William Howard Taft's Prescient Endorsement of Standard Oil, 112 Years Young

Knew Something About The Sherman Act

A previous post on this blog celebrated the birthday of Standard Oil Co. v. United States, 221 U.S. 1 (1911).  As explained in that post, Standard Oil articulated the "Rule of Reason" that courts apply when determining whether an agreement between two or more firms is a "contract, combination or conspiracy in restraint of trade or commerce among the several states" and thus contrary to Section 1 of the Sherman Act.  Recognizing that all agreements restrain trade in some sense, the Standard Oil Court read Section 1 narrowly, so as not to offend liberty of contract.  Thus, the Court held that Section 1 bans only those restraints that produce "the consequences of monopoly," namely, prices above the competitive level, output below the competitive level, and/or quality below the competitive level. 

Standard Oil was controversial at the time, with Justice Harlan (in dissent) and various commentators claiming that the Court's Rule of Reason contravened two key Supreme Court precedents, including United States v. Joint Traffic Association, 171 U.S. 505 (1898), and United States v. Trans Missouri Freight Association, 166 U.S. 290 (1897).   Harlan and others also invoked Addyston Pipe and Steel Co. v. United States, 85 F. 271 (6th Cir. 1898), which the Supreme Court unanimously affirmed.  See 175 U.S. 211 (1899).  According to Harlan, for instance, the Sixth Circuit's Addyston Pipe decision had read Section 1, as interpreted by Trans-Missouri Freight, to ban every contract that restrained trade, without regard to reasonableness.  Harlan issued a similar dissent in American Tobacco v. United States, 221 U.S. 106, 180 (1911), which reiterated Standard Oil's Rule of Reason when interpreting and applying Section 2 of the Sherman Act.

 

Whether he knew it or not, Harlan's charge was potentially embarrassing for then-President William Howard Taft, who, as an appellate judge, had authored the Sixth Circuit's decision in Addyston Pipe and appointed Edmund White, then an Associate Justice, as Chief Justice upon the death of Melvin Fuller. 

 

112 years ago today, President Taft responded to this critique of Standard Oil, without mentioning Harlan by name, in his Third Annual message to Congress.  Some of Taft's remarks, found here on the website of the University of Virginia's Miller Center, are worth re-reading:

 

"In two early cases, where the statute was invoked to enjoin a transportation rate agreement between interstate railroad companies, it was held that it was no defense to show that the agreement as to rates complained of was reasonable at common law, because it was said that the statute was directed against all contracts and combinations in restraint of trade whether reasonable at common law or not. It was plain from the record, however, that the contracts complained of in those cases would not have been deemed reasonable at common law. In subsequent cases the court said that the statute should be given a reasonable construction and refused to include within its inhibition, certain contractual restraints of trade which it denominated as incidental or as indirect.

These cases of restraint of trade that the court excepted from the operation of the statute were instances which, at common law, would have been called reasonable. In the Standard Oil and Tobacco cases, therefore, the court merely adopted the tests of the common law, and in defining exceptions to the literal application of the statute, only substituted for the test of being incidental or indirect, that of being reasonable, and this, without varying in the slightest the actual scope and effect of the statute. In other words, all the cases under the statute which have now been decided would have been decided the same way if the court had originally accepted in its construction the rule at common law.

It has been said that the court, by introducing into the construction of the statute common-law distinctions, has emasculated it. This is obviously untrue. By its judgment every contract and combination in restraint of interstate trade made with the purpose or necessary effect of controlling prices by stifling competition, or of establishing in whole or in part a monopoly of such trade, is condemned by the statute. The most extreme critics can not instance a case that ought to be condemned under the statute which is not brought within its terms as thus construed.

The suggestion is also made that the Supreme Court by its decision in the last two cases has committed to the court the undefined and unlimited discretion to determine whether a case of restraint of trade is within the terms of the statute. This is wholly untrue. A reasonable restraint of trade at common law is well understood and is clearly defined. It does not rest in the discretion of the court. It must be limited to accomplish the purpose of a lawful main contract to which, in order that it shall be enforceable at all, it must be incidental. If it exceed the needs of that contract, it is void.

The test of reasonableness was never applied by the court at common law to contracts or combinations or conspiracies in restraint of trade whose purpose was or whose necessary effect would be to stifle competition, to control prices, or establish monopolies. The courts never assumed power to say that such contracts or combinations or conspiracies might be lawful if the parties to them were only moderate in the use of the power thus secured and did not exact from the public too great and exorbitant prices. It is true that many theorists, and others engaged in business violating the statute, have hoped that some such line could be drawn by courts; but no court of authority has ever attempted it. Certainly there is nothing in the decisions of the latest two cases from which such a dangerous theory of judicial discretion in enforcing this statute can derive the slightest sanction."

 

In short, Taft rejected claims that Chief Justice White's Standard Oil opinion departed from Supreme Court precedent and his own Addyston Pipe decision.   As Taft noted, subsequent decisions had imposed upon Section 1 a "reasonable construction," holding that the statute did not reach incidental or indirect restraints.   See United States v. Joint Traffic Association, 171 U.S. 505 (1898) and Hopkins v. United States, 171 U.S. 578 (1898).   In so doing, the Court avoided claims that the statute was so broad as to offend liberty of contract.  (See here).   Standard Oil, Taft said, simply employed a different verbal formulation, "The Rule of Reason," to describe the very same standard that courts, including Addyston Pipe, had been applying since the late 1890s.  If anything, Taft actually understated his case.  After all, decisions such as Joint Traffic and Hopkins had announced that indirect restraints, including mergers and the formation of partnerships, were beyond the scope of the Sherman Act altogether, regardless of their impact upon prices or output.  Standard Oil, by contrast, contemplated that at least some such transactions could be unreasonable, ironically expanding the scope of the Act to condemn welfare-reducing conduct previously beyond its reach. (See pp. 796-97 of this source).  Moreover, the decision suggested that some agreements were automatically unreasonable, if the "nature and character" of such conduct established that they necessarily produced the consequences of monopoly.  The resulting rule, then replicated, in substance, but not in form, the distinction between "naked" and "ancillary" restraints announced by then-judge Taft in Addyston Pipe.   Like the Rule of Reason itself, this distinction has stood the test of time.

