Justice Antonin Scalia once observed that “the American people are neither sheep nor fools,” in McConnell v. Federal Election Commission, 540 U.S. 93 (2003). During his 30 years on the U.S. Supreme Court, he wrote 104 majority opinions but only three of those addressed substantive antitrust issues. This article addresses those three seminal antitrust opinions. Next month’s article will address Scalia’s dissenting opinions in antitrust cases. A review of the three substantive antitrust opinions Scalia authored for the majority of the court reveals that he frequently presumed that antitrust defendants—alleged monopolists in each case—were likely just sheep, living in a world that all too quickly presumed them to be wolves. As can be seen from a review of those majority opinions, Scalia rejected the notion that, without more, one could presume that an anticompetitive effect revealed anticompetitive motive or conduct, even when such a conclusion was equally plausible. Indeed, in two cases, he cast aside jury verdicts for plaintiffs.
In Business Electronics v. Sharp Electronics, 485 U.S. 717 (1988), there was a conflict in the circuits as to where to draw the line between vertical price restraints, which are illegal per se, and vertical nonprice restraints, which are assessed under the rule of reason. Sharp Electronics Corp. published a list of suggested minimum retail prices for its business calculators, but its agreements with its distributors recognized that these were merely suggestions and the dealers could still set their own prices. Business Electronics Corp. (BEC) competed with Gilbert Hartwell as distributors in the relevant market. Notably, BEC’s “retail prices were often below [Sharp’s] suggested retail prices and generally below Hartwell’s retail prices, even though Hartwell too sometimes priced below [Sharp’s] suggested retail prices.” As a result, Hartwell complained to Sharp about BEC’s price-cutting and threatened to terminate its dealership with Sharp unless Sharp terminated its relationship with BEC. Thereafter, Sharp did just that.
A jury returned a verdict in favor of BEC based on an instruction that “the Sherman Act is violated when a seller enters into an agreement or understanding with one of its dealers to terminate another dealer because of the other dealer’s price-cutting.” The U.S. Court of Appeals for the Fifth Circuit reversed, holding that the jury had been improperly instructed to apply a per se rule; rather, it held, “to render illegal per se a vertical agreement between a manufacturer and a dealer to terminate a second dealer, the first dealer must expressly or impliedly agree to set its prices at some level, though not a specific one. The distributor cannot retain complete freedom to set whatever price it chooses.”
Writing for the majority of six, Scalia agreed with the Fifth Circuit and held that, absent “some agreement on price or price levels,” such an agreement was not per se illegal. Scalia reasoned that—notwithstanding the fact that a manufacturer and dealer reached an agreement to terminate a competing dealer because of price-cutting—such an agreement should not be evaluated in the same manner as other illegal vertical price restraints. Central to Scalia’s reasoning was the possibility that such an agreement may not be solely motivated by a desire to inflate prices, but “by a legitimate desire to have dealers provide [superior] services” and a belief that higher prices may “ensure that its distributors earn sufficient profit to pay for programs such as hiring and training additional salesmen,” i.e., higher prices lead to better service. Justices Byron White and John Paul Stevens dissented and Justice Anthony Kennedy abstained.
In City of Columbia v. Omni Outdoor Advertising, 499 U.S. 365 (1991), the issue was whether a conspiracy exception existed to Parker immunity—from Parker v. Brown, 317 U.S. 341 (1943)—which holds that the Sherman Act does not apply to anticompetitive restraints imposed by states as an act of government. There, the local billboard market was dominated by Columbia Outdoor Advertising Inc. (COA), which controlled 95 percent of the relevant market and enjoyed longstanding relationships with the town’s mayor and city council. When Omni Outdoor Advertising, a Georgia corporation, began erecting its own billboards in and around Columbia, South Carolina, “COA executives met with city officials to seek the enactment of zoning ordinances that would restrict billboard construction.” COA prevailed in having its proposed zoning ordinances implemented, and Omni alleged that the city and COA had conspired in violating the Sherman Act. After a jury verdict in favor of Omni, the district court granted a judgment notwithstanding the verdict. The Fourth Circuit reversed and reinstated the jury verdict.
Scalia observed that the Fourth Circuit was “correct in its conclusion that the city’s restriction on billboard construction was prima facie entitled to Parker immunity.” However, he said the Fourth Circuit erred in finding that a conspiracy exception to such immunity existed where “politicians or political entities are involved as conspirators with private actors in the restraint of trade.” As in Sharp, Scalia, in rejecting the jury’s verdict, relied on alternative plausible explanations for such conduct that were not necessarily anticompetitive and noted that “unlawful activity has no necessary relationship to whether the governmental action is in the public interest.” He went on to state that action pursuant to state law—such as regulating zoning of billboards—”is ipso facto exempt from the operation of the antitrust laws.” The majority in reversing found that even if the state lawmakers may have been bribed, coerced, or otherwise conspired with private actors, it did not change the result. Scalia’s belief was that such actions could also have been presumably taken in the public interest, particularly in a world where “virtually all regulation benefits some segments of the society and harms others.” Justice Thurgood Marshall, White and Stevens dissented.
