that emerged from the Court’s decisions.
REEDER-SIMCO v. VOLVO TRUCKS NORTH AMERICA
The Robinson-Patman Act (“RPA”) generally prohibits discriminatory pricing in the sale of goods of “like grade and quality.” It has not been a hot topic in Antitrust circles for some time, so commentators were surprised when the Supreme Court took up the Volvo case. Most expected the Court to define whether the Act applied to customer-specific bidding markets, and whether the Act required two actual purchases. But the Court did not directly address these issues, finding instead that without head-to-head competition between the entities that received different prices there can be no harm to competition, and therefore the Robinson-Patman Act did not apply.
Reeder-Simco was a Volvo Trucks-authorized dealer in Arkansas, selling Volvo heavy-duty trucks such as mixers and dump trucks. Volvo dealers solicited a particular customer’s business and, during the bidding process, Volvo would adjust the wholesale price it charged for its trucks at the behest of the bidding dealers. The dealer would not actually purchase the trucks until after the customer accepted the dealer’s bid, but Volvo would sometimes lower its price after the dealer won the bid.
Reeder believed that it lost business because of Volvo’s discriminatory pricing practices and sued for violations of the Robinson-Patman Act, claiming that Volvo’s practice constituted discrimination in price among goods of “like grade and quality” and harmed competition. Reeder alleged that Volvo unlawfully favored other dealers by giving them greater price concessions, thus reducing Reeder's ability to compete for retail customers. Reeder’s case focused on different prices across Volvo dealers, but it provided little evidence of head-to-head competition for the same customer.
The Court granted certiorari to decide what constitutes a “competitor” in a customer-specific bidding process, and whether the RPA applies to bidding-style, customer-specific markets. In addition, scholars anticipated resolution of the RPA’s “two sales” requirement: if the buyer never accepts an offer, and therefore does not make a purchase, have there been “two sales” to compare?
By a 7-2 majority, the Supreme Court held that a manufacturer may not be held liable for price discrimination under the RPA without a showing that the manufacturer discriminated between dealers in actual competition with each other on the same sale to the same customer. Thus, any alleged price discrimination could not substantially affect competition. “Absent actual competition with a favored Volvo dealer . . . Reeder cannot establish the competitive injury required under the Act.” The Court reserved judgment on the larger issue of whether the RPA applies to markets in which sales are made by competitive bidding and special-order sales, instead glossing over the issue and directly analyzing the merits of the specific RPA claims. Additionally, the Court did not address whether the RPA required Reeder to actually make a purchase at a higher price to satisfy the RPA “two sales” requirement, even though Reeder was offered a worse price than other dealers, but never made a purchase pursuant to that price.
Although the “no competition” finding disposed of the case on its merits, the Court added a discussion of the RPA’s policies. It stated that the RPA was intended to curb large chain stores’ buyer power, so it should not be applied to situations in which the favored purchaser does not have market power, or where the favored purchaser is not a large department store or chain store, or where the discriminatory price fosters interbrand competition.
This decision is noteworthy is several respects. First, in industries in which sales are based on head-to-head bidding and no sales take place until after a bid is awarded, price discrimination is allowable if buyers are not competing to resell to the same customers. Second, if a price differential has an impact on competition among buyers, that is, it causes harm to competition, the RPA will still apply. Therefore, offering the same price to all dealers is still a better practice in terms of RPA compliance. Any adjustment to price should be made after a particular dealer is selected by the consumer. Finally, the Court did not go so far as to limit the RPA to only those situations involving a large purchaser with market power, or where the practice harms only interbrand competition, so RPA compliance will still require vigilance for sellers of goods.
ILLINOIS TOOL WORKS INC. ET AL. v. INDEPENDENT INK, INC.
Until the Illinois Tool Works decision, the Supreme Court followed a precedent articulated in International Salt Co. v. United States holding that a patent created a rebuttable presumption of market power. Courts and commentators were nearly unanimous in their criticism of this presumption. So it came as no surprise to the antitrust community that the Supreme Court reversed the presumption, and held that a patent alone is not enough to prove market power in a relevant market.
In reversing the Federal Circuit, the Court cited a generation of economic literature that undercut the validity of the International Salt presumption. This included criticism from leading antitrust scholar, Herbert Hovenkamp that “there is no economic basis for inferring any amount of market power from the mere fact that the defendant holds a valid patent.” In addition to antitrust scholarship, the Court cited a Congressional amended to the section of the patent laws that gave rise to the presumption as further indication that International Salt’s time had passed.
This case arose when Independent Ink, Inc. asserted an antitrust “tying” claim against its competitor, Trident, Inc., a subsidiary of Illinois Tool Works, Inc (ITW). To prove a tying case, the plaintiff must show that the defendant (1) has market power in Good 1, and (2) uses that market power to force consumers who want Good 1 to also purchase Good 2 (or perhaps, to not purchase a competitor’s good that competes with Good 2). ITW produced printing systems for applying barcodes and had a patent on the printhead used in those systems. Independent Ink developed ink that could be substituted for ITW’s ink, but was effectively excluded from the market by ITW’s requirement that its customers also purchase its unpatented ink. Independent Ink claimed that this was an illegal tying arrangement, in violation of Section One of the Sherman Act. Of course, the International Salt presumption made this case a relatively easy one for Independent Ink, as it avoided the costly element of proving that ITW had market power in a properly-defined market. This presumption allowed Independent Ink to succeed before the Federal Circuit, which held that the presumption of market power – no matter how outdated –was nonetheless binding precedent.
