Loyola Consumer Law Review

Volume 9 | Issue 2 Article 13

1997 Antitrust Policy and Horizontal in the 21st Century William E. Kovacic Prof., George Mason University School of Law

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Recommended Citation William E. Kovacic Antitrust Policy and Horizontal Collusion in the 21st Century, 9 Loy. Consumer L. Rev. 97 (1997). Available at: http://lawecommons.luc.edu/lclr/vol9/iss2/13

This Feature Article is brought to you for free and open access by LAW eCommons. It has been accepted for inclusion in Loyola Consumer Law Review by an authorized administrator of LAW eCommons. For more information, please contact [email protected]. FEATURE ARTICLE Antitrust Policy and Horizontal Collusion in the 21st Century by William E. Kovacic, Professor,George Mason University School of Law

Introduction

For most of this century, at least since the en- criminal sanctions.6 The per se rule againsthori- shrinement of the per se rule against horizontal zontal output restraints is clear, well-known, and in United States v. Socony-Vacuum stringently applied to violators, yet the DOJ still Co.,' detecting and punishing concerted horizon- convenes numerous grand juries to probe price- tal price and output restraints have formed the fixing. Reports about the DOJ's criminal inquiry core of antitrust enforcement in the United States. into price-fixing in the food additives industry - The Department of Justice ("DOJ") and the Fed- which yielded the payment by Archer Daniels eral Trade Commission ("FTC") aggressively Midland of a record fine of $100 million7 - lead prosecute bid-rigging, price-fixing, and market one to ask how many episodes of collusion go allocation schemes.2 In fact, commentators gen- undetected? erally regard the enforcement of stringent rules The third phenomenon is the recognition and against such agreements as antitrust's most im- use of techniques for coordinating business con- portant positive contribution to the American duct that courts are unlikely to label as "price 3 economy. fixing" or even characterize as concerted action. Three troubling phenomena attend current ef- The modem economic literature has identified forts to attack collusion and will beset future en- how firms can coordinate conduct by means that forcement programs. One is substantial concep- avoid an express exchange of assurances or em- tual uncertainty and doctrinal confusion about ploy tactics - such as subtle forms of signalling how to distinguish between lawful unilateral con- - that are less likely to attract an antitrust chal- duct and illegal collective behavior. The defini- lenge.8 Enforcement of the Sherman Act has in- tion and proof of concerted action are much liti- spired firms to adopt tactics that achieve roughly gated issues in horizontal restraints cases under the same results as a conventional agreement with Section 1 of the Sherman Act,4 yet neither courts their rivals while operating outside Section 1 's nor commentators have developed a satisfactory ban on concerted action. calculus for determining whether, without direct This Article offers a strategy for addressing proof of agreement, the plaintiff has established these phenomena and guiding antitrust's future that the defendants conspired to restrain trade.5 treatment of horizontal collusion. The strategy A second disturbing phenomenon is the ap- has four elements. The first is to reformulate the parent persistence of a significant level of co- doctrine governing the proof of agreement where vert collaboration by rivals to set prices or other the plaintiff lacks direct testimony or documents vital terms of trade. For some time, business proving concerted action and, instead, relies en- managers have known that horizontal price-fix- tirely on circumstantial evidence that the defen- ing is illegal and punishable by severe civil and dants conspired to fix prices or restrict output.

1997 FeatureArticle *97 Such an approach would rest heavily on modem coordination of pricing and output decisions economic understandings of what partici- without significant offsetting of competitive ben- pants must do to coordinate their behavior. efits. The FTC could perform this function by The second element seeks to generate a larger conducting hearings or economic studies. Such volume of direct evidence of conspiracy. This inquiries might suggest the appropriateness of Article proposes the use of bounties to encour- proscribing specific conduct by issuing enforce- age employees of cartel participants to inform ment guidelines, initiating cases, or adopting government enforcement officials about episodes administrative rules. of collusion. A bountyhunting mechanism would help identify covert agreements and, by increas- I. Doctrine governing the use of circum- ing the likelihood of detection, would discour- stantial evidence to prove an illegal age direct exchanges of assurances. This mecha- Section 1 agreement nism would also force cartel members to rely more upon less direct Antitrust litigants de- means for coordination vote much effort to de- which may be harder to A bountyhunting termining whether the use successfully. mechanism would help conduct in question The third element is stemmed from an to frustrate the forma- identify covert agreement and, there- tion and operation of fore, implicates Section by altering gov- agreements and, by l's ban against collec- ernment policies that fa- increasing the likelihood tive trade restraints. A cilitate effective collu- law whose reach hinges sion. Moreover, an ad- of detection, would on the existence of an justment to the pro- agreement requires cesses by which public discourage direct courts to decide what entities purchase goods exchanges of assurances. conduct constitutes an and services is strongly agreement and how recommended. With striking frequency, govern- such an agreement may be proven in a trial.9 ment purchasing bodies are the victims of collu- sive schemes to rig bids. This Article further A. Four forms of coordination advocates the abandonment of procurement prac- tices that make the government more vulnerable Antitrust disputes under Section 1 of the to successful collusion by helping cartel mem- Sherman Act present four types of coordination. bers achieve consensus, detect cheating, and pun- In the first group of matters, the defendants ex- ish defectors. pressly exchange assurances that they will fol- The fourth element is institutional. The Ar- low a common course of action, and the fact of ticle suggests that the FTC play a greater role in collective action emerges through documents or identifying conduct that indirectly facilitates the testimony from participants to the challenged

