I. INTRODUCTION
Thank you and good morning. I'm pleased to have the opportunity to address this distinguished gathering on some important antitrust issues concerning associations
Before I continue, I must make the usual disclaimer: the views I express here are my own and do not necessarily reflect the views of the Commission or of any other Commissioner. In fact, as my votes in several recent cases indicate, my views on some issues are not shared by my colleagues within the Commission. But I'm working on that.
II. HORIZONTAL RESTRAINTS ANALYSIS
AND ITS IMPORTANCE TO TRADE ASSOCIATIONS
We all know that a trade or professional association can be thought of as a confederation of economic actors in direct competition with one another -- that is, in a "horizontal" competitive relationship. And cooperative arrangements among competitors ring certain bells at the antitrust enforcement agencies -- sometimes very loudly.
An understanding of how the FTC applies antitrust laws to association activities must therefore begin with how the Commission prosecutes and adjudicates horizontal restraint-of-trade cases. I will begin with a description of some "first principles" and an explanation of how the Commission has interpreted these principles to develop its current analytical framework for horizontal restraints. I will then characterize the Commission's application of this framework.
Antitrust law has long recognized that agreements among competitors can be anticompetitive, procompetitive, or competitively neutral. Thus, although Section 1 of the Sherman Act literally prohibits "every contract, combination, or conspiracy
. . . in restraint of trade,"(2)Ìýthe Supreme Court decided long ago that Section 1 prohibits only "unreasonable" restraints.(3)The reasonableness of a restraint depends solely on its actual or likely effect on competition.(4)ÌýAnd as the Court reminded us inÌýSharp, "[t]he term 'restraint of trade' . . . refers not to a particular list of agreements, but to a particulareconomic consequence, which may be produced by quite different sorts of agreements in varying times and circumstances."(5)
As you all know, courts historically have applied one of two methods of analysis -- depending on the type of restraint at issue -- to determine whether an agreement unreasonably restrains competition. Some types of agreements among competitors -- such as naked price-fixing, bid-rigging, market or customer allocation, and certain types of boycotts -- are condemned per se upon proof of the existence of an agreement. That is, they are conclusively presumed to restrain trade unreasonably. Under theÌýper seÌýrule, the court simply proceeds to judgment without considering evidence of actual effects or asserted business justifications.
Nevertheless, over the last two decades, the Supreme Court has stated repeatedly that the rule of reason is "the standard traditionally applied for the majority of anticompetitive practices challenged under 1 of the [Sherman] Act."(6)ÌýStated simply, the rule of reason entails a balancing of the perceived threat of harm to competition from the challenged conduct against the likelihood that it will yield procompetitive efficiencies. The "presumption in favor of a rule-of-reason standard"(7)Ìýfor analyzing restraints is rebutted only by a showing that the challenged restraint is of a type that can be conclusively condemned because of its "pernicious effect on competition and lack of any redeeming virtue."(8)ÌýThis presumption plays an important role in the Commission's determination of when it should apply the per se rule versus the rule of reason in the analysis of particular horizontal restraints.
In the late 1970s, the Supreme Court began to exercise caution in applying the per se rule to restraints that appeared to fall within traditionally proscribed categories -- for instance, "price-fixing" -- but lacked obvious anticompetitive effects. For example, in BMI,(9)NCAA,(10)ÌýNorthwest Wholesale Stationers,(11)ÌýandÌýIndiana Federation of Dentists,(12)Ìýthe Court established certain guiding principles that for more than a decade have provided the basic framework for the courts' as well as the Commission's approach to analyzing horizontal restraints.
First, the Court emphasized that, before applying theÌýper seÌýrule, courts and enforcement agencies should examine whether, on balance, the conduct at issue is of the type that always (or virtually always) results in significant anticompetitive effects. As the Court put it, application of the per se rule to a particular practice is limited to instances in which "the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output," rather than "one designed to 'increase economic efficiency and render markets more, rather than less, competitive.'"(13)ÌýIf the practice is not of a type that almost always restricts output, then courts should examine evidence relating to its likely effect on competition before determining its reasonableness. The Supreme Court has reminded us that "the criterion to be used in judging the validity of a restraint on trade [under the Sherman Act] is its impact on competition."(14)
Second, the Court established that the rule of reason and theÌýper seÌýrule do not delineate rigid, mutually exclusive categories. As the Court stated inÌýNCAA, "there is often no bright line separating per se from Rule of Reason analysis. Per se rules may require considerable inquiry into market conditions before the evidence justifies a presumption of anticompetitive conduct."(15)ÌýBMI, NCAA, and other cases establish a truncated rule-of-reason analysis at the convergence of the two traditional standards.