Robert Bork, Antitrust Revolutionary

Economic Subversive

This week brought the sad news that Robert Bork has died, at the age of 85.  Bork had a long and varied career.  (See here and here for remembrances.)  He served in the Marine Corp from 1945-46 and graduated from the College at the University of Chicago in 1948.  He then matriculated at the University of Chicago Law School, which he left to rejoin the Marines during the Korean War.  After Law School he served as a fellow in Law and Economics for one year, practiced law at Kirkland and Ellis in Chicago and then joined the faculty at Yale Law School.  While at Yale, President Nixon nominated and appointed Bork to serve as Solicitor General of the United States in 1973, where Bork served until the end of the Ford Administration in January 1977.  President Reagan nominated Bork to the United States Court of Appeals for the District of Columbia Circuit in 1981 and appointed him after Senate confirmation in 1982.   He retired from that court in 1988.  President Reagan nominated Bork to the Supreme Court in 1987, but the U.S. Senate ignominiously refused to confirm him.  This essay, by former Tenth Circuit Judge Michael McConnell, now Director of the Stanford Constitutional Law Center, explains why the Senate's rejection of Judge Bork helped politicize the Court and diminish the Rule of Law.

Most of the punditry and analysis following Judge Bork's death has focused on his views on the Constitution, particularly his strong and articulate support for an "originalist" approach to constitutional interpretation.  These commentaries have ignored Bork's tremendous influence in another field, namely, Antitrust Law.  For instance, the main piece in the New York Times on Bork's passing, while over 2,000 words long, contains only a brief paragraph about his contributions to antitrust law.  CNN's story on the occasion of Bork's death does not mention Bork's contributions to antitrust law at all, aside from a brief quote of Justice Scalia, who lauds Bork's influence over the field.  Other essays have, like Judge McConnell's, focused on the implications of Bork's nomination and rejection for the confirmation process and the integrity of the courts.  (See here and here.)  These oversights are unfortunate.   Simply put, Bork helped revolutionize the way that scholars, judges and enforcement officials view the appropriate scope of antitrust regulation and thus the role of the federal government in the nation's economy.  More precisely, no individual scholar had a greater influence on antitrust law and policy than Robert Bork.

Many know Bork from his classic book, The Antitrust Paradox, published in 1978.  For instance, one remembrance states "The Antitrust Paradox, published in 1978, shifted the entire focus of antitrust policy toward consumer welfare," without mentioning any previous work.  (See also several similar statements by various participants in this National Review symposium.)   However, Bork's campaign to revolutionize Antitrust started more than a decade and a half before publication of the Antitrust Paradox.   In particular, while at Yale (ironically?) Bork laid the foundation for the so-called "Chicago Revolution" in antitrust law and policy with a series of articles published between 1961 and 1968.  The Antitrust Paradox drew upon these arguments.     In these works, Bork made two broad and fundamental contributions to antitrust analysis, one normative and one technocratic.

As a normative matter, Bork argued that the antitrust laws should have one goal and one goal alone, namely, the maximization of consumer welfare, which Bork equated with allocative efficiency and thus total economic welfare.  To be sure, other scholars embraced a "total welfare" approach before Bork did.  In particular, and as I explained in this article, Harvard-school economists Edward Mason, Donald Turner, and Carl Kaysen also embraced "total welfare" as an exclusive goal of antitrust regulation.  However, Bork's work differed from the work of these scholars in two ways.  First, Bork expressly linked "total welfare" and "efficiency" to "consumer welfare," whereas the Harvard School had not employed the latter term, choosing instead to focus only on "efficiency" as the appropriate goal.  Second, unlike these Harvard scholars, Bork offered a legal defense of total welfare/consumer welfare as an antitrust goal.  In particular, after a thorough review of the legislative history of the Sherman Act, Bork argued that the Congress that passed the Act only "intended" to ban those restraints that reduced total welfare, thus leaving those that enhanced efficient resource allocation unscathed.  See Robert H. Bork, Legislative Intent and the Policy of the Sherman Act, 9 J. L. & Econ. 7 (1966).  Bork also argued that, even if Congress's goal was unclear, courts should nonetheless pursue "consumer welfare" exclusively, because the pursuit of any other goal (e.g., a fair distribution of income) or combinations of goals (e.g. protection of small businesses and efficiency) would require courts to make value choices and trade-offs that were properly left to the legislature.  See  Robert Bork, The Goals of Antitrust Policy, 57 American Econ. Rev. (Papers and Proceedings) 242 (1967).  Some scholars have taken issue with Bork's equation of "consumer welfare" with total welfare, with one scholar referring to this claim as "something [Bork] made up." (See also here for an argument that Congress meant to ban all restraints that increased consumer prices in a relevant market, even if the practice increased total welfare.)    Correct or not, Bork's claim was highly influential.  Indeed, in Reiter v. Sonotone, 442 U.S. 330, 343 (1979) the Supreme Court announced that Congress intended the Sherman Act as a "consumer welfare prescription," citing the Antitrust Paradox for this proposition.