98 0 Loyola Consumer Law Reporter Volume 9, number 2 arrangement. When detected by government one end of the continuum is proof of direct evi- enforcement officials, episodes of such behav- dence of an exchange of assurances, often con- ior rarely result in fully litigated trials. Instead, sisting of documents or testimony recounting they usually are concluded through plea agree- how the participant formed a plan of action. At ments, civil consent orders, or damage settle- the other end is unadorned proof of patterns of ments.' 0 parallel behavior - proof that the industry de- Many cases present harder analytical and evi- fendants have pursued (simultaneously or se- dentiary issues. In a second group of matters, quentially) similar business strategies overtime." defendants covertly exchange express assur- Courts often distinguish between express and ances, but there is no direct evidence showing tacit agreements. These terms acknowledge dif- that the defendants assured one another that they ferences in the types of proof used to prove con- would act in concert. Here, the plaintiff relies certed action. Cases speaking of express agree- on circumstantial proof to demonstrate the prob- ments usually involve direct proof that the de- ability that the observed behavior resulted from fendants exchanged assurances that they will act a covert exchange of assurances. in concert - such as a document embodying a In a third group of cases, the parties use indi- collective commitment to pursue a course of con- rect means to design and adopt a collective plan duct or testimony by which a conspirator de- of action. Finding an agreement depends on the scribes how the group reached consensus. Di- plaintiff's ability to specify the tactics that serve rect documentary or testimonial evidence typi- as surrogates for a direct exchange of assurances cally stands atop the hierarchy of proof because and to show that such tactics enabled the defen- it gives the court greater confidence that the de- dants to formulate and execute a common strat- fendants acted in concert. egy. In cases that speak of , the plain- In a fourth set of matters, firms coordinate their tiff usually uses circumstantial evidence to prove behavior simply by observing and anticipating an agreement. The tacit collusion label acknowl- the moves of their rivals. In some industry set- edges that the proof is inferior to direct docu- tings, such conduct may yield competitive effects mentary or testimonial evidence of an agreement. that mimic those of an express cartel agreement. Many cases that use this terminology find liabil- As the hazards of using an express exchange of ity. The crucial policy issue in such matters is assurances to coordinate behavior with rivals how to define the quantum of proof that will sup- have increased, firms may rely more upon sig- port an inference that the defendants exchanged nalling and other tactics that are less likely to assurances. elicit a government inquiry (or, more remotely, In some cases, courts seem to use the terms criminal prosecution) and may help achieve some express and tacit as synonyms for collective and of the same results. unilateral. In saying that behavior constitutes a Horizontal restraints cases have featured con- tacit conspiracy, a court may be saying that, tinuing efforts to create a vocabulary that de- though the conduct is suspicious, the plaintiff has scribes the continuum of evidence that plaintiffs not introduced enough proof to permit an infer- have offered to establish concerted action. At ence of collective action. Courts using the ter-