Third, the Supreme Court established that courts must be very cautious in expanding the categories of conduct to which theÌýper seÌýrule may be applied. The Court observed that "'[i]t is only after considerable experience with certain business relationships that courts classify them as per se violations . . . '"(16)ÌýFor example, in IFD the Court clearly cautioned against "extend[ing] per se analysis to restraints imposed in the context of business relationships where the economic impact . . . is not immediately obvious."(17)ÌýAnd inSylvaniaÌý-- a case involving vertical rather than horizontal restraints -- the Court warned that "departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than
. . . upon formalistic line drawing."(18)ÌýThe Court has thus made it very clear that lower courts and enforcement agencies must carefully avoid elevating judicial economy to such a level that they risk summarily condemning economically beneficial activity.
Fourth, applying its own principles, over the last two decades the Court has narrowed -- rather than expanded -- the circumstances in which application of theÌýper seÌýrule is justified, with regard to both horizontal and vertical restraints.(19)
Thus, when confronted with conduct falling outside the traditionallyÌýper seÌýillegal categories, the Supreme Court has instructed the lower courts (and of course the Commission) to consider the inherent nature of a challenged restraint, its possible efficiency rationales, and its effect on competitionÌýbeforeÌýdetermining whether it is appropriate to apply theÌýper seÌýrule. In some circumstances, where the adverse effect is obvious and countervailing procompetitive benefits are nonexistent, a full-blown rule-of-reason analysis is not required. In any case, regardless of the standard used, "the essential inquiry remains the same"(20)Ìý-- to assess the effect on competition.
III. FROM MASS. BOARD TO CDA
InÌýMassachusetts Board of Registration in Optometry(21)Ìý-- which until last year served as the Commission's framework for the analysis of horizontal restraints -- the Commission concluded that these Supreme Court decisions laid the foundation for a truncated rule-of-reason approach to those restraints.(22)ÌýThe analysis set forth inÌýMass. BoardÌýwas designed to identify cases in which a full rule-of-reason inquiry is not necessary to condemn a restraint as unreasonable. The Commission applied this approach in making both enforcement and adjudicative decisions under Section 5 of the Â鶹´«Ã½ Trade Commission Act.(23)
InÌýMass. Board, the Commission condemned a state optometry board's regulations restricting several types of truthful, non-deceptive advertising, including advertising of price discounts. In assessing the reasonableness of the restrictions, the Commission asked a series of questions regarding the nature and effect of each restriction. The first question is whether the restriction is "inherently suspect" -- that is, does the restriction "appear[] likely, absent an efficiency justification, to 'restrict competition and decrease output'?"(24)ÌýIf the answer is "no," the restriction is analyzed under the full rule of reason.
But if the restriction is inherently suspect, the Commission then asks the next question -- whether the restraint has a plausible efficiency justification. If it does not, the inherently suspect restriction can be condemned without further analysis. Finally, if the inherently suspect restriction does have a plausible efficiency justification, the Commission asks whether that efficiency is valid in the particular case. If sound evidence fails to suggest that the efficiency is reasonably related to the restriction in the particular case, the efficiency claim may be rejected and the restriction condemned. Thus, underÌýMass. Board, if a restraint wasÌýnotÌýinherently suspect, or if it was inherently suspect but had a valid efficiency justification, its legality had to be determined under the full rule of reason.
The Commission found that the Optometry Board's advertising restrictions were inherently suspect, lacked a plausible efficiency justification, and were therefore unlawful without a full rule-of-reason analysis. The Commission applied the "Mass. BoardÌýapproach" in a number of subsequent decisions, with similar results. For example, inÌýDetroit Auto Dealers Association,(25)Ìýdecided the year afterMass. Board, the Commission held unlawful an agreement among car dealers to restrict showroom hours. And inÌýNew England Motor Rate Bureau,(26)Ìýthe Commission struck down a transport association's joint formulation and filing of collective rates.