Finally, in Verizon Communications v. Law Offices of Curtis V. Trinko LLP, 540 U.S. 398, (2004), Scalia tackled the complex regulatory framework created by the Telecommunications Act of 1996. There, Verizon faced an antitrust claim for allegedly violating its duty to share its telephone network with competitors, as mandated by the act. Verizon’s competitors had alleged that Verizon had neglected this obligation, allowing orders to go unfilled. Law Offices of Curtis V. Trinko LLP, a local telephone service customer, filed a class action, alleging that “Verizon had filled rivals’ orders on a discriminatory basis as part of an anticompetitive scheme to discourage customers from becoming or remaining customers of [Verizon’s competitors].” The district court granted a motion to dismiss, which the Second Circuit reversed and reinstated the antitrust claim.
In reversing the Second Circuit, Scalia noted the duty to provide access to competitors was imposed by the 1996 act. He refused to read “anticompetitive malice” into Verizon’s alleged refusal to deal. Scalia reasoned post-Twombly, in affirming a dismissal under Rule 12(b)(6), that it was the complexities of the “new systems [that] must be designed and implemented” “deep within the bowels of Verizon,” as mandated by the 1996 act, that plausibly might have lead Verizon innocently to not comply, rather than some “competitive zeal.” “Verizon’s reluctance to interconnect … tells us nothing about dreams of monopoly,” he said, particularly where such interconnectedness was mandated by congressional regulation. “Failure to provide a service with sufficient alacrity might have nothing to do with exclusion.” Furthermore, he reasoned that the very existence of congressional “regulation significantly diminishes the likelihood of major antitrust harm.” Justice David Souter, Stevens and Thomas concurred.
In short, all three of Scalia’s substantive antitrust opinions for the majority fundamentally turn on his concern over “false positives,” namely that “mistaken inferences and the resulting false condemnations are especially costly, because they chill the very conduct the antitrust laws are designed to protect.” In Sharp, Scalia resisted the inference that an agreement to fire a price-cutting distributor was an effort to vertically restrain prices. In Omni, Scalia was not persuaded that politicians enacted zoning legislation beneficial to a local monopoly, and detrimental to its out-of-state competitor, out of a desire to limit competition.
And in Trinko, Scalia, in the limited context of a motion to dismiss, would not accept that an alleged monopolists’ failure to provide congressionally-mandated telecommunications access was motivated by a desire to maintain the monopoly power that had led Congress to act. Yet, in each case, such anticompetitive inferences were arguably eminently reasonable and, in two cases, the jury had previously returned a plaintiff’s verdict, which were cast aside on appeal.
Finally, in assessing what effect Scalia’s absence from the Supreme Court may have, it is worth noting that in all three opinions discussed above, Scalia wrote for a clear majority of six justices. In Sharp, Scalia was joined by Justices William Rehnquist, William Brennan, Harry Blackmun, Sandra Day O’Connor and Marshall; in Omni, by Rehnquist, Blackmun, O’Connor, Kennedy and Souter; and in Trinko, by Rehnquist, O’Connor, Kennedy, Ginsburg, and Justice Stephen Breyer with no dissents. Only White, Marshall and Stevens, now former justices, had dissented in Sharp and Omni. Thus, while Scalia saw sheep where there were possibly antitrust wolves, he was not the only one on the Supreme Court to do so, and some still remain. Stay tuned.
Carl W. Hittinger is a senior partner in Baker & Hostetler’s antitrust group and litigation group coordinator for the firm’s Philadelphia office. He concentrates his practice on complex commercial and civil rights trial and appellate litigation, with a particular emphasis on antitrust and unfair competition matters. He can be reached at 215-564-2898 or chittinger@bakerlaw.com.
Julian D. Perlman is a senior associate in the firm’s litigation group, with a focus on complex commercial litigation, including antitrust litigation matters. He is resident in the firm’s New York City office, and his practice frequently brings him to Philadelphia, his hometown. He can be reached at 212-589-4629 or jperlman@bakerlaw.com.
Reprinted with permission from the “March 7, 2016” edition of the “The Legal Intelligencer”© 2016 ALM Media Properties, LLC. All rights reserved.
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