1997 FeatureArticle * 99 minology in this way ordinarily decline to find lize charges under Section 2 of the Sherman Act. liability. The Court stated that "[n]o formal agreement is 17 necessary to constitute an unlawful conspiracy."' B. Basic framework of Sherman The Court explained that a finding of conspiracy Act agreement jurisprudence is justified "[w]here the circumstances are such as to warrant a jury in finding that the conspira- Modem judicial efforts to define the elements tors had a unity of purpose or a common design of a Section 1 agreement originated in four Su- and understanding, or a meeting of minds in an preme Court decisions beginning withInterstate unlawful arrangement." 8 Circuit,Inc. v. United States2 in 1939 and end- In 1948 in United States v. ParamountPic- ing with Theatre Enterprises,Inc. v. Paramount tures, Inc., 9 the Court reiterated Interstate Film DistributingCorp." 3 in 1954. In sustaining Circuit'sagreement formula. In considering Sec- the conviction of movie exhibitors for fixing the tion 1 and Section 2 conspiracy claims, the Court prices to be charged for first-run films, the Inter- said "[i]t is not necessary to find an express agree- state CircuitCourt defined the concerted action ment in order to find a conspiracy. It is enough requirement in these terms: that a concert of action is contemplated and that 20 the defendants conformed to the arrangement." While the District Court's finding of an The formative period of agreement decisions agreement of the distributors among them- ended in 1954 in Theatre Enterprises. There the selves is supported by the evidence, we Court said "[c]ircumstantial evidence of con- think that in the circumstances of this case sciously parallel behavior may have made heavy such agreement for the imposition of the inroads into the traditional judicial attitude to- restrictions upon subsequent-run exhibitors ward conspiracy; but 'conscious parallelism' has was not a prerequisite to an unlawful con- not read conspiracy out of the Sherman Act en- ' 2 spiracy. It was enough that, knowing that tirely. ' concerted action was contemplated or in- As a group, the four cases established three vited, the distributors gave their adherence conceptual points of reference. First, courts 4 to the scheme and participated in it.' would characterize as concerted action interfirm coordination realized by means other than a di- The Court explained that "[a]cceptance by rect exchange of assurances. Second, courts competitors, without previous agreement, of an would allow agreements to be inferred by cir- invitation to participate in a plan, the necessary cumstantial proof suggesting that the challenged consequence of which, if carried out, is restraint conduct more likely than not resulted from con- of interstate commerce, is sufficient to establish certed action. Third, courts would not find an an unlawful conspiracy under the Sherman agreement where the plaintiff showed only that 15 Act." the defendants recognized their interdependence Seven years later, in American Tobacco Co. v. and simply mimicked their rivals' pricing moves. United States, 6 the Court addressed the agree- Subsequent Supreme Court decisions have ment issue in reviewing conspiracy to monopo- tried to capture these principles in a new formula.

100 • Loyola Consumer Law Reporter Volume 9, number 2 In 1984, in addressing C. Plaintiff's burden of proof conspiracy allegations inMonsanto Co. v. Spray- Rite Service Corp,' the Court observed: Plaintiffs in Section 1 cases bear the burden of establishing the fact of an agreement. The The correct standard is that there must be "conscious commitment to a common scheme" evidence that tends to exclude the possibil- can be shown with direct or circumstantial evi- ity of independent action by the [parties]. dence.24 As elaborated in later decisions, That is, there must be direct or circumstan- Monsanto's articulation of the burden of proof tial evidence that reasonably tends to prove has considerable importance where the defendant that [the parties] had a conscious commit- moves for summary judgment on conspiracy is- ment to a common scheme designed to sues. achieve an unlawful objective.13 The fear that mistaken inferences from am- biguous evidence might deter procompetitive or Neither the Monsanto standard nor its prede- benign conduct led the Supreme Court in cessor formulas provides a useful basis for iden- Matsushita Electrical Industrial Co. v. Zenith tifying concerted action. These tests show that Radio Corp.2 to extend and apply Monsanto's the concept of agreement encompasses more than conspiracy standards to horizontal agreements. a direct exchange of assurances, yet they offer Where the plaintiff relies on circumstantial evi- no operational means for determining when the dence to establish concerted action, Matsushita defendants have engaged in something more than stated that "antitrust law limits the range of per- consciously parallel conduct. missible inferences from ambiguous evidence in Under the Monsanto formula, one could deem a Section 1 case" and emphasized that "conduct interdependent conscious parallelism as a "con- as consistent with permissible competition as scious commitment to a common scheme." Each with illegal conspiracy does not, standing alone, firm in a tight knows that the effect of support an inference of antitrust conspiracy."2' 6 its acts depends on the reactions of its rivals. All Quoting Monsanto, theMatsushitaCourt then producers perceive that price increases will stick specified the plaintiff's burden of proof when the only if all firms raise prices. Realizing their in- defendant seeks summary judgment or a directed terdependence, each firm decides, without con- verdict against claims when circumstantial evi- sulting its rivals, to match competitor price in- dence alone is introduced to establish collective creases. Repeated efforts to match rivals' price action: moves arguably indicate the firm's conscious commitment to achieve higher prices. The sole To survive a motion for summary judgment interfirm communication consists of each firm's or for a directed verdict, a plaintiff seeking observation of its rivals' price changes. By cali- damages for a violation of Section 1 must brating its own moves to conform with the deci- present evidence that 'tends to exclude the sions of its rivals, each firm can be said to have possibility' that the alleged conspirators "consciously committed" itself to participate in acted independently ....[Plaintiffs] in this a "common scheme." case, in other words, must show that the

