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Paging Dr. Miles: Antitrust Law Examined

After a decade of mostly steering clear of disputes over alleged monopolies, price-fixing and other restraints of trade, the U.S. Supreme Court is turning once again to antitrust law.

Four cases interpreting antitrust law are expected to be decided this term. Last term, the first under Chief Justice John G. Roberts Jr., the court decided three antitrust cases. The latest cases are before the court because the justices agreed to hear appeals from business defendants who seek to limit the reach of the antitrust laws.

Experts in antitrust law, both the believers and the skeptics, foresee change in the works. “It’s extraordinary to have so many antitrust cases before the court at the same time,” says Robert Lande, a professor of antitrust law at the University of Baltimore. “They didn’t have to take these cases. It says they are reaching out to change the antitrust law.” Some long standing doctrines “are based on a type of analysis that is quite outdated,” says Joseph Angland, chair of the ABA Antitrust Law Section and a partner at Heller Erhman in New York City.

For example, he says, free market economists have shown in recent decades that certain business practices are not always anti competitive, even if they were deemed to be per se illegal under the court’s antitrust doctrines.

Last year, the court overturned the rule that made it automatically illegal for owners of a patented or copyrighted product to require buyers to purchase another of its products. Illinois Tool Works v. Independent Ink, 126 S. Ct. 1281. Those tying arrangements were outlawed in the 1947 case, International Salt Co. v. United States, 332 U.S. 392, and in a 1962 ruling involving the Hollywood studios and independent theaters, United States v. Loews, 371 U.S. 38.

Illinois Tool Works, in which the justices scrapped the per se rule, tested whether the seller of a patented high speed printer could require buyers to purchase only its replacement ink.

“Congress, the antitrust enforcement agencies and most economists have reached the conclusion that a patent does not necessarily confer market power upon the patentee,” wrote Justice John Paul Stevens in a decision handed down last March. “To­day we reach the same conclusion and therefore hold that in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product.”

The ABC’s of MSRP

This term’s premier antitrust case raises a similar question of even greater practical importance: Should the court overturn the nearly century old rule that makes retail price fixing per se illegal?

The rule stems from Dr. Miles Medi­cal Co. v. John. D. Park & Sons, 220 U.S. 373 (1911). Car buyers can see this rule at work when they look at the “manufacturer’s suggested retail price” that is displayed on the window of a new vehicle. The price is only “suggested” because it is illegal for manufacturers to insist that the dealers sell the car for that amount.

Angland says this per se rule is ripe for repeal. “To­day, this doctrine commands no support among economists, and it has no logical basis. What’s notable is that this artifact has lasted so long,” he says.

Angland filed an amicus brief on behalf of a group of eminent economists who urged the court to take up a dispute between a manufacturer and a retail women’s store and overturn the Dr. Miles rule.

In Leegin Creative Leather Products v. PSKS, No. 06-480, a California manufacturer of women’s handbags was sued by a Texas retailer operating as Kat’s Kloset after its supply of fast selling Brighton bags was cut off because it sold some at a discount. A Texas jury ruled that Leegin was enforcing a “resale price maintenance agreement,” and a federal appeals court, citing Dr. Miles, upheld a nearly $4 million judgment against the manufacturer.

“This case is an ideal vehicle for this court to revisit its decision in Dr. Miles,” said Ted Olson, the former solicitor general, in his petition on behalf of Leegin. He, too, called the rule against retail price fixing “antiquated,” since economists have shown that mini­­mum retail prices “can have significant pro competitive effects.”

Angland says some products, whether a digital camera or a high quality hand bag, are sold best in a retail store with a good display and a smart sales staff. If the item features new technology, the sales staff must be able to show customers how the new technology works.

“But if a guy down the block can sell the same product at a discount, the retailer is not going to invest in the display and the sales staff,” he says. “So, no one will be there to teach consumers about this new product. That’s why resale price maintenance is needed. It’s not there because manufacturers want to make retailers rich.”

Lande agrees the court is likely to overturn the per se rule against retail price fixing, but he thinks it will hurt consumers. “The effect will be higher prices for consumer goods, and I think that is undesirable,” he says. The case is scheduled to be argued March 26.

Bubble Inflation

On the next day, the court is slated to hear arguments in a case that alleges “an epic Wall Street conspiracy,” in the words of the New York City based 2nd U.S. Cir­cuit Court of Appeals. The plaintiffs, a group of invest­ors, assert that 16 of the nation’s leading underwriters and investment banks conspired to inflate the prices of more than 900 initial stock offerings during the dot com bubble of the late 1990s.

The Securities and Ex­change Commission joined the defendants in urging the antitrust complaint be dismissed because the investment syndicates were already regulated. But the 2nd Circuit refused to dismiss the case. The high court will take up Credit Suisse First Boston v. Billings, No. 05-1157, to resolve the conflict between the securities and antitrust laws.

In late November, the court heard arguments in an antitrust suit that alleges the lack of competition for local phone service stems from a conspiracy among the nation’s leading telecommunications companies. Bell Atlantic v. Twombly, No. 05-1126.

The 1996 Telecommunications Act encouraged local competition, but the suit alleges the incumbent companies refused to enter the territory of the others and “refrained from engaging in meaningful head to head competition in each other’s market.”

A district judge dismissed the suit as insufficient to state a claim, but the 2nd Circuit revived it, saying the “parallel conduct” by the phone companies of not competing in the territory of others was sufficient for a “plausible” claim of a conspiracy.

Lawyers for Bell Atlantic said this loose standard “invites frivolous suits that burden courts and impose incalculable costs on antitrust defendants.” Also citing the enormous costs for discovery, the ABA filed an amicus brief urging the court to reject the notion that parallel conduct by companies in the same industry is enough to go forward with discovery.

“Lawyers experience great pressure to advise their clients to settle even flimsy antitrust cases that proceed past the pleading stage,” the brief said. “To survive a motion to dismiss, a complaint must allege facts that show that there is an agreement.”

Market Share Aggression

While Bell Atlantic and Credit Suisse test whether the suits should go forward, Weyerhaeuser v. Ross Simmons Hardwood Lumber Co., No. 05-381, asks the court to throw out a judgment that held North America’s largest wood products company liable for trying to corner the market on new hardwood.

Weyerhaeuser already had about two thirds of the market for hardwood in Washington and Oregon, according to the complaint, when it sought to drive its competitors out of business by paying too much for the available logs.

The jury ruled for the defunct saw mill operator and, with triple damages, handed down a $78 million verdict.

Lawyers for Weyerhaeuser said the decision, if upheld, threatens “economic dislocation on a national scale.” Businesses should not be held liable for aggressive bidding, they said, since neither companies nor their lawyers can draw a clear distinction between paying enough to win a bid or paying too much for raw materials.

Regardless of what the rulings may be, antitrust lawyers are pleased that at long last the court is looking their way. “It is certainly refreshing,” Angland says, “that the Supreme Court is taking a large docket of antitrust cases.”

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David G. Savage covers the U.S. Supreme Court for the Los Angeles Times and writes regularly for the ABA Journal.