As a technocratic matter, Bork proposed the sort of radical reform in antitrust doctrine necessary to make "consumer welfare" as he defined it the exclusive priority of antitrust law.   Perhaps most famously, Bork rehabilitated the distinction, made famous by William Howard Taft, between "naked" and "ancillary" restraints.  See Addyston Pipe and Steel Co. v. United States, 85 F. 271 (6th Cir. 1898).  Like Taft, Bork argued that naked restraints should be unlawful per se, while ancillary restraints should be analyzed under a forgiving rule of reason.   Moreover, Bork also contended that early Sherman Act case law followed Taft's template, even though courts sometimes used different formulations when articulating antitrust doctrine.  In particular, Bork concluded that Taft's formulation anticipated the "Rule of Reason," articulated in Standard Oil v. United States, 221 U.S. 1 (1911) (discussed here), which banned only those restraints that "unduly restrain trade" by producing "monopoly or its consequences."  See Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 74 Yale L. J. 775 (1965).  Moreover, employing the latest economic theory of the time (and theory that is still adequate for such purposes today), Bork explained why this distinction between "naked" and "ancillary" restraints would produce results that would maximize "consumer welfare" as he defined it.  See Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, part II, 75 Yale L. J. 373 (1966).   Thus, Bork explained that ancillary restraints could align the incentives of individual venture participants with the welfare of the overall venture and thus produce significant efficiencies and enhance the allocation of resources.  In so doing, he argued persuasively for the expansion for the category of restraints deemed "ancillary" to otherwise lawful objectives.  For instance, relying upon the work of Lester Telser, Bork explained how minimum resale price maintenance or exclusive territories imposed by manufacturers or joint ventures could ensure that dealers or venture partners made adequate investments in promotion, instead of "free riding" on the efforts of other dealers or partners. (Unlike Telser, who had focused only on vertical minimum rpm, Bork focused on horizontal and vertical price and non-price restraints.)   In so doing, Bork drew on the work of Ronald Coase, whose 1937 article on the Nature of the Firm would help Coase earn the Nobel Prize in Economic Science in 1991.  Thus, Bork was an early pioneer in applying transaction cost economics to antitrust problems.   (See here, at pp. 53-54 for an account of Bork's early invocation of Coase and transaction cost considerations).  During this same period, Richard Posner, a later convert to Chicago thinking, contended that non-price vertical restraints rarely produced benefits and should this be presumptively unlawful.

The Supreme Court endorsed Bork's reasoning in Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977), holding, contrary to previous precedent, that non-price vertical restraints could prevent "free riding" and thus may produce "redeeming virtues" of the sort that preclude per se condemnation.  Instead, the Sylvania Court said, courts should analyze such agreements under a forgiving rule of reason.  (Note that the Court issued Sylvania before publication of the Antitrust Paradox.)  Less than a decade later, the Court applied similar reasoning in the context of horizontal restraints, invoking Sylvania and subsequent work of Judge Bork for the proposition that horizontal agreements between members of  sports leagues could enhance the quality of the league's product, thereby preventing per se condemnation of such restraints.    See NCAA v. Board of Regents of the University of Oklahoma, 464 U.S. 85 (1984).  Shortly thereafter, the Court extended Sylvania, holding that an agreement between a manufacturer and a dealer to terminate another dealer for price cutting was not unlawful per se.  See Business Electronics v. Sharp Electronics, 485 U.S. 717 (1988).  Nearly a decade later, the Court unanimously reversed the per se ban on maximum resale price maintenance.  See State Oil v. Khan, 522 U.S. 3 (1997).  More recently, in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), the Court overturned a 96 year old ban on minimum resale price maintenance, relying upon the work of Bork and others for the proposition that such agreements could combat free riding and thus facilitate promotion of a manufacturer's product.  Each of these decisions, from Sylvania through Leegin, cited Bork's academic work with approval.  To be sure, these decisions cited the work of other scholars as well, but at least some such work simply repeated what Bork had already said a decade or more earlier.

Bork's influence was not confined to the definition and treatment of ancillary restraints.  He also leveled powerful critiques at the Supreme Court's hapless and wealth-destroying merger doctrine, exemplified by cases such as Vons Grocery v. United States, 384 U.S. 270 (1964) and Brown Shoe Co. v. United States, 370 U.S. 294 (1962).  See Robert H. Bork, Anticompetitive Enforcement Doctrines Under Section 7 of the Clayton Act, 39 Tex. L. Rev. 832 (1961).    In both decisions the Supreme Court banned, as contrary to section 7 of the Clayton Act, mergers between firms with small shares in markets characterized by ease of entry.  (In Vons, for instance, the firm created by the challenged merger would have had 8 percent of a market with over 3,000 remaining firms.)  As Bork explained, such mergers could not create or facilitate the exercise of market power.  It was thus logical to infer that parties to such transactions hoped to achieve efficiencies. Bork also leveled powerful critiques against overly intrusive standards governing alleged predatory activity, particularly often-unfounded claims that refusals to deal or vertical integration disadvantaged rivals without creating offsetting efficiencies and thus injured consumers.  See Robert Bork and Ward Bowman, The Crisis in Antitrust, 65 Columbia L. Rev. 363 (1965); Robert H. Bork, Vertical Integration and the Sherman Act, 22 U. Chi. L. Rev. 157 (1954).  In 1986, the Supreme Court, in a unanimous opinion by Justice Stevens, invoked Bork's test for evaluating alleged predatory conduct.  See Aspen Highlands v. Aspen Highlands Ski Co., 472 U.S. 585, 597 n. 33 (1986)(citing the Antitrust Paradox for the proposition that conduct was only predatory if it excluded rivals on some basis other than efficiency).

Obviously Bork was not the only participant in the Chicago Antitrust Revolution.   Moreover, many outside the Chicago School endorsed Chicago School critiques of current doctrine and proposals for reform.  For instance, Bork's work led Harvard School icon Donald Turner to reverse his views on vertical restraints.  However, the record shows that Bork led the way and employed reason, not force, to convince others to follow.

The AALS Cartel

 Not Good Enough for the AALS?

Received Substandard Legal Education?

Over at Truth on the Market, Thom Lambert has taken issue with a rule, promulgated by the American Association of Law Schools, that forbids law schools from making lateral offers of employment to faculty at other schools after March 1.  To be more precise, the rule admonishes against such offers in cases in which the poached faculty member must begin teaching at the new institution that same fall.  Lambert asserts, and I know of no evidence to the contrary, that law schools fastidiously adhere to the rule, even though it is framed as a "best practice."