1997 FeatureArticle 9 101 inference of conspiracy is reasonable in light tra ingredient of centralized orchestration of of the competing inferences of independent policy which will carry parallel action over the action or collusive action that could not have line into the forbidden zone of implied contract harmed [plaintiffs]. 27 and combination. '32 Courts enjoy broad discre- tion to establish the reach of Section 1 by defin- As in Monsanto, the Court in Matsushita ing this "extra ingredient" broadly or narrowly. sought to reduce error costs associated with ex- Courts have relied on operational criteria cessively broad application of liability stan- known as "plus factors" to determine whether a dards.' In Matsushita, Japanese suppliers of pattern of parallel conduct results from an agree- electronics equipment allegedly conspired to ment. The chief "plus factors" have included: price below cost in the United States, drive American firms from the market, and later raise " The existence of a rational motive for prices to levels. In such a case, the defendants to act in concert. Court emphasized that mistaken inferences of " Actions contrary to each defendant's conspiracy could injure consumers by deterring self-interest unless pursued as part of firms from offering low prices.29 a collective plan. Phenomena that can be explained ra- D. Interdependence and the role of tionally only as the result of concerted plus factors action, such as submitting uniform sealed bids where the uniformity could In markets characterized by interdependence, not result from common cost factors. each firm realizes that the effect of its actions " The defendant's participation in past depends upon the response of its rivals.3" In collusion-related offenses. highly concentrated markets, the recognition of " Evidence that the defendants had the interdependence can lead firms to coordinate opportunity to communicate or actu- their conduct simply by observing and reacting ally did so. to their competitors' moves. In some instances, " The use of facilitating devices such as such oligopolistic coordination yields parallel delivered pricing or most favored na- behavior (e.g., parallel price movements) that tion clauses. approaches the results that one might associate " Industry characteristics (product ho- with a traditional agreement to set prices, output mogeneity, frequent transactions, levels, or other conditions of trade. readily observed price adjustments, The line that distinguishes tacit agreements high entry barriers, and high concen- (which are subject to Section 1 scrutiny) from tration) that are conducive to success- mere tacit coordination stemming from ful coordination. oligopolistic interdependence (which eludes Sec- " Industry performance data, such as ex- tion l's reach) is indistinct. The size of the safe traordinary profits, that suggest suc- harbor recognized by Theatre Enterprises3' de- cessful coordination. pends on what conduct courts regard as the "ex- The absence of a plausible, legitimate

102 o Loyola Consumer Law Reporter Volume 9, number 2 business rationale for suspicious con- The variation in judicial analysis of plus fac- duct (such as certain communications tors suggests that the outcome in many agree- with rivals), or the presentation of con- ment cases depends upon the court's trived rationales for certain conduct. unarticulated intuition about the likely cause of observed parallel behavior. Judges appear to vary Two basic problems have attended judicial in their acceptance of the proposition in Theatre efforts to identify and evaluate plus factors. First, Enterprisesthat conscious parallelism does not courts have failed to establish an analytical always bespeak concerted behavior. Judges who framework that explains why specific plus fac- regard pricing uniformity as a sign of collabora- tors have stronger or weaker evidentiary value tion will give lip service to Theatre Enterprises or presents a hierarchy of such factors. Antitrust but will expand the range and reduce the quan- agreement decisions rarely rank plus factors ac- tum of conduct that, when added to parallel be- cording to their probative merit or specify the havior, can support a finding of agreement. On minimum critical mass of plus factors that must the other hand, judges who see parallelism as a be established to sustain an inference that con- desirable, natural manifestation of rivalry are duct resulted from concerted acts rather than from likely to display a greater reluctance to give ef- conscious parallelism. Nor do courts devote fect to asserted plus factors and will be more much effort to evaluating the economic signifi- sympathetic to the defendants' explanations cance of each factor. The lack of a meaningful about why such plus factors implicate conduct analytical framework makes judgments about the that is either procompetitive or essentially be- resolution of future cases problematic and gives nign. an impressionistic quality to judicial decision The second problem results from the devel- making in agreement-related disputes. opment of new arguments, rooted in the modem The failure in modem cases to provide a hier- economics literature dealing with repeated archy of plus factors and explain the competi- games, that market performance associated with tive significance of each might be attributed to collusive schemes can result from interdepen- one of the less discussed but more important Su- dent, consciously parallel conduct in some in- preme Court decisions of the 1960s. In Conti- dustry settings. Firms in a number of industry nental Ore Co. v. Union Carbide & Carbon settings may be able to achieve collusive out- Corp.,33 the Court stated that "plaintiffs should comes without resorting to conduct that might be given the full benefit of their proof without be characterized as an agreement. 35 Under tightly compartmentalizing the various factual Matsushita,defendants might argue successfully components and wiping the slate clean after scru- that observed parallelism is as consistent with tiny of each. ' 34 For lower court judges, this pas- what agreement doctrine has recognized as in- sage can be read to dispense with the need for a dependent action - namely, the recognition and careful assessment of the importance of each el- response to interdependence - as with an infer- ement of proof and to encourage the practice of ence of collusive behavior. Moreover, under dropping difficult conceptual issues into the lap Matsushita'simplausibility test, firms could as- of the jury. sert that it makes no economic sense for them to

