NUMBER 79

F ROM THE LATHAM & WATKINS LITIGATION DEPARTMENT BULLETIN NO. 79 JANUARY 21, 1999

Supreme Court Limits Per Se “ Prohibition Against Group Boycotts We conclude no Continuing a trend now in its third decade of Finding no antitrust violation, the district court increasingly analyzing alleged antitrust viola- dismissed Discon’s case for failure to state a boycott-related per se tions under the “,” the U.S. Su- claim. But the Second Circuit was more sympa- preme Court has ruled unanimously that a thetic to Discon, reversing the district court and rule applies and that buyer’s unilateral decision to buy from one seller holding that NYNEX’s decision to terminate the plaintiff here must rather than another, even for an “improper” Discon without any legitimate business justifica- reason, cannot be a per se violation of Section 1 tion constituted a group boycott under Klor’s, allege and prove of the Sherman Act. NYNEX Corp. v. Discon, Inc., Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 67 U.S.L.W. 4031, 1998 U.S. LEXIS 8080 (Decem- 212 (1959) (condemning horizontal agreement harm not just to a ber 14, 1998). Under the Court’s decision, hori- among competing manufacturers to boycott a single competitor, but zontal agreements between direct competitors retailer), and thus under Section 1 was illegal to boycott a supplier will continue to be . 93 F.3d 1055 (2d Cir. 1996). per se. But vertical agreements and unilateral to the competitive In their amicus brief to the Supreme Court, the decisions to replace a supplier will be deemed (FTC) and Department process, i.e., to unlawful only if they are shown to be harmful to of Justice (DOJ) argued that a the competitive process. The Court’s decision is itself. . . . between a purchaser and a supplier to exclude a more a clarification than a departure from the competing supplier should never be deemed il- Court’s earlier precedents. The freedom to legal per se. Unlike the horizontal exclusionary switch suppliers lies NYNEX considers the legality of a business deci- agreement among competitors condemned in sion by the NYNEX Corporation and several of Klor’s, the principal case on which the Second close to the heart of its affiliates to terminate Discon, Inc.—which Circuit relied, a vertical exclusionary agreement had been supplying telephone “removal ser- could have many pro-competitive justifications. the competitive vices” to New York Telephone, a NYNEX subsid- Indeed, as the Second Circuit itself acknowl- process that the iary—in favor of AT&T Technologies, a edged, “in the vast majority of cases, the deci- competitor of Discon’s. In its complaint Discon sion to discriminate in favor of one supplier over antitrust laws seek to alleged that by terminating it NYNEX violated another will have a pro-competitive intent and Sections 1 and 2 of the Sherman Act, conspiring effect.” encourage. with its new supplier, AT&T, to restrain trade ille- The Supreme Court agreed with the enforce- gally and to monopolize the market in tele- ment agencies, holding that “an agreement by a phone removal services. The heart of Discon’s ” buyer to purchase goods or services from one claim was that the termination was not pro- supplier rather than another” may not be con- From the U.S. Supreme Court competitively motivated. AT&T charged higher demned by an antitrust court merely because “it Decision prices than Discon and as a result, regulators al- finds no legitimate business reason for the pur- lowed New York Telephone to charge higher chasing decision.” Basing its ruling on Klor’s rates to its customers. In exchange, AT&T paid a and other precedents, the Court limited applica- “rebate” to Materiel Enterprises Company, an- other NYNEX subsidiary. CLIENT ALERT

tion of the per se rule to boycotts involving horizontal burden to prove actual anticompetitive harm. While NYNEX agreements. With respect to boycotts involving vertical is not likely to make this type of litigation disappear en- agreements, by contrast, the court held that “the plaintiff... tirely, the increased burden that NYNEX imposes on plain- must allege and prove harm not just to a single competitor, tiffs could discourage some of them from bringing suit. but to the competitive process, i.e., to competition itself.” With respect to government action, both the FTC and DOJ Application of the per se rule in a case like NYNEX, the supported what ultimately became the Court’s approach— Court went on to say, “would transform cases involving namely that, with the exception of business behavior that is improper for various reasons, say, agreements, vertical agreements are never illegal per se. cases involving nepotism or personal pique, into treble- Thus, the government is not likely to bring an enforcement damages antitrust cases” and thus “discourage firms from action against a firm that has terminated a supplier—even changing suppliers—even where the competitive process it- if this has been done at the behest of the terminated self does not suffer harm.” supplier’s competitor—absent a showing that the termina- The animating principle behind the Court’s decision is the tion was anticompetitive overall and not merely damaging notion that “[t]he freedom to switch suppliers lies close to from the sole perspective of the terminated supplier. the heart of the competitive process that the antitrust laws The NYNEX decision does not address how a court should seek to encourage.” But this principle does not foreclose determine whether the termination of a particular supplier all claims. The Court specifically confined its holding to is anticompetitive. But the inquiry undoubtedly will be very Discon’s per se theory of liability, leaving the door open on similar to other rule of reason inquiries. The legality of a remand to liability under the rule of reason. particular termination will likely depend on whether the To litigate successfully in the post-NYNEX world, suppliers parties have and on the probable effect the who have been terminated by their customers must do termination will have on prices, output and quality in the more than show that the decision to terminate them lacked supplier’s market. Because the law may be difficult to apply a legitimate business justification. In view of the applica- in some circumstances, we suggest that you seek guidance tion of the rule of reason to such disputes, plaintiffs will before terminating a supplier at the request of that have the affirmative, more difficult, and hence more costly supplier’s competitor.

SAN FRANCISCO/ SILICON VALLEY Client Alert is published by Latham & Watkins as a J. Thomas Rosch news reporting service to clients and other friends. Peter K. Huston (415) 391-0600 The information contained in this publication should not be construed as legal advice. Should further NEW JERSEY James E. Tyrrell, Jr. analysis or explanation of the subject matter be (973) 639-1234 required, please contact the attorneys listed to the NEW YORK right or the attorney whom you normally consult. Bruce J. Prager If you have any questions E. Marcellus Williamson (212) 906-1200 ©Copyright 1999 by Latham & Watkins about this Client Alert, please contact Bruce J. CHICAGO James A. Cherney HICAGO ■ OS NGELES ■ EW ERSEY Prager E. Marcellus CHICAGO LOS ANGELES NEW JERSEY Prager or E. Marcellus (312) 876-7700 ■ ■ Williamson in the New York NEW YORK ORANGE COUNTY SAN DIEGO LOS ANGELES office at (212) 906-1200. Michael J. Shockro ■ SAN FRANCISCO SILICON VALLEY You may also call any of the (213) 485-1234

WASHINGTON, D.C. ■ HONG KONG attorneys listed at the right: ORANGE COUNTY Virginia S. Grogan LONDON ■ MOSCOW (714) 540-1235 SAN DIEGO SINGAPORE ■ TOKYO SAN DIEGO Peter H. Benzian (619) 236-1234

WASHINGTON, D.C. Edward J. Shapiro (202) 637-2200

BULLETIN NO. 792 JANUARY 21, 1999