The Supreme Court’s reversal, while expected, will have significant consequences for both patent holders and antitrust plaintiffs. First, intellectual-property holders will have greater freedom to bundle patented products with unpatented products. This would likely apply to copyrights and trademarks as well, as the Court’s logic is equally applicable to those forms of intellectual property. Second, patent holders will have greater freedom to license their products, as their patents alone will not open them up to antitrust suits for refusing to license to competitors or for entering into exclusive-dealing arrangements. Of course, a patent holder could still be sued for these types of conduct if the plaintiff could define a relevant market and show that the patent holder has market power in that market.
TEXACO, INC. v. DAGHER
With the increasing prevalence of joint ventures in the economy, it should come as no surprise that joint-venture law is one of the hottest areas of antitrust. It is against this backdrop that the Supreme Court accepted certiorari in Texaco v. Dagher, in which the Ninth Circuit held that Shell and Texaco could be found per se liable for setting the price of gasoline they sold through a joint venture. In a brief, unanimous opinion by Justice Thomas, the Supreme Court reversed and held that activities at the core of a joint venture, such as setting prices for the venture’s products, are not per se violations of Section One of the Sherman Act.
Equilon, the joint venture at issue in Dagher, was a combination of all the downstream assets (refineries, pipeline, terminals, and service stations) of Shell and Texaco in the western United States. Under the joint-venture agreement, Shell and Texaco agreed to spilt profits and the risks of losses from the venture in a ratio equal to the value of assets that each company contributed to the venture. Shell and Texaco agreed also not to compete with the Equilon or Motiva ventures or with each other in the refining or marketing of gasoline in the U.S. market. Shell and Texaco voluntarily submitted the arrangement to the FTC for its approval, which they received after completing some modest divestitures.
For eight months after the joint venture was formed, Shell and Texaco continued to independently price their own brands of gasoline. Eventually a decision was made that “the Shell and Texaco brands would have the same price in the same market areas.” This decision caused Texaco-branded gasoline, which had traditionally been sold at two cents a gallon cheaper than Shell, to rise to the Shell price level. The price increase prompted a lawsuit from a class of 23,000 independent station owners that alleged that Shell and Texaco committed a per se violation of Section One of the Sherman Act by conspiring with each other to set the same price for their individual brands of gasoline. The Ninth Circuit reversed a grant of summary judgment for the defendants, holding under the ancillary restraints doctrine that Shell and Texaco had not demonstrated that their setting of a unified price for their competing brands was related to any procompetitive purpose of the venture.
The Ninth Circuit’s opinion prompted a flood of amicus curiae briefs urging reversal from parties ranging from Microsoft to the Northwest Ohio Specialty Physicians. Most notably, Visa U.S.A. filed a brief requesting that the Court extend its Copperweld precedent to shield joint ventures from Section One liability for all conduct within the scope of the venture.
In reversing, the Supreme Court wisely declined these invitations to blindly apply Copperweld to joint ventures, instead issuing a narrow decision that a fully-integrated joint venture was not per se liable for setting the prices of its own products. The decision rested on the level of integration between Shell and Texaco and the companies’ decision to share profits, such that each was indifferent to whether a gallon of Shell or Texaco gasoline was sold. Thus, the Court reasoned that Shell and Texaco had ceased competing in the relevant market after they formed their venture and were no longer subject to Section One’s per se rule. The Court also noted that the “naked/ancillary restraints” doctrine, which the Ninth Circuit used to find per se liability, did not apply to “core activities” of joint ventures such as pricing the venture’s products. Because the plaintiffs did not challenge the formation of the venture and did not pursue a case under the “rule of reason,” the Court held that summary judgment was proper for the defendants.
Because of the narrowness of the Court’s opinion, it is unlikely that the Dagher decision will have a significant impact on the antitrust treatment of joint ventures. The Court has, however, further weakened the per se rule. It also appears that when the Court analyzes joint-venture conduct, it will be willing to look at the incentives of joint-venture participants to whether they truly are “competitors” that can conspire within the meaning of Section One. Finally, the Court noted that the Equilon joint venture was analyzed and approved by the Federal Trade Commission. While this alone is never dispositive of an antitrust analysis, it was a factor in the Court’s analysis, which further emphasizes the benefits of seeking agency approval for conduct between competitors.
SO WHERE ARE WE NOW?
What can we learn from the Supreme Court’s rediscovery of antitrust in the 2005 Term? In the three cases from this term, the Court appears willing to confront assumptions that have been present in the law for years. It also appears to be moving toward an analysis in antitrust cases that is based heavily on competitive effects. Such analyses have already found favor in lower courts in recent high-profile cases. It is likely that the Court’s renewed interest in antitrust will continue into the future, as challenging antitrust cases in rapidly-evolving markets work their way through the lower courts.
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