1997 FeatureArticle e 103 IIIIII I

use tactics that violate Section 1 of the Sherman introducing proof that demonstrates how the de- Act when the recognition of interdependence can fendants achieve consensus, detect defection yield the same market results. Where the recog- from the agreed course of action, and sanction nition of interdependence alone accounts for the cheaters. To survive a motion for summary judg- market outcome, the difficulties in identifying ment or a motion to dismiss, the plaintiff would and prescribing avoidable conduct are likely to need to provide a plausible explanation for how preclude effective antitrust intervention. defendants have executed all three tasks. The defendants could rebut this prima facie case by E. Proposed approach for estab- advancing benign or procompetitive rationales lishing an agreement based on circum- for specific challenged acts, or by demonstrat- stantial evidence ing that the observed market outcomes more likely than not resulted from the recognition of The refinement of federal merger enforcement interdependence alone. policy in the past fifteen years has placed increas- The most important threshold element of proof ing reliance on economic theories that illuminate in this framework would consist of evidence the conditions in which consolidation is likely showing how the defendants communicate their to have net anticompetitive effects. Among other intentions and confirm their commitment to a features, the DOJ/FIC 1992 Horizontal Merger proposed course of action. Perhaps the most pro- Guidelines36 specify how a transaction might in- bative proof of the mechanism for achieving con- crease the abilities of firms to coordinate their sensus would consist of evidence demonstrating activity. The economic understanding of the pro- that a pattern of extensive communication among cess by which firms cooperate successfully the defendants preceded a complex, parallel guides the analysis of coordinated adjustment in behavior that could not readily be anticompetitive effects. explained as the product of the defendants inde- A similar, economically-oriented reformula- pendent efforts to identify and adhere to focal tion of agreement jurisprudence in circumstan- points for organizing their conduct. The exist- tial evidence cases would focus on the three pre- ence of a means for detecting cheating might be requisites to successful cooperation by rivals: revealed by establishing a pattern of bilateral exchanges of pricing information among com- " The reaching of a consensus on pric- petitors or exchanges of data through trade asso- ing, output, or other terms of trade; ciations. Such conduct might serve the purpose * The detection of deviations from the of identifying defections from the consensus agreement; and price. " The punishment of firms that cheat. II. Bountyhunting as a means for gener- A reformulated standard in circumstantial evi- ating direct evidence of conspiracy dence cases would be organized to focus on the fulfillment of these conditions. Where the evi- Over the past twenty years, federal enforce- dence of collaboration is wholly circumstantial, ment officials have pursued a number of initia- the plaintiff's prima facie case would consist of tives to increase their ability to obtain direct evi-