I have had previous opportunities to address in detail the meaning of "inherently suspect" as that term was used inÌýMass. Board,(27)and I do not plan to dwell on the concept today. Instead, I will discuss how the Commission has moved away fromÌýMass. BoardÌýas its basic framework for appraising horizontal restraints, adopting in its place the analysis set forth in last spring'sÌýCalifornia Dental AssociationÌý("CDA") opinion.(28)ÌýCDA is on appeal before the Court of Appeals for the Ninth Circuit, so I will simply discuss the views articulated in the opinions in that case -- matters of public record.
CDAÌýinvolved restrictions promulgated and enforced by a state dental association and its local component societies against certain forms of price and non-price advertising by California dentists. I agreed with the three other Commissioners who found CDA's restraints on advertising unlawful,(29)Ìýbut I differed with them over how to reach that result.
The Commission majority condemned CDA's price advertising restraints asÌýper seÌýillegal, and also invalidated both the restrictions on price advertising and those on non-price advertising under the rule of reason. Under their application of theÌýper seÌýrule, the majority equated restraints on the advertising of prices with the direct fixing of prices. The majority stated:
CDA's restrictions on advertising "low" or "reasonable" fees, and its extensive disclosure requirement for discount advertising, effectively preclude its members from making low fee or across-the-board discount claims regardless of their truthfulness. Such a ban on significant forms of price competition is illegal per se regardless of the manner in which it is achieved.(30)
I disagreed with the rationale adopted by the majority, primarily because they were far too swift to condemn the price advertising rules asper seÌýillegal. My separate opinion reviewed the basis for the creation of aÌýper seÌýrule in the early years of antitrust and the Supreme Court's frequently repeated warning against too hastily applyingÌýper seÌýcondemnation to restraints with which we lack sufficient familiarity. In my view the whole thrust of Supreme Court jurisprudence over the last two decades in the area of both horizontal and vertical restraints has been to reinforce this note of caution. The cases that I discussed earlier -- most prominently,ÌýBMI, NCAA, and Indiana Federation of DentistsÌý-- exemplify the Court's reluctance (one might even say risk-aversion) to extend per se treatment without adequate confidence that the restraints at issue deserve such summary disposition.
I considered the majority's analogy between CDA's price advertising rules and classic price-fixing to be strained. Condemning classic price-fixing asÌýper seÌýillegal rests in large part on our certainty, after many years' experience, that such behavior is virtually always pernicious. I viewed it as an unwarranted stretch to accord the same peremptory treatment to price advertising restrictions, whose economic implications are not always obvious. Although the majority labored to draw an analogy between price-fixing and the restraints at issue, their analysis of CDA's price advertising rules -- involving an examination of competitive consequences that theÌýper seÌýrule is supposed to obviate -- made clear why restraints on price advertising should not be labeledÌýper seÌýillegal. And moving to a more general consideration of rules that some future Commission might "analogize" to price-fixing, I am concerned that CDA signals a trend toward identifying conduct that warrantsÌýper seÌýtreatment with less than the cautious, narrow precision mandated by the Supreme Court. Such a trend is fraught with problems, including the difficulty and arbitrariness of distinguishing agreements that directly fix prices (and are thusÌýper seÌýillegal) from seemingly ancillary agreements that merely have an indirect effect on price. Because of their potential procompetitive impact, these restraints are due consideration under the rule of reason.
Despite my disagreement with their reasoning, I did agree with theÌýCDAÌýmajority that both the price and the non-price advertising restrictions could be found unlawful. Unlike my colleagues, however, I followed theÌýMass. BoardÌýapproach to reach that conclusion: I determined that CDA's restraints on advertising were inherently suspect and lacking in plausible efficiency justifications. I reached a finding of illegality with the same speed and efficiency as my colleagues who applied the per se rule, with one critical difference: I at least entertained the possibility that CDA's price advertising rules, which in my view could not be comfortably analogized to naked price-fixing, might have some justification meriting the Commission's scrutiny.
TheÌýMass. BoardÌýapproach to horizontal restraints served the Commission well in numerous cases in the eight years between its formulation and theÌýCDAÌýmajority's virtual -- if not explicit -- abandonment of it. I do not expect the present Commission to resurrectMass. Board, now that it has decided that per se treatment can be extended with an ease that might have surprised the Justices who joined inÌýBMI and NCAA. But I hope that the Commission and the courts will proceed cautiously with any efforts to extend theÌýper seÌýrule to practices that might turn out to have competitive justifications when examined under the more discerning lens of theÌýMass. Boardapproach.
