Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

When Price Fixing Is Not Price Fixing

Seal of the United States Court of Appeals for...

Seal of the United States Court of Appeals for the Seventh Circuit. (Photo credit: Wikipedia)

According to a recent decision by Judge Posner in the Seventh Circuit in In re Sulfuric Acid Antitrust Litigation, the following scenario is not subject to the per se rule against price fixing:

  1. Companies outside the United States, as an unwanted manufacturing byproduct, produce what is to them a waste chemical for which there is little or no market in their home country.
  2. There is a U.S. market for the chemical and U.S. producers who manufacture it.
  3. The foreign companies have no U.S. distribution network and so sign up the U.S. producers as distributors (giving them exclusive territories), in return for “shutdown” agreements that preclude the U.S. producers from manufacturing their own supplies of the chemical.
  4. Absent the shutdown agreements, there would be an oversupply, and the foreign companies might sell into the U.S. at a loss. They might be willing to do that to avoid the environmental and storage costs they would otherwise incur, but then they could be subject to antidumping proceedings brought by the U.S. manufacturers.

Under these facts, the shutdown agreements are subject to a Rule of Reason analysis, and not the per se rule, so they still could in theory be unlawful. But the fact that the plaintiffs in Sulfuric Acid abandoned a Rule of Reason case suggests that they thought it would be very difficult to win.  After all, the agreements facilitated market entry, which is pro-competitive.

Update: In response to a reader question, there was no agreement on prices in this case.  There was an alleged output agreement, though, and economically the two types of agreements are thought to be equivalent.  An agreement to raise prices will decrease demand and output; an agreement to cut output will raise prices.  The shutdown agreements would tend to raise prices.

In applying the Rule of Reason, Judge Posner noted that this case was unique, “combining such elements as involuntary production and potential antidumping exposure.” He rightly concluded that “[i]t is a bad idea to subject a novel way of doing business (or an old way in a new and previously unexamined context . . . .) to per se treatment under antitrust law.”

However, in reaching his conclusion, Judge Posner made some other remarks which are less persuasive. For one thing, in analogizing the analysis to that of Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979), which allowed blanket music licenses to be sold, he wrote that the blanket copyright licenses were not a product, new or old, but a “contractual instrument” for marketing music, which was the product. But that seems to beg the question of whether a “contractual instrument” for marketing is an unlawful per se agreement. In the alternative, he suggested that the foreign-supplied chemical could itself be the “new [BMI-type] product.” However, that analysis seems to open the door to an argument that any jointly-sold product is a “new product,” even if it is identical to other commodities being sold.

Additionally, Judge Posner noted that exclusive dealing agreements (where a distributor agrees not to carry competing lines) are not per se illegal, so “what difference should it make that the competing line is produced by the distributor himself?  And so the shutdown agreements might be found to be an innocent species of exclusive dealing.”  There is a looseness to this language that may be exploited in unanticipated ways in future cases.  Two competitors cannot agree to curtail output simply by appointing one as the “distributor” of the other.

In short, the opinion seems like the right result on the facts, but it opens the door to Rule of Reason arguments in the future about other arrangements whose status and pro-competitive effects may be less clear.

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