Antitrust Alert: Federal Appeals Court Reaffirms Flexible Legal Standard for Restraints in Competitor Collaborations
A new decision by a U.S. federal judge and leading antitrust scholar has reaffirmed the U.S. antitrust principle that competitive restraints adopted to foster competitor collaborations will not be summarily condemned under the per se rule, but instead evaluated under a rule of reason analysis when they are supported by plausible procompetitive justifications. This opinion by Judge Richard Posner in the Sulfuric Acid Antitrust Litigation provides welcome guidance for companies considering how to structure competitor collaborations—a process that often involves the adoption of restraints to align parties' incentives and further the parties' efforts to achieve the procompetitive objectives of the overall collaboration.
Judge Posner rejected an attempt by class action plaintiffs to challenge as per se illegal restraints adopted as part of collaborative arrangements among two Canadian mining companies and several U.S. sulfuric acid producers. The U.S. producers agreed to stop producing their own (higher cost) sulfuric acid and to distribute in exclusive territories within the U.S. (lower cost) sulfuric acid produced by the mining companies in Canada as a by-product of their mining operations. Judge Posner acknowledged (as plaintiffs alleged) that the challenged restraints restricted the U.S. producers' ability to market their own sulfuric acid in competition with the mining companies' sulfuric acid. But Judge Posner found that the defendants had plausibly shown that the restraints facilitated entry by the mining companies into the U.S. sulfuric acid market. By mitigating the business risks that the parties faced in cooperating with one another (which could have impeded the collaboration), Judge Posner wrote, the restraints "enable[d]" the parties to combine the "substantial economies in transportation and marketing" associated with the U.S. producers' distribution networks with the mining companies' substantially lower costs of production, leading the price of sulfuric acid in the U.S. to drop significantly. Based on this showing, the court held, the restraints should be evaluated not under the per se rule but under the rule of reason, which requires an evaluation of the actual effect of the restraint on competition. Because the plaintiffs had declined to pursue their claims under the rule of reason, their case was dismissed.
There are some important lessons in Judge Posner's ruling:
- Restraints agreed upon by competitors that (if agreed to in isolation) could be challenged as per se illegal (e.g., price fixing, output restrictions, territorial allocations) should be evaluated under the rule of reason, where the parties to the restraint can plausibly show that "the challenged practice when adopted could reasonably have been believed to promote ‘enterprise and productivity.'" To qualify for such treatment, the restraint need not go so far as to pave the way for the introduction of a "new product" into a U.S. market, but need only be "plausibly argued to increase competition or other economic values on balance."
- Companies should take caution that merely asserting cursory procompetitive justifications to an otherwise facially anticompetitive agreement likely will not allow them to avoid the per se rule. And so it is important to fully evaluate the reasons and potential justifications for a restraint before actually agreeing with an actual or potential competitor.
- Just because a restraint is not per se illegal does not mean that it is per se legal. The Sulfuric Acid plaintiffs could have proceeded to trial against the defendants had they not foregone their claims under the rule of reason. As Judge Posner explained, "the rule of reason directs an assessment of the total economic effects of a restrictive practice." This means that the parties to a challenged restraint will have the opportunity to explain and justify the restraint and shift the burden back to the plaintiffs to show that the restraint actually reduces competition.
- The costs of defending a (justifiable) restraint under the rule of reason should not be underestimated. Many plaintiffs, like those in Sulfuric Acid, may be discouraged from litigating such claims, but not all will. And as the nine-years-long Sulfuric Acid litigation shows, producing plausible evidence of a procompetitive justification can require a substantial investment of time and resources, particularly in cases such as these where the business arrangements and facts are complex.
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