iIn deciding In re Sulfuric Acid Antitrust Litigation on December 12, 2012,[1] the Seventh Circuit ruled in favor of competing suppliers claiming that their agreements to limit production, agree on price, and allocate distribution networks increase efficiencies and productivity. The opinion may flirt with the question of how much further can or should the usual per se rule for such horizontal conduct be eroded.
Background—The Claims
Plaintiffs were a class of industrial purchasers of sulfuric acid, which they used as an input into the production of certain chemicals. The defendants were Canadian and US metal smelters that processed non-ferrous minerals such as nickel and copper. The Canadian defendants were required to produce sulfuric acid as an environmentally safe by-product of their smelting operations. The U.S. defendants manufactured sulfuric acid to meet U.S. demand. Defendants then sold the sulfuric acid to the plaintiffs.
The Canadian defendants produced excessive quantities of sulfuric acid and were faced with over-supply in the Canadian market. The U.S. defendants manufactured sulfuric acid in an expensive process, but had established distribution networks that the Canadians apparently coveted. The Canadian defendants entered into various contracts with several U.S. producers and distributors of sulfuric acid. Under the applicable agreements, the U.S. producers agreed to cease their production of sulfuric acid, and instead buy the products from the Canadian companies for resale through the U.S. producers’ distributor network. As a result, the U.S. producers would profit from distribution rather than from production, and the Canadian companies would have access to an undersupplied market for sulfuric acid. The plaintiffs argued that the arrangement involved “shutdown agreements” that resulted in reduced total sales of sulfuric acid that raised the market price. According to the plaintiffs, the “shutdown agreements” were per se illegal agreements to reduce output and raise prices in violation Section 1 of the Sherman Act.
The district court judge certified the class, but dismissed the per se allegations on the merits. While the plaintiffs could have gone to trial under the rule and reason, they decided instead to forego that right and appeal the dismissal under a per se liability rule.
The Seventh Circuit Decision
Plaintiffs' decision to forego a trial on the rule of reason claim puzzled Judge Posner, the author of the opinion. Under the rule of reason, plaintiffs would have to prove that the defendants agreed to raise the price of their products, just as they would have to prove in a per se case. But plaintiffs would also have to prove defendants' market power in order to establish a prima facie case, which would then shift the burden to defendants to prove that the behavior was not anticompetitive. Posner postulated that because plaintiffs abandoned their rule of reason claim, they likely feared that a jury would find the agreements were procompetitive. Posner's comments raise the issue of whether plaintiffs will be willing to try rule of reason cases in light of the growing justifications for otherwise anticompetitive conduct.[2]
The focus of the opinion was whether the "shutdown agreements" were per se illegal. The Panel conceded that the agreements, by themselves, would indeed be per se antitrust violations if they stood alone. [3] However, in light of the justifications by the defendants for entering into these agreements, a rule or reason analysis was proper. While Judge Posner noted that even though the record did not contain evidence of the defendants’ cost structure or market wide economic analysis, he was willing to conduct an analysis based upon the rationale provided by the defendants. Judge Posner’s analysis assumed that had the agreements not been entered into, the Canadian companies could have entered the market with below cost pricing, but such conduct likely would be challenged in an anti-dumping action by the U.S. defendants. In any event, the U.S. defendants were slowly exiting the market for producing sulfuric acid because of its high cost. According to the panel, the “shutdown agreements,” therefore, may only have had the effect of accelerating the inevitable trend of the entrance of Canadian companies’ product into the U.S. market and the conversion of U.S. manufacturers to distributors.[4]
Judge Posner also recognized that while the “shutdown agreements,” were a form of price fixing, they would escape per se illegal condemnation if the challenged practices could reasonably have been believed to promote “enterprise and productivity.” He hypothesized that under the parties’ shutdown agreements, the entry of the Canadians into the U.S. market was likely to result in an eventual fall in the price of sulfuric acid. If the shutdown agreements facilitated this result, then the effect was positive and therefore the “shutdown agreements” should not be analyzed under the per se rule.[5] His reasoning was similar to that set forth in Broadcast Music, Inc. vs. Columbia Broadcasting System, Inc. 441 U.S. 1, 24 (1979) and Polk Brothers, Inc. vs. Forest City Enterprises, Inc., 776 F.2d 185, 189 (7th Circuit 1985), in which defendants’ otherwise anticompetitive agreements were justified because they resulted in a product that could not otherwise exist.[6]
As an aside, the panel recognized that the economic factors presented were unusual. The economics of the market exposed the defendants to a choice of either forcing the U.S. defendants to produce at a loss, exposing the Canadian defendants to potential anti-dumping risks, or entering into the “shutdown agreements” through the joint venture. The court noted that the case law did not support exposing a novel set of circumstances or a new way of doing business to per se scrutiny.[7]
Plaintiffs also argued that the Canadian defendants used the venture to grant illegal, exclusive distribution territories to the U.S. defendants if they agreed to distribute the Canadians’ sulfuric acid. The Panel dismissed the idea that this was somehow market allocation and a per se violation or anti-trust laws. Rather, Judge Posner focused on the fact that in transforming their business from manufacturing to distribution, the U.S. defendants were taking a very large risk and therefore needed the protection of an exclusive distributorship in order to justify the expense and the risk of becoming a distributor for the Canadian defendants. As a result, the exclusive nature of the agreements should be analyzed under the rule of reason and not condemned as per se illegal.[8]
Analysis
Judge Posner's opinion appears to stretch at times to give the benefit of the doubt to defendants, especially in light of the absence of complete economic data in the record. Nevertheless, the opinion does give shelter to aggressive contractual provisions that increase productivity and efficiency without actually creating a new product that would not otherwise be available, as was required in BMI. The opinion expands the scope of BMI to agreements that simply cause a product that already exists without the agreement to be less expensive to make or easier to distribute.
Accordingly, while the opinion does not give a green light to all justifications for otherwise anticompetitive conduct, the fear of per se condemnation is likely reduced. Clients will need guidance in structuring their contracts and venture agreements to take advantage of the continued erosion of per se condemnation of various agreements because pushing too far could still result in antitrust liability.
[1] 2012 WL 6700395 (7th Cir. Dec. 27, 2012).
[2] Id. at *1.
[3] Id. at *2-*3.
[4] Id. at *3-*4.
[5] Id. at *4.
[6] Id. at *4-*5.
[7] Id. at *5.
[7-8] Id. at *6-*7.