104 9 Loyola Consumer Law Reporter Volume 9, number 2 dence of collusion. The DOJ has resorted more perceive to be unethical conduct). Beyond these frequently to investigation techniques such as information-gathering techniques, the antitrust wire-tapping and electronic surveillance and has system does not enlist the assistance of inform- broadened cooperation with other law enforce- ers. For example, antitrust doctrine generally ment entities and government bureaus. The DOJ denies standing to employees who allege that also has experimented with expanded leniency their employers have engaged in conduct that and immunity programs that provide incentives restricts competition in product markets in which for cartel participants to inform the government the employers sell their goods or services.37 about episodes of collusion. Collectively, these One approach to uncovering and deterring steps have increased the likelihood that efforts covert coordination schemes is to give company by competitors to coordinate their behavior insiders more robust incentives to provide infor- mation to enforcement through a direct ex- U change of assurances Over the pasi twenty agencies. Experimenta- would be detected, pros- tion with a ecuted, and penalized. years, federal enforcement bountyhunting mecha- Many of these infor- nism modeled loosely mation-gathering officials have pursued a on the Civil False mechanisms seek to ob- number of in itiatives to Claims Act would serve tain the assistance of this purpose. 38 Al- cartel insiders. Coop- increase their though the Civil False ability to Claims eration by insiders - Act ( such as the disgruntled obtain direct eidence of bountyhunting scheme employee, or the cartel collusion. has a number of serious participant who feels be- flaws, it properly recog- trayed by other cartel members - is a key in- nizes the power of decentralized monitoring to gredient to many successful efforts to unmask uncover violations of the law that otherwise covert coordination among rivals. Efforts to en- would pass undetected or would be detected with- tice insiders to provide information on the cartel out the assistance of insiders only at a compara- recognizes the benefits of decentralized moni- tively higher cost. toring in enforcing antitrust commands. Decen- An antitrust bounty-hunting mechanism would tralized monitoring schemes seek to exploit the pay informers a percentage of amounts ultimately superior access of insiders, vis-a-vis external ob- recovered by the government where the servers such as government investigators, to in- informer's cooperation contributes significantly formation bearing upon the commission of vio- to the identification and successful prosecution lations of the law. of a collusion offense. Such a bounty scheme To date, antitrust enforcement has enlisted in- would have the following procedural elements: formers chiefly by offering leniency or immu- nity to offenders, or simply by relying on volun- " The informer's data would be pre- tary disclosures by nonculpable individuals (such sented in writing to the DOJ. as sales managers who are upset by what they " The amount of the informer's bounty

1997 FeatureArticle * 105 - ranging up to as much as 25 per- vulnerable to successful collusion. In an impres- cent of all recovered fines and civil sive number of instances, the challenged cartels penalties - would be set ex post in a have lasted ten years or more. court hearing and would be adjusted One important element of anti-collusion policy downward where the informer has is to avoid creating conditions that facilitate suc- helped organize or execute the scheme. cessful coordination. To a large degree, govern- Informers would be protected by anti- ment procurement policy assists firms in devis- retaliation safeguards. ing and implementing cartels. Two features of Informers could be represented by procurement policy stand out. The first consists counsel, who would be entitled to the of domestic content or local content purchasing payment of reasonable attorneys fees requirements that narrow the field of potential and costs for assisting the informer. bidders. Domestic preference commands such Defendant organizations could pursue as the Buy American Act' stymie the destabiliz- counterclaims for contribution against ing influence of entry as a discipline on cartel informers for their participation in il- coordination. legal collusion. The second feature is a series of procedural controls that are designed to increase the integ- Experimentation with such a mechanism rity of the procurement process but whose main might run for ten years and would sunset unless effect is often likely to be the promotion of ef- reauthorized by Congress. A ten-year trial would fective seller coordination. A major example is provide a suitable time to assess the efficacy of the process for opening bids in a sealed bid pro- the informing system in eliciting useful infor- curement. Bids ordinarily are unsealed in a pub- mation about covert cartels. Its anticipated ben- lic setting and are displayed for all offerors to efit would be to generate a larger body of direct observe.4' This procedure enables cartel partici- evidence of unlawful cooperation and, thus, to pants to determine whether their co-conspirators avoid reliance on more problematic circumstan- abided by the terms of their agreement to rotate tial proof. bids or otherwise suppress rivalry. An obvious reform would be to permit inspection of bids by HI. Promoting entry and otherwise desta- a guardian internal to the purchasing organiza- bilizing coordination: the case of pub- tion, such as an inspector general. This simple lic procurement policy measure would complicate the detection of cheat- ing by cartel members and still ensure that the Bid-rigging schemes in federal, state, and lo- winning offeror has been identified correctly.42 cal procurement programs account for a strik- Amid considerable current interest in reinvent- ingly large percentage of DOJ antitrust grand jury ing public institutions, a broad-based effort to proceedings. From 1988 through 1992, for ex- identify public policies that reinforce collusion ample, approximately 40 percent of all DOJ would be appropriate. The public procurement criminal indictments challenged collusive mechanism is a single important illustration. A schemes targeted at public procurement bodies.3 9 fuller assessment of the causes of episodes of Public purchasing authorities seem unusually collusion prosecuted by the DOJ and the FTC is