As Lambert points out, the rule in question is a horizontal restraint of trade between rivals of the sort that courts ordinarily condemn.  Indeed, he expressly (and properly) invokes the Department of Justice's recent suit against eBay, challenging an alleged agreement between eBay and Intuit whereby the two firms agreed not to poach each other's employees.  (The Department also entered a consent decree with Intuit forbidding the practice.)  If the eBay/Intuit agreement violates Section 1 of the Sherman Act, and Lambert makes a persuasive case that it does, then so does the agreement between the member law schools of the AALS.  Such agreements, by their nature, reduce rivalry between companies (in the case of eBay/Intuit) and member schools (in the class of the AALS rule).  At the same time, neither agreement appears to produce any "redeeming virtue" of the sort recognized as cognizable by case law applying the Sherman Act.  To be sure, the fact that a faculty member leaves her institution in, say, May, for another school, can impose substantial costs on the institution that loses the faculty member.   However, as Lambert notes, the costs will vary depending upon the faculty member, the courses she taught, and whether the school is located near other schools that might be sources of potential visitors who would not have to relocate.  As Lambert also points out, schools can protect themselves unilaterally against such harm by entering contracts forbidding their faculty from accepting offers after a certain date, contracts that contain liquidated damages clauses that compensate the school for the any damages suffered when the faculty member leaves late in the year.    (These damages could, for instance, compensate the school for the cost of hiring a visitor to cover the departing faculty member's courses on short notice.)  (By analogy, it should be noted that many universities unilaterally provide that a faculty member who receives a sabbatical must return to teach for at least one year before leaving for another school.)  As a result, Lambert contends, no agreement between law schools is necessary to combat the harms from late departures.

Of course, and as Lambert recognizes, the Sherman Act does not ban all horizontal restraints.  Instead, as previously noted on this blog, courts will allow those horizontal agreements that are necessary to overcome any market failures that would result from parties' reliance upon an unfettered, atomistic market to conduct economic activity.  A classic example is the formation of a partnership and restraints ancillary thereto.  Such restraints may, for instance, prevent individual partners from "moonlighting," that is, competing with the partnership, thereby eliminating horizontal rivalry that would otherwise occur.  Nonetheless, as William Howard Taft explained over a century ago, the common law encouraged such restraints, and properly so.   After all, Taft said, such agreements encourage partners to devote all of their efforts to furthering the business of the partnership, instead of diverting value from the enterprise to themselves or, as modern economists would put it, "free riding" on the larger partership.  See United States v. Addyston Pipe & Steel Co., 85 F. 271, 280 (6th Cir. 1898) (treating such restrictions as paradigmatic ancillary restraints that the law should "encourage"); Robert Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 75 Yale L.J. 373, 381-83 (1965) (explaining how such restrictions could prevent free riding by partners on the overall enterprise and thus enhance welfare).  Put another way, such agreements pass muster under the Sherman Act's "Rule of Reason," articulated in Standard Oil v. United States, because they do not restrain trade "unduly," but instead "advance" or "fructify" it. 

In short, horizontal cooperation between rivals is perfectly proper when reliance on the unfettered market would otherwise  result in a market failure and a misallocation of resources.  See Alan J. Meese, Price Theory, Competition and the Rule of Reason, 2003 Ill. L. Rev. 77.  Where, on the other hand, there is no such failure, that is, where unilateral decisions in an efficient market will produce efficient results, there is no rationale for such collective action, and courts should ban otherwise lawful restraints.   See Alan J. Meese, Monopoly Bundling in Cyberspace: How Many Products Does Microsoft Sell?, 44 Antitrust Bulletin 65 (1999).  As the Supreme Court explained in National Society of Professional Engineers v. United States, 435 U.S. 679 (1978), the antitrust laws rest on the assumption that consumers understand their own interests and can assess the virtues and relative prices of competing products.

At the same time, the "anti-poaching agreement" that Lambert has condemned may be the tip of the AALS cartel iceberg.   Even a brief perusal of the organization's membership requirements reveals various provisions that eliminate competition without any apparent market failure justification.  For instance, the AALS provides that law schools must have a full time faculty of a certain minimum size, so as to "provide ready professional relationships among the faculty and between the faculty and the students and to offer a reasonably broad curriculum."  The Nation's first law school, at William and Mary, would have flunked this standard, because the faculty consisted of Founding Father George Wythe, who taught, among others, John Marshall, who would later become Chief Justice of the United States.  So far as I know, however, no one would plausibly argue that Marshall's legal education was "not up to snuff."

The same AALS standards also prevent a law school from de-emphasizing research so as to encourage more teaching,   The standards also mandate that each member school "shall seek to have a faculty, staff, and student body which are diverse with respect to race, color, and sex."  Finally, the standards require each school to have a library of a particular size.  The requirements of minimum faculty size, significant support for research and minimum library size, it should be noted, likely raise barriers to entry, by requiring a new school to enter at a particular scale to become a member.

Each of these standards seems inconsistent with the principle that Lambert espouses and, for that matter, the Supreme Court's antitrust case law.  One can stipulate that large faculties, significant research, diversity and large libraries are "good things" without thereby providing a justification of collective imposition of these objectives.  Put another way, there is no apparent market failure that prevents competition between member schools from resulting in appropriate attention to each of these attributes.  For instance, there is no apparent reason that potential law students are incapable of assessing the value that a diverse faculty will add to their education and thus preferring, other things being equal, those schools with diverse faculties.  That's the way competition in a free society is supposed to work.  Ditto for faculty size.  If a school believes that its large faculty provides a better educational environment, other things being equal, than a smaller faculty and vice versa, each such school should be free to offer its product in the marketplace, subject to market competition from other products.  Who knows, one such school might educate the next John Marshall!
 

No Lobster Cartel in Maine . . . .