Joel Klein, the Acting Assistant Attorney General in charge of the Antitrust Division, recently addressed the ABA's Antitrust Section on the Division's approach to horizontal restraints.(31)ÌýAlthough the Division's analytical approach differs slightly fromÌýMass. BoardÌýanalysis, its "stepwise" formulation generally bears a strong -- and in my view welcome -- resemblance toÌýMass. Board. One of the clear messages in this speech is the Division's hesitancy to apply per se rules to conduct with which we lack adequate experience.(32)
To recapitulate the discussion to this point: I consider application of theÌýper seÌýrule to be warranted only with respect to conduct that is defined with sufficient precision to minimize the risk of automatically condemning activities that may well be efficient. As to whether we should apply theÌýper seÌýrule to conduct with which we lack adequate experience, the Supreme Court has cautioned us against over-aggressive expansion of the rule beyond the traditionally defined conduct. That is how I believe the courts and the Commission understood the per se concept in the pre-CDA era. The rejection of theÌýMass. BoardÌýapproach poses the danger that enforcers will arbitrarily expand the types of conduct labeledÌýper seÌýillegal, without appropriate consideration of possible efficiency justifications. Â鶹´«Ã½ agencies have a duty to avoid this type of error: an unwarranted expansion of use of theÌýper seÌýlabel could be harmful to consumers and businesses if, as I expect, it is likely to overdeter procompetitive behavior.
Despite my position on these issues, I of course recognize that the approach to horizontal restraints laid out by the majority inÌýCDAÌýis the analytical structure currently employed at the FTC. Associations and their members would be well advised to readÌýCDAÌýas a warning that the Commission may be increasingly comfortable analogizing certain types of conduct to the long-established "naked" forms of anticompetitive behavior, and to tailor their conduct accordingly.
Thank you. I would be glad to answer questions as time permits.
ENDNOTES
1.ÌýThese remarks are the author's; they do not necessarily represent the views of the Â鶹´«Ã½ Trade Commission or of any other Commissioner.
2.Ìý15 U.S.C. 1.
3.ÌýBoard of Trade of the City of Chicago v. United States, 246 U.S. 231 (1918);ÌýStandard Oil Co. v. United States, 221 U.S. 1, 66-70 (1911);Ìýaccord, Business Elecs. Corp. v. Sharp Elecs. Corp.,Ìý485 U.S. 717, 723 (1988) ("Sharp");ÌýNat'l Collegiate Athletic Ass'n v. Board of Regents, 468 U.S. 85, 98 (1984) ("NCAA").
4.ÌýNCAA, 468 U.S. at 104;Ìýsee also Sharp, 485 U.S. at 731.
5.ÌýId. (emphasis added).
6.ÌýContinental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977) ("Sylvania").
7.ÌýSharp, 485 U.S. at 726.
8.ÌýNorthwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 289 (1985) (quotingÌýNorthern Pac. R. Co. v. United States, 356 U.S. 1, 5 (1958)).
9.ÌýBroadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979) ("BMI").
10.ÌýSupraÌýn.2.
11.ÌýSupraÌýn.7.
12.ÌýFTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) ("IFD").
13.ÌýBMI, 441 U.S. at 19-20 (quotingÌýUnited States v. United States Gypsum Co., 438 U.S. 422, 441 n.16 (1978)).
14.ÌýNCAA, 468 U.S. at 104 (footnote omitted).
15.ÌýId. at 104 n.26.
16.ÌýBMI, 441 U.S. at 9-10 (quotingÌýUnited States v. Topco Associates, Inc., 405 U.S. 596, 607-08 (1972)).
17.Ìý476 U.S. at 458-59.
18.ÌýSylvania, supraÌýn.5, 433 U.S. at 58-59.
19.ÌýSee, e.g., Sharp, supraÌýn.2, andÌýSylvania, supraÌýn.5 (refusal to applyÌýper seÌýrule to non-price vertical restraints, even though such restraints can have impact on price);ÌýCopperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984) (limiting circumstances in which coordinated activity of a parent and a wholly-owned subsidiary can constitute conspiracy);ÌýJefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984) (limiting circumstances in whichÌýper seÌýrule can be applied to tying);ÌýMonsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984) (limiting circumstances in which inference of aÌýper seÌýillegal resale price maintenance agreement is justified);ÌýBMI, supraÌýn.8 (refusal to applyÌýper seÌýrule to horizontal conduct where restraint has effect of creating new product).