106 - Loyola Consumer Law Reporter Volume 9, number 2 likely to reveal other respects in which public invoked such theories. 46 In these cases, the con- policies facilitate collusion by discouraging de- duct arguably was equally susceptible to legal stabilizing entry and increasing the likelihood challenge under Section 1 of the Sherman Act, that deviations from cartel arrangements will be and reliance on Section 5 was not critical to suc- detected and punished. It would not be surpris- cessful prosecution of the complaint. ing if one found that the federal antitrust agen- In some agreement cases, the FTC has com- cies often are in the position of attempting to bined conspiracy counts with a separate allega- correct behavior that stems from perverse incen- tion that the practice violates Section 5 even if tives supplied by flawed public policies. undertaken as a unilateral act, with no agreement or conspiracy. Although a number of cases find IV. The role of the Federal Trade Commis- a violation on such a theory, they rely signifi- sion cantly on the finding of an agreement.47 The Section 5 of the FTC Act prohibits "unfair Commission and judicial opinions in these cases methods of competition"'4 and has been inter- are generally unsatisfying. Beyond offering preted to prohibit conduct that violates Section broad generalizations about the FTC's expansive 1 of the Sherman Act. Courts also have con- authority under Section 5, the opinions impre- cluded that the FTC can use Section 5 to chal- cisely delineate either the liability standard be- lenge conduct that infringes the "spirit or policy" ing applied or the type and amount of evidence of the Sherman Act or constitutes an incipient needed to establish a violation. violation of the Sherman Act' While the exist- Finally, there are a handful of cases in which ence of a "contract, combination ... or con- the Commission has challenged a practice that spiracy" 45 in restraint of trade must be established allegedly fixes prices or reduces competition to prove a Section 1 violation, no such proof is without attempting to show any agreement. necessary to establish a Section 5 violation. For While these cases offer the greatest potential for this reason, Section 5 has been a continuing carving out a unique role for Section 5 in the source of attraction to the FTC and commenta- facilitating practices area, they pose the greatest tors as a means of attacking facilitating practices analytical challenges, and the Commission's ef- and forms of interfirm coordination that may defy forts thus far have yielded unimpressive results. characterization as an agreement for Sherman Act To date, the only success the Commission can purposes. claim in this area is a somewhat grudging ac- Over the years, the Commission has used sev- knowledgment from reviewing courts that such eral approaches to apply Section 5 against fa- a violation may be theoretically possible. Courts cilitating practices. Many of the Commission's uniformly have declined to find liability on the earlier cases (where the FTC enjoyed the great- evidence advanced by the Commission. 4 est success) used Section 5 to attack agreements, Despite limited success in this area, the FTC either express or tacit, by competitors to imple- remains perhaps the best vehicle for articulating ment and use facilitating practices. For example, standards designed to discourage anticompetitive most of the Commission's challenges to coordination among competitors. Rather than industrywide use of basing point pricing systems rely exclusively or even chiefly on litigation to and similarly delivered pricing methods have provide guidance, the Commission might de-

1997 FeatureArticle* 107 velop enforcement guidelines or use rulemaking ticle has suggested several approaches for im- to delineate standards of conduct.4 9 The basis proving the treatment of collusion issues in the for the use of such tools might be the type of next century. The first is to apply a more mean- comprehensive hearings that the Commission ingful and economically rigorous approach to used in 1995 to lay the foundation for new ap- evaluating plus factors that are used to determine proaches to dealing with issues associated with when defendants have engaged in something the emergence of global markets and innovation more than consciously parallel activity and can in antitrust analysis.50 A comparable exploration properly be deemed to have acted in concert. A of collusion would be appropriate as a founda- second approach is to experiment with new tech- tion for reformulating policies controlling agree- niques for generating a larger volume of "direct" ments among competitors. evidence of illegal agreements, including the use of bounties as incentives for the revelation of information by insiders to collusive schemes. A Conclusion third approach is to alter government policies - Collusion is a vital concern of competition such as various features of public procurement policy, yet the antitrust system has achieved only policy - that facilitate effective collusion. A modest success in devising a satisfactory defini- fourth approach is for the FTC to assume a larger tion for the concept of concerted action and cre- role, through hearings, guidelines, and ating a suitable methodology for establishing the rulemaking, in delineating conduct standards. existence of an agreement in litigation. This ar-