Excess Capacity

Not Evidence of Collusive Output Reduction

Flotilla of Lobster Boats Plying Their Trade in Casco Bay

A recent article in the Portland Press Herald quotes a state official warning Maine's lobstermen not to engage in price fixing or collective tactics designed to restrict the supply of lobsters.   In particular, the Press Herald quoted Marine Resources Commissioner Patrick Keliher as follows:

"We have heard that fishermen are seeking to impose a de facto shutdown of the fishery and coercing others into complying by threatening to cut off their gear," Keliher said in his release. "Any such actions will be met with targeted and swift enforcement."

Mr. Keliher is of course correct that agreements between  to fix prices or reduce output are unlawful, both under Section 1 of the Sherman Act and Maine's parallel antitrust statute.   More precisely, an agreement between lobstermen to set prices or reduce output would be unreasonable per se and thus contrary to the "Rule of Reason" that the Supreme Court articulated in Standard Oil v. United States, 221 U.S. 1 (1911).

At the same time, as the Press Herald article notes, individual lobstermen remain entirely free to refrain from setting new traps and/or harvesting from traps already set.  Moreover, it seems highly unlikely than any conspiracy between lobstermen could in fact result in unreasonably low output or unreasonably high prices.  In particular, several factors suggest that any collective effort to increase prices or reduce output would be doomed to fail.  First, there are over 1,000 lobstermen in Maine; it would be difficult to say the least for such individuals to negotiate and police an anticompetitive agreement.  Second, even if most lobstermen in fact agreed to reduce output and increase prices, those who refused to participate in the agreement could undercut it, by increasing their own output and thereby counter-acting any output reduction by conspirators.  Such a response would be particularly effective if the market was characterized by excess capacity, e.g., unused but servicable equipment like the unused lobster traps, pictured above, located on an island in Casco Bay. Third, ostensible participants in a price or output agreement could cheat, surreptitiously setting more traps than called for by the agreement, for instance.  Fourth, even if all current partipants in the marketplace somehow agreed to reduce output and increase prices, any resulting unreasonable prices would attract new entry, thereby increasing output and driving prices back down.

Those suspcious that price fixing might be afoot might invoke reports of lobstermen simultaneously reducing the number of traps set or harvesting less often from such traps, as Businessweek reported earlier this week.  However, such data are equally consistent with an alternative hypothesis, namely, that market participants are rationally responding individually to low lobster prices.  (The Businessweek article reports that lobstermen are receiving between $2 and $2.50 per pound for theit catch; the Press Herald suggests that the price has been even lower.)  Simply put, as prices fall, the payoff from searching for lobsters falls as well, with the result that individual lobstermen might conclude that the cost of such search outweighs the potential benefits, at least in the short run.  Because similar lobster prices prevail throughout the Maine region, numerous lobstermen might individually decide to "stay home." Taken together these individual and perfectly legal decisions might (incorrectly) appear to be the result of collective action.  Absent additional evidence demonstrating actual collective action, however, the public should be confident that the lobstering trade is a well-functioning competitive market.

  

Happy Birthday Standard Oil v. United States, 221 U.S. 1 (1911)

Probably a Better than Average Investment at the Time

Didn't Live to 100, But His Greatest Decision Did

Sunday May 15 was the 100th birthday of Standard Oil v. United States, 221 U.S. 1 (1911). Authored by Chief Justice Edward D. White, pictured above, Standard Oil is the most important antitrust decision ever, having articulated certain fundamental principles that still animate antitrust law. Here are a few examples of Standard Oil's enduring principles, followed by some additional thoughts.

1. Standard Oil confirmed what was at least implicit in several prior decisions, namely, that the Sherman Act does not ban all contracts that "restrain trade" in the ordinary sense of that phrase. Instead, the Court said, the statute only bans agreements that restrain trade "unduly" by producing "monopoly or its consequences." To determine whether a contract produces such consequences, Standard Oil said, courts should employ "reason." Thus was born the Sherman Act's "Rule of Reason." Some, including Justice Harlan in dissent, argued that this Rule of Reason was a departure from prior case law which had purportedly banned all restraints of trade. However, as Chief Justice White explained for the Court, prior decisions had banned only "direct" restraints, leaving so-called "indirect" restraints entirely unscathed. See e.g. United States v. Joint Traffic Ass'n, 171 U.S. 505 (1898). Moreover, White continued, courts had employed "reason" to distinguish "direct" from "indirect" restraints, treating as "direct" only those restraints that produced monopoly or its consequences. Thus, he (properly) concluded, the "direct/indirect" test and the "Rule of Reason" would, if properly applied, would reach identical results. William Howard Taft, then President of the United States, agreed with the Court's assessment of precedent and expressed that agreement in a December 2011 message to Congress.

2. After examining both English and American sources bearing upon the meaning of the term "restraint of trade," the Court identified three possible "consequences of monopoly," the presence of which would require condemnation of a restraint because it restrained trade "unduly," namely output reduction, price increases, and reductions in quality. The mere fact that an agreement restricted the freedom of action of the parties to it did not suffice to render it a "restraint of trade" within the meaning of the statute. Courts still adhere to this principle today, requiring a showing or inference of tangible economic harm before condemning a restraint. For instance, in Continental T.V. v. G.T.E. Sylvania, 433 U.S. 36, 53 n. 21 (1977), the Court pointed out that all contracts restrain trade, and concluded that courts should only consider the objective economic effects of agreements when conducting Rule of Reason analysis. Thus, Standard Oil rejects assertions that courts should consider non-economic values, such as the autonomy of traders, when given content to the Sherman Act.

3. Any broader reading of the statute, e.g., one that applied "its prohibitions to any case within its literal language" would contravene the Constitution's protection for liberty of contract or, in the Court's words "be destructive of all right to contract or agree or combine in any respect whatever as to subjects embraced in interstate trade or commerce." Thus, instead of reading the statute broadly so as to ban each and every agreement that reduced competition in one way or another, the Court held that reasonable restraints of trade were protected by liberty of contract and thus beyond the reach of the statute, even if they otherwise restrained interstate commerce. Protection of such restraints, the Court said, was the best way to ensure a well-functioning competitive order.

