The Antitrust Legacy of Justice Stevens/One Irony

Law360 has published an article on the judicial legacy of retiring Supreme Court Justice John Paul Stevens (pictured above) and, in particular, his influence in some lower profile areas, such as Antitrust Law. The article quotes your humble blogger a few times. Here is a link to the article:

Here also is a link to an article I wrote on the antitrust jurisprudence of Justice Stevens, particularly his approach to non-standard contracts that can overcome market failure, about four years ago. I presented the paper at a conference on the Jurisprudence of Justice Stevens at Fordham Law School and was honored by the invitation to attend and participate.

Two cases not mentioned in the Law360 article also deserve particular mention, and I will also discuss a couple more along the way.   First, Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984) and second, Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007). Justice Stevens wrote the majority opinion in the former and joined the dissent in the latter. In the former the Court retained the per se rule against tying contracts but significantly altered the test so as to raise the bar for plaintiffs attacking ties.  In particular, the Court held that, to satisfy the "economic power" element of the per se rule, a plaintiff must show that the defendant possesses the sort of market power in the tying product market ordinarily necessary to establish antitrust liability in other contexts. Thus, mere product differentiation would not suffice to establish such economic power, as it had in prior cases. See United States v. Loews, Inc., 371 U.S. 38 (1962) (holding that possession of a copyright established presumption of economic power). As Judge Posner would later note, Jefferson Parish's definition of economic power "doomed" franchise tying cases from the 1960s and 1970s, which had found "economic power" sufficient to establish a per se violation in the mere ownership of a franchise trademark combined with the ability to impose the tie. See e.g. Siegel v. Chicken Delight, 448 F.2d 43 (9th Cir. 1971). By requiring proof of the sort of power required to establish liability in other antitrust contexts, Justice Stevens implicitly rejected those decisions. Indeed, the rejection was not necessarily implicit; the defendant in Jefferson Parish had a 30 percent share of the relevant market and operated under a trademark well-known to actual and potential customers. More recently, in Illinois Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006) Justice Stevens authored the opinion for the Court confirming what many had suspected for years, viz., that mere possession of a patent does not ipso facto raise a presumption that the owner of the patent possesses the sort of economic power necessary to establish a per se unlawful tying agreement. Justice O'Connor had said the same thing 20 years earlier in her concurrence in Jefferson Parish.

Jefferson Parish, then, is an example of how Justice Stevens helped incrementally undo some of the more extreme manifestations of antitrust law's inhospitality tradition, as he had helped to do in Continental T.V. v. GTE Sylvania (where he provided the critical 4th vote in favor of granting certiorari in the first place and then the critical fifth vote in favor of Justice Powell's masterful opinion). Sylvania rejected and overturned the per se rule against non-price vertical restraints such as exclusive territories and location clauses, holding that such non-standard agreements can facilitate the production of promotional information and thus enhance competition between manufacturers, so-called "interbrand competition." In NCAA v. Bd. of Regents of the University of Oklahoma, 468 U.S. 85 (1984) he cited Sylvania for the proposition that even horizontal restraints that reduce rivalry can in fact enhance interbrand competition and thus consumer welfare. Lower courts have properly read NCAA and Sylvania as undermining previous decisions purporting to ban as unlawful per se even horizontal restraints that are ancillary to a legitimate joint venture. See Topco v. United States, 405 U.S. 596 (1972) (banning as unlawful per se horizontal division of territories ancillary to legitimate joint venture). See e.g. Polk Brothers v. Forest City Enterprises, 776 F.2d 185 (7th Cir. 1985).

Leegin, of course, was a different kettle of fish. There Justice Stevens joined Justice Breyer's dissent, rejecting the majority's decision to overrule Dr. Miles v. John D. Park and Sons, 220 U.S. 373 (1911), which had banned minimum resale price maintenance. Justice Breyer's dissent is quite unconvincing. He invokes stare decisis in favor of retaining Dr. Miles, but in so doing contradicts several of the Court's previous decisions articulating a unique approach to stare decisis in the antitrust context. That is to say, while he invoked "stare decisis," he ignored caselaw repeatedly establishing that courts can (and should) adjust antitrust doctrine, overruling prior decisions if necessary, including at least one decision he joined --- State Oil v. Khan, 522 U.S. 3 (1997) (a unanimous opinion by Justice O'Connor).  Indeed, as I have argued elsewhere, the whole notion of a Rule of Reason, articulated in Standard Oil v. United States, 221 U.S. 1 (1911) (discussed in great detail in a subsequent post) implies that courts will apply the best version of economic theory when evaluating trade restraints and, moreover, will adjust antitrust doctrine in light of advances in economic theory. Or, as Justice Stevens himself said in National Society of Professional Engineers v. United States, 435 U.S. 679 (1978):

"Congress, however, did not intend the text of the Sherman Act to delineate the full meaning of the statute or its application in concrete situations. The legislative history makes it perfectly clear that it expected the courts to give shape to the statute's broad mandate by drawing on common law tradition. The Rule of Reason, with its origins in common law precedents long antedating the Sherman Act, has served that purpose. It has been used to give the Act both flexibility and definition, and its central principle of antitrust analysis has remained constant."

Those common law precedents, of course, required courts to reconsider and abandon doctrine when economic theory undermined the economic premises of that doctrine.  See Alan J. Meese, Price Theory, Competition and the Rule of Reason, 2003 Illinois L. Rev. 77, 89-92.

It's unfortunate that Justice Stevens did not prevail upon Justice Breyer to change his mind and join the majority.