20.ÌýNCAA, 468 U.S. at 104.
21.Ìý110 F.T.C. 549 (1988) ("Mass. Board").
22.ÌýAs with the other standards used in the evaluation of the reasonableness of a horizontal restraint, theÌýMass. BoardÌýanalysis presumes proof of concerted action.
23.Ìý15 U.S.C. 45.
24.ÌýMass. Board, 110 F.T.C. at 604 (quotingÌýBMI, 441 U.S. at 20). Generally, an agreement is likely to restrict competition and reduce output when it restrains some significant aspect of interfirm rivalry. Kevin J. Arquit and Joseph Kattan, "Efficiency considerations and horizontal restraints," 36ÌýAntitrust Bull. 717 (1991).
25.Ìý111 F.T.C. 417 (1989),Ìýaff'd in part and remanded, 955 F.2d 457 (6th Cir.),Ìýcert. denied, 506 U.S. 973 (1992),Ìýorder modified, 5 Trade Reg. Rep. (CCH) 23,853 (FTC, June 20, 1995).
26.Ìý112 F.T.C. 200 (1989),Ìýenforced as modified, 908 F.2d 1064 (1st Cir.),Ìýorder modified, 113 F.T.C. 1013 (1990).
27.Ìý"Horizontal Restraints Analysis at the Â鶹´«Ã½ Trade Commission," Prepared Remarks of Commissioner Roscoe B. Starek, III, before the Chicago Bar Association (May 19, 1993).
28.ÌýCalifornia Dental Association, Docket No. 9259 (Mar. 25, 1996), 5 Trade Reg. Rep. (CCH) 24,007.
29.ÌýCommissioner Azcuenaga would have dismissed the complaint against CDA. She questioned the majority's application of theÌýper seÌýrule to CDA's price advertising restrictions, and she disagreed with the majority's conclusions that CDA had market power and that entry into the California dental market was difficult. Dissenting Opinion of Commissioner Mary L. Azcuenaga at 2-3 [5 Trade Reg. Rep. (CCH) 24,007 at 23,803]. "No anticompetitive effects having been shown," she concluded, "the complaint should be dismissed with respect to the conduct judged under the rule of reason."ÌýId. at 3 [5 Trade Reg. Rep. (CCH) 24,007 at 23,803].
30.ÌýCDA, slip op. at 16-17 [5 Trade Reg. Rep. (CCH) 24,007 at 23,787]. Elsewhere, the majority said: "This effective prohibition on truthful and nondeceptive advertising of low fees and across-the-board discounts constitutes a naked attempt to eliminate price competition and must be judged unlawfulÌýper se. That it does so by the indirect means of suppressing advertising does not change that result. . . . Horizontal agreements suppressing broad categories of truthful and nondeceptive price advertising . . . effectively suspend a significant form of price competition." Slip op. at 19, 21 [5 Trade Reg. Rep. (CCH) 24,007 at 23,788-89].
After condemning the price advertising rules asÌýper seÌýunlawful, the majority then applied to CDA's restraints on both price and non-price advertising a rule-of-reason approach that differed from the truncated formula ofÌýMass. Board. The conclusion was that both types of restraints were unlawful under the rule of reason. Id. at 37-39 [5 Trade Reg. Rep. (CCH) 24,007 at 23,796-97].
31.ÌýJoel I. Klein, "A Stepwise Approach to Antitrust Review of Horizontal Agreements," Remarks before the American Bar Association's Antitrust Section Semi-Annual Fall Policy Program (Nov. 7, 1996) ("A Stepwise Approach").
32.ÌýDiscussing problems that stem from efforts to maintain a sharp dichotomy between theÌýper seÌýapproach and full-blown rule-of-reason analysis, Klein noted that "adhering to such a dichotomy runs the risk of submerging thoughtful analysis in a battle over the selection of the proper mode of inquiry; and, consequently, . . . matters that are too complex for per se condemnation sometimes get shoe horned into that category, . . ." "A Stepwise Approach" at 5;Ìýsee also id. at 10-11, 13 ("Since we're starting with an agreement that directly eliminates some competition on price or output, our only hesitation about striking it down should be our concern that, unlike what we've come to be confident about in per se cases, there may be something good going on in these other cases. And we should satisfy ourselves whether there is or there isn't.").