"[T]he omission [from the Sherman Act] of any direct prohibition against monopoly in the concrete, indicates a consciousness that the freedom of the individual right to contract, when not unduly or improperly exercised, was the most efficient means for the prevention of monopoly, since the operation of the centrifugal and centripetal forces resulting from the right to freely contract was the means by which monopoly would be inevitably prevented if no extraneous or sovereign power imposed it and no right to make unlawful contracts having a monopolistic tendency were permitted. In other words, that freedom to contract was the essence of freedom from undue restraint on the right to contract."

The Supreme Court reiterated this insight, albeit without mentioning liberty of contract, nearly six decades later, citing Standard Oil for the proposition that Congress could not have meant to ban all private contract law because that body of law "establishes the enforceability of commercial agreements and enables competitive markets -- indeed, a competitive economy -- to function effectively." See National Society of Professional Engineers v. United States, 435 U.S. 679 (1978).

4. As a corollary to the ban on "undue" restraints, Standard Oil's Rule of Reason implied a safe harbor for "normal," "usual," or "ordinary" agreements. Indeed, the Court condemned the Standard Oil trust precisely because its growth, the Court said, was "not as a result of normal methods of industrial development[.]" Or, as the Court put it in the American Tobacco Co. v. United States, 221 U.S. 106 (1911), decided two weeks later: "[Standard Oil held] that the statute did not forbid or restrain the power to make normal and usual contracts to further trade by resorting to all normal methods, whether by agreement or otherwise, to accomplish such purpose." American Tobacco, it should be noted, reaffirmed Standard Oil's promulgation of the Rule of Reason and held that a similar analysis, including the distinction between undue and normal/usual/ordinary restraints, should control courts' determination whether a defendant has "monopolized" interstate commerce contrary to Section 2 of the Sherman Act. Subsequent decisions confirmed that a contract or other practice was "normal" or "ordinary" and thus beyond the scope of Congress's power to regulate under the Sherman Act or Clayton Act if it was the type of practice a firm would adopt without regard to the practice's propensity to obtain or maintain market power. See FTC v. Sinclair Oil, 261 U.S. 463 (1923) (holding that the Clayton Act did not empower the Commission “to interfere with ordinary business methods); FTC v. Gratz, 253 U.S. 421 (1920) (same). Courts still employ this approach under Section 2 of the Sherman Act, refusing to condemn conduct that reduces a firm's costs, even if such conduct should maintain or create a monopoly.

5. Standard Oil and its Rule of Reason require a "common law," dynamic approach to the Sherman Act. By its nature, the decision's "Rule of Reason," with its focus on the consequences produced by a challenged restraint, precludes any reading of the statute that would freeze in place a list of restraints that are prohibited or, for that matter, list of restraints that are not prohibited. Instead, the Court held that the statute provides courts with the flexibility to treat particular restraints differently over time, depending upon judges' assessment of the economic consequences of such restraints. Such assessments can change as economic conditions change or as evolving economic theory sheds new light on the impact of particular restraints, leading courts to "translate" the principles animating the Rule of Reason in light of new information. (See pp. 89-92 of this article for additional articulation of this point.) Thus, the Standard Oil Court expressly noted that restraints or other practices that appear harmful at one point in time can, decades or century later appear beneficial or vice versa, thereby justifying different legal treatment. The Supreme Court has repeatedly endorsed this approach. In 1988, for instance, the Court cited Standard Oil for the proposition that "[t]he Sherman Act adopted the term "restraint of trade" along with its dynamic potential. It invokes the common law itself, and not merely the static content that the common law had assigned to the term in 1890." See Business Electronics Corp. v. Sharp Electronics, 485 U.S. 717 (1988). This "dynamic potential," the Court said, included the ability to overrule previous decisions banning particular restraints when advances in economic theory undermined the economic premises of such earlier decisions. See also Continental T.V. v. G.T.E. Sylvania, 433 U.S. 36 (1977) (discarding per se rule against non-price vertical restraints based upon changed economic understanding of such agreements). This dynamic approach has served antitrust law well, as it has allowed courts the flexibility to adjust legal doctrine in response to changed conditions and insights, thereby minimizing the need for Congress to amend the Sherman Act in response to such changes.

Readers interested in further development of these themes may want to consult pp. 83-92 of this article.

Some additional observations:

First, the Standard Oil opinion was extremely controversial at the time as was the American Tobacco decision. Justice Harlan issued a lengthy and vehement dissent, in which he accused his brethren of judicial activism, ignoring precedent and reaching a result unduly favorable to trusts. Harlan even claimed that the Court's purported activism would undermine the public's faith in a neutral judiciary. Harlan's dissent helped fuel similar criticism by commentators and political partisans off the Court. Many criticized President Taft, who had appointed Chief Justice White, and these criticisms no doubt helped motivate Taft's lengthy message to Congress defending the decision mentioned above. Though highly controversial at the time, the Supreme Court unanimously invoked and applied the Rule of Reason just seven years later in Chicago Bd. of Trade v. United States, 246 U.S. 243 (1918), and the stands to this day.

Second, some criticism of Standard Oil reflected a fear that Chief Justice White's version of the Rule of Reason would empower courts to sustain price fixing agreements that set reasonable prices, contrary to what some saw as the holdings of prior decisions. Indeed, dissenting in United States v. Trans Missouri Freight Association, 166 U.S. 290 (1897) , then Associate Justice White, in an opinion joined by Justices Field, Gray and Shiras, argued that a ban on horizontal agreements setting reasonable prices would violate firms' liberty of contract, an argument the Court rejected, at least in the context of railroad corporations that had received special privileges from states where they operated, in both Trans-Missouri Freight and United States v. Joint Traffic Ass'n, 171 U.S. 505 (1898). (In Addyston Pipe and Steel Co. v. United States, 175 U.S. 211 (1899), by contrast, the Court first sustained the lower court's finding that the cartel set unreasonable prices before (unanimously) holding that the price fixing in question was a direct restraint of interstate commerce in violation of the Sherman Act.) However, Standard Oil does not address one way or the other whether in fact horizontal agreements setting reasonable prices would survive scrutiny under the Rule of Reason. Thus, future decisions condemning such price fixing without regard to the reasonableness of the price set did not contravene Standard Oil. See e.g. United States v. Trenton Potteries, 273 U.S. 392 (1927) (condemning agreement between firms with 80 percent share of the relevant market without regard to reasonableness of the price set).