Let me note a final bit of irony. Justice Stevens has repeatedly worked to limit the Constitution's protection for economic liberties dissenting, for instance, in decisions that provided modest protection for property rights. A classic case is Nolan v. California Coastal Commission, 483 U.S. 825 (1987) where a local agency attempted to condition the grant of a permit on a property owner's "agreement" to turn over a chunk of his property to the state, for purposes unrelated to the permit, without compensation. While the Supreme Court voided the condition as a violation of the Takings Clause, Justice Stevens dissented. At the same time, in National Society of Professional Engineers, mentioned above, Justice Stevens embraced the Standard Oil decision "hook, line and sinker." Standard Oil, in turn read the Sherman Act narrowly so as to avoid striking the statute down as inconsistent with the 5th Amendment's guarantee of liberty of contract. See Meese, Price Theory, Competition and the Rule of Reason, 2003 Ill. L. Rev. at 83-89. A broader reading, the Court said, would void all sorts of ordinary agreements and grind commerce to a halt. In the very same way, in National Society of Professional Engineers, Justice Stevens pointed out that reasonable commercial contracts are a sine qua non of productive activity. He also recognized that courts should not ban reasonable restraints and defined "unreasonable" in the same way the Standard Oil Court defined that term, namely, producing harm in the form of higher prices or reduced output due to an exercise of market power. By embracing Standard Oil and its Rule of Reason, Justice Stevens, perhaps unwittingly, embraced the very economic liberty he often tried to undermine in other contexts.

How To Inject Real Competition Into the Health Insurance Market

(R-Ohio)

Liked Competition

(D-Illinois)

Pretends to Like Competition

The Richmond Times Dispatch editorial board has identified (yet) another contradiction in President Obama's plans for health care reform. On the one hand, the President and his supporters claim that they want to inject more "competition" into the nation's health insurance markets, by creating a so-called "public option." At the same time, none of the bills proposed by President Obama's allies in Congress would amend laws that both exempt insurance companies from federal antitrust laws --- which are supposed to encourage competition --- and empower states to block competition that might take place across state lines. The brief editorial, which is worth reading in full, can be found here.

http://www2.timesdispatch.com/rtd/news/opinion/editorials/article/ED-COST30_20090729-190409/282857/

The chief culprit here is the McCarran-Ferguson Act, which Congress passed in 1945 in response to the Supreme Court's decision in United States v. South-Eastern Underwriters, 322 U.S. 533 (1944). Southeastern Underwriters held that the Sherman Antitrust Act (named for its sponsor, Senator John Sherman, R-Ohio, pictured above) applied to the business of insurance and banned a horizontal price fixing agreement between insurance companies selling insurance across state lines. The decision was correct and made perfect sense. However, in its infinite wisdom, Congress responded to the decision by passing the McCarran-Ferguson Act, which, among other things, granted antitrust immunity to insurance companies who are regulated by state insurance authorities. The only exceptions to such immunity are for instances in which the company engages in "boycott, coercion or intimidation." McCarran-Ferguson was one of several New Deal-era federal statutes that undermined competition by encouraging price fixing and creating barriers to entry. Another classic example is the Motor Carrier Act of 1935, which required anyone wishing to transport goods across state lines in a truck to obtain a federal license to do so. The Act also empowered the Interstate Commerce Commission to sets prices for such transportation and pass on truckers' applications to serve particular routes. Put another way, the Act empowered the ICC to engage in Central Planning of the trucking industry.

Thus, so long as insurance companies are subject to state oversight, they may engage in the sort of horizontal price fixing that would be a felony if practiced by, say, automobile manufacturers. They may also engage in exclusionary tactics that do not rise to the level of "boycott, coercion or intimidation." Moreover, such companies can merge with one another with impunity, thereby producing concentrated markets without regard to whether such concentration is necessary to produce efficiencies. As the Times-Dispatch editorial notes, 94 percent of state insurance markets are "concentrated" if one applies Department of Justice Merger Guidelines. The problem is compounded in this context, where, because of McCarran-Ferguson, insurance companies can agree on the prices they will charge consumers without any threat of liability under Federal law.

Ordinarily, concentration itself it not necessarily a problem, since the threat of new entry can sometimes prevent firms in concentrated markets from raising prices above the competitive level. If, say, Dominos and Pizza Hut agree on the price of delivered pizza, Papa Johns and others can enter the market and defeat the cartel. However, McCarran-Ferguson empowers a state to prevent entry by out-of-state insurance companies into the state's own market, thereby preventing consumers in, say, Virginia from seeking health insurance from firms based in New York. In the end, then, McCarran-Ferguson is a sort of one-two punch: insurance companies may agree on prices they will charge consumers in a particular state, and consumer may not seek to avoid such price fixing by seeking insurance elsewhere.

There are various ironies here. The Obama administration and its allies generally support, or claim to support, aggressive enforcement of the antitrust laws. At the same time, they have made no effort to undo the pernicious anti-competition effects of McCarran-Ferguson. Moreover, some arguments for the so-called "public option" rest on the assumption that the Federal Plan will become so large that it will have bargaining leverage over providers of health care, an assumption in tension with a professed desire to enhance competition.

There is final irony. President Obama and his allies claim that failed markets justify additional government involvement in the health care industry. In this case, however, the problem seems to be failed government. To quote the Times-Dispatch:

"The market gets blamed for a lot these days, but it is absurd to pin high health insurance premiums on markets when excessive regulations are much more culpable. Any health care overhaul should repeal the ban on interstate health insurance shopping."

Enough said !