Third, principles announced in Standard Oil apply equally to Section 1 and Section 2 of the Sherman Act, as the Court confirmed in the American Tobacco mentioned earlier in this post. Section 1, of course, applies to "concerted action," that is, an agreement between two or more parties. Section 2, by contrast, applies only to conduct that is "unilateral." At the same time, the modern Rule of Reason applied under Section 1 differs from that applied under Section 2 in two ways. First, courts analyzing concerted action under Section 1 purportedly "balance" any harms that a restraint produces against any benefits, in an effort to determine which impact predominates. (See pp. 98-113 of this article for a general discussion of this analysis and some of the issues that arise; see also this comprehensive article about how modern courts conduct rule of reason analysis.). By contrast, courts analyzed challenged conduct under Section 2 conduct no such balancing. Thus, in the Section 2 context, proof that challenged conduct produces significant benefits that cannot be achieved in some other way ends the case, without regard to whether such conduct outweighs any purported harms. Second, when balancing harms versus benefits under Section 1, courts purport to ascertain whether the restraint increases or decreases prices paid by consumers, thus implementing a "purchaser welfare standard." Under Section 2, by contrast, courts treat the prices paid by purchasers as beside the point. Thus, if conduct is "normal" or "usual" because it produces benefits independent (See pp. 673-86 and 708-15 of this article for a demonstration that courts implementing Section 2 have never focused on the welfare of purchasers but have instead articulated doctrine that seeks to ban only that conduct that reduces overall economic welfare). At some point, it seems, courts will have to reconcile these contradictions.

On the Distinction Between Regulation and Enforcement: Why the Antitrust Division is Apparently Exceeding its Authority

NCAA Commissioner-in-Chief?

NCAA Vice-Commissioner in Chief?

When running for President, Barak Obama (pictured above receiving a gift from 2010 BCS champion Alabama) made no secret of his desire to replace the current BCS Bowl system with an eight team national playoff to determine college football's champion. Moreover, nearly two years ago, Seantor Orrin Hatch, pictured below President Obama, called for an antitrust investigation of the BCS system. Last week the Antitrust Division of the Department of Justice finally "got the hint," and sent a letter to the NCAA seeking an explanation for the association's failure to adopt a playoff system similar to that employed in some other college sports, including, e.g., college basketball.

The letter does not formally or informally charge the NCAA with any violations of the antitrust laws or any other federal law. Nor does it articulate or even adumbrate any argument that the BCS system, which is a particular form of playoff system, and/or the means used to enforce it violate the antitrust laws. Instead, the letter begins by noting that the Attorney General of Utah, hardly a disinterested party (the state's two best college football teams are in conferences whose winners do not automatically qualify for a BCS bowl), has announced an intent to challenge the BCS under the antitrust laws. The letter also notes that 21 economists --- a miniscule fraction of the nation's economists --- have filed a memorandum with the Division calling for an antitrust investigation of the BCS system. Finally, the letter notes that "other prominent individuals have publicly urged the Antitrust Division to take action against the BCS."

The DOJ's letter is perplexing to say the least. The Antitrust Division is charged with enforcing the nation's antitrust laws, period. That is to say, the Division is charged with determining whether a given restraint, by reducing pre-existing competition, reduces consumer welfare. However, the letter reads more like a request from a congressional committee considering regulatory legislation or an adminstrative agency charged with promulgating New Deal style "public interest" regulation. Thus, the letter asks open-ended questions that are untethered to any recognizable standard of antitrust liability. For instance, the letter asks why "the Football Bowl Subdivision does not have a playoff" and "[w]hat steps does the NCAA plan to take to establish a playoff at this time?" Finally, and most oddly, the letter asks "[h]ave you determined that there are aspects of the BCS system that do not serve the interests of fans, colleges, universities and players?" To what extent would an alternate system better serve those interests?"

These questions suggest that the Antitrust Division is conducting an inquiry that exceeds its jurisdiction, that is, that the Division is seeking to leverage its authority to enforce the antitrust laws to determine whether, say, an 8 team playoff system is superior to the current BCS system and then to foist upon the NCAA the results of the Division's analysis. Would it be sheer coincidence if Division determines that the best system is the one preferred by the President of the United States, who can hire and fire the head of the Antitrust Division at will?

But don't the antitrust laws require the NCAA to adopt the optimal system of determining a national champion? After all, many have argued that antirust should ban those restraints that reduce economic welfare. Certainly not. The Sherman Act forbids contracts, combinations and conspiracies in restraint of trade or commerce among the several states. A century ago, in Standard Oil v. United States (discussed here in a subsequent post), the Supreme Court held that only contracts that produce "the consequences of monopoly" restrain trade within the meaning of the statute. There are, the Court said, three such consequences: higher prices, reduced output and reduced quality. (A modern economist would recognize these consequences as different manifestations of an exercise of market power.) A restraint that produces none of these consequences cannot violate the Sherman Act, regardless of its other effects and regardless of whether a different restraint would produce even more social benefits. (For a summary of Standard Oil's Rule of Reason, see pp. 83-92 of the article found here.) The Supreme Court has repeatedly reiterated that Standard Oil properly states the law under Section 1 of the Sherman Act. See e.g. National Society of Professional Engineers v. United States, 435 U.S. 679 (1978). Indeed, and ironically, the Antitrust Division's own guidelines for examining "collaboration among competitors" provide that "Rule of reason analysis focuses on the state of competition with, as compared to without, the relevant agreement." (See Competitor Collaboration Guidelines, Section 1.2; id. at Section 3.1) There is no suggestion that such analysis entails comparison of the challenged restraint to a restraint that has never existed in the hope that the latter restraint would better serve the interests of society and consumers.

It's difficult if not impossible to square the Antitrust Division's letter with any effort to enforce Section 1's Rule of Reason or for that matter its own enforcement guidelines. Under Standard Oil, the question for the Division is straight-forward, if difficult to answer. Does the BCS system adopted in 1998 --- the first effort to create a true national championship game --- reduce output, raise prices or reduce quality compared to the system that preceded it, that is, the status quo ante? That status quo ante, in turn, involved no playoff whatsover, but instead an uncoordinated "system" of numerous bowls, each promoted separately. The relevant question is NOT whether the Antitrust Division, 21 economists, or a court can imagine a different completely hypothetical system, e.g., an 8 team playoff, that would serve consumers and various other groups even better than the current system. Indeed, if Rule of Reason analysis did turn on this sort of hypothetical inquiry, the Sherman Act would rapidly become a license for a form of central planning. Any number of firms, after all, enter long term ventures or contracts that restrain parties to them and thus "reduce competition." However, most such agreements properly survive Rule of Reason scrutiny because they produce no harm in the first place or produce only benefits compared to the status quo ante. Thus, an antitrust standard banning harmless or beneficial restraints simply because a different practice would be even more beneficial for all concerned would empower courts and the antitrust enforcement agencies to examine any agreement to determine whether some other agreement would produce even more benefits. For instance, such an approach would authorize courts and the enforcement agencies to examine any merger to determine whether a different transaction produced even more benefits. Such an approach would be unprecedented and radically change the nature of antitrust regulation and contravene Standard Oil's fundamental premise that Section 1 should leave market actors free to exercise their contractual liberty as they see fit absent proof that the restraint in question produces antitrust harm compared to the status quo ante. The parties to various restraints, disciplined as they are by a free market, know far better than the enforcement agencies whether there might be some other arrangement that serves the interests of themselves and thus society even better.

Antitrust officianados might ask "but what about the less restrictive alternative test; don't courts conducting Rule of Reason analysis ask whether a challenged restraint is the least restrictive means of achieving the restraint's purported objective?" Yes, but only in narrow circumstances. (See pp. 110-113 of this article for an explanation of the role of less restrictive alternatives in Rule of Reason analysis.) That is to say, courts only ask whether there is a less restrictive means of achieving a restraint's objective if a plaintiff first shows that the challenged restraint produces antitrust harm compared to the status quo ante. Absent such a showing, the presence or not of such an alternative is simply irrelevant under current law, including the Division's own enforcement guidelines quoted above. Or, as Judge Frank Easterbrook put it in Chicago Professional Sports Ltd. Partnership v. NBA, 95 F.3d 593 (7th Cir. 1996) ("The Antitrust Laws do not deputize district judges as one man regulatory agencies. The core question in antitrust is output. Unless a contract reduces output in some market, there is no antitrust problem."). Ironically, the last question in the Division's letter quoted above, which asks whether there is another system that would improve everyone's welfare, seems to amount to an implicit concession that current system does not produce antitrust harm in the form of an exercise of market power that reduces output. For, if it did, then it's hard to imagine how a more competitive alternative would improve the welfare of consumers AND producers, the latter of whom benefit from reduced output flowing from exercises of market power.

None of this is the say that the BCS system would, in fact, survive scrutiny under an antitrust test that properly implements Standard Oil's Rule of Reason. The 21 economists mentioned above have argued that the BCS system entails a cartel between four bowls --- Fiesta, Orange, Sugar and Rose --- that were previously independent and unilaterally decided which teams to invite. The BCS system, these economists argue, disadvantages those schools from non-BCS conferences, that is, conferences whose winners do not automatically qualify for a BCS bowl and thus "injures schools in major college football's five other conferences . . . and also harm consumers by restraining output, fixing prices and reducing quality." The result, it is said, "is a marked change from the pre-BCS era, when non-traditional teams frequently competed for college football's national championship" (at least as measured by polls of sportswriters and coaches). It should be noted that, if these economists are correct, the appropriate remedy is emphatically NOT to impose an 8 team playoff, but instead to return to the status quo ante, where each bowl decided whom to invite and where to televise its product independent of the others.

There are, of course, significant counter-arguments to the claim that the BCS system is an unreasonable restraint of trade. For instance, the mere fact that the BCS entails horizontal cooperation between potential rivals does not transform it into a naked and presumptively illegal cartel. As the Supreme Court recognized in NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1986), college football necessarily requires some horizontal cooperation, including cooperation about the size of salaries paid athletes, that would otherwise be unlawful. Moreover, each college football conference is itself a "cartel" that, for instance, determines the number of games played by its member teams ("output") and divides revenue among various schools, sometimes allocating significant revenue to schools that had losing records during the season in question. Nor is it always apparent what measure of price or output the 21 economists are referring to; there were 35 bowl games at the end of the 2010-2011 season. Are the economists asserting that there would have been even more such games absent the BCS? Perhaps more importantly, are they including "quality" within their measure of output? (All sports leagues limit the "output" of games; presumably such limits survive scrutiny because they enhance the quality of the games actually played and thus maximize "output" properly understood.) Without such an output reduction, how could the BCS increase prices? What prices would have fallen without the BCS? Prices for tickets? Prices that networks charge advertisers? Prices that Bowls charge networks for the rights to televise various bowls? Finally, the 21 economists complain about facets of the BCS, e.g., its revenue sharing arrangements, that seem unrelated to any appropriate antitrust concern. Just as antitrust law is unconcerned with the choice between the BCS system and an 8 team playoff, it is also agnostic between different schemes of allocating revenue, unless a challenged scheme results in a reduction in output and resulting increase in price.

But, at least the 21 economists seem to be asking the right question, unlike the Department of Justice.

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.