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310U.S. 150(1940). sal. Noteworthy critiques of antitrust's per se prohibition 2 See Report of the ABA Antitrust Law Section Task Force on the against certain horizontal output restrictions include Almarin Phillips, Market Structure, Organizationand Performance: AntitrustDivision of the U.S. DepartmentofJustice, reprinted An Essay on PriceFixing and Combinationsin Restraint of in 58 ANTITRUST L.J. 747, 763-65 (1989); Joseph W. Trade (1962); George Bittlingmayer, Price-Fixingand the McAnneny, The JusticeDepartment's CrusadeAgainstPrice- Addyston Pipe Case, 5 REs. INL. & ECON. 57 (1983); Harold Fixing: Initiativeor Reaction?, 36 ANTITRUST BULL. 521,523- Demsetz, How Many Cheersfor Antitrust's 100 Years?, 30 25 (1991). The number of criminal price-fixing cases initi- ECON. INQUIRY 207 (1992). ated by the DOJ from 1980 through 1990 exceeded the total number of such matters in the previous 90 years of experi- 15 U.S.C. § 1 (1994). ence under the Sherman Act. See also James F.Rill, 60 Min- See Peter C. Carstensen, Commentary: Reflections on Hay, utes with James F.Rill, AssistantAttorney General,Antitrust Clark,and the RelationshipofEconomicAnalysis andPolicy Division, U.S. Departmentof Justice, 59 ANTrrRUST LJ. 45 to Rules of Antitrust Law, 1983 Wisc. L. REv. 953, 962 (ob- (1990); Charles R. Rule, 60 Minutes with Charles R. Rule, serving that commentators have yet to provide "a clear stan- Assistant Attorney General,Antitrust Division, 57 ANTITRUST dard to separate unlawful collusion from permissible LJ. 257 (1988). interdepency" and concluding that "[tihe courts have sought, 3 See, e.g., ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY with a similar lack of success, to find legal criteria to deter- AT WAR WITh ITSELF 263 (1978) (praising the per se ban mine the existence of an unlawful combination"); William E. against horizontal price-fixing and market divisions and con- Kovacic, The Identificationand Proofof HorizontalAgree- cluding that "[i]ts contributions to consumer welfare over the ments Under the Antitrust Laws, 38 ANrrTRUST BULL 5, 24- decades have been enormous"). Such approval is not univer- 25,35-37 (1993).

108 e Loyola Consumer Law Reporter Volume 9, number 2 6 Since 1974, Sherman Act violations have been punishable as 26 Id. at 588. felonies. On several occasions in the past twenty years, Con- 7 Id. gress has strengthened the scheme of penalties and thus in- creased the likelihood that violators will be punished severely. 2s Monsanto emphasized the dangers of discouraging legitimate See ERNEST GELLHORN & WILLIAM E. KOVACIC, ANTITRUST LAW discussions between producers and their dealers. 465 U.S. at AND ECONOMICS IN A NUrSHELL 451-52 (4th ed. 1994). 763-64. 7 See Grain Processorto Pay $100 Million to Resolve Price 29 475 U.S. at 593. Matsushita's policy rationale may have less FixingCase, TRADE REG. REPORTS (CCH), Issue No. 443, at 1 significance for horizontal conspiracy cases that do not in- (Oct. 16, 1996); see also Scott Kilman, Ajinomoto Pleads volve claims of collective below-cost pricing. Horizontal Guilty to ConspiringWith ADM, Others to Fix Lysine Price, agreements to raise prices or cut output pose greater com- WALL ST. J., Nov. 15, 1996, at A4 (reporting that another par- petitive dangers than the concerted low pricing challenged in ticipant in the food additives price-fixing arrangement has Matsushitaand therefore might be subject to more liberal stan- agreed to pay a fine of $10 million to settle the government's dards of proof. criminal charges). 30 See F.M. SCHERER & DAVID Ross, INDUSTRIAL MARKEr STRUC- 1 See Jonathan B. Baker, Two Sherman Act Section 1 Dilemmas: TURE AND ECONOMIC PERFORMANCE 199 (3d ed. 1990). ParallelPricing, the Oligopoly Problem, and Contemporary 31 346 U.S. 537 (1954). Economic Theory, 38 ANTrmusT BuL.. 143 (1993). 9 The discussion in this section is derived in part from Kovacic, -2 SCHWARTZ Er AtL, supra note 10, at 439. supranote 5. 33370 U.S. 690 (1962). 10 Louis B. SCHWARTZ, JOHN J. FLYNN & HARRY FIRST, FREs EEENR- 14 Id. at 699. The Court added that "the duty of the jury was to PRISE AND ECONOMIC ORGANIZATION: ANTITRUST 438 (6th ed. look at the whole picture and not merely at the individual 1983). figures in it." Id. (citingAmerican Tobacco Co., 147 F.2d at 11Agreements also might be classified by how strongly the al- 106.) leged conspirators commit themselves to a common scheme. 1 See Baker, supra note 8 for the formative treatment of this The evidence of agreement may reveal unqualified support point. for a course of action, a receptive attitude falling short of outright approval, or an expression of interest that reserves 3' The 1992 Horizontal are reprinted in 4 freedom to act as one likes. See VI PHILLIP AREEDA, ANTI- Trade Reg. Rep. (CCH) 113,104. 37 TRUST LAw 63-65 (1986). See, e.g., Apperson v. Fleet Carrier Corp., 879 E2d 1344, 1352 22 306 U.S. 208 (1939). (6th Cir. 1989) (denying standing to employees who chal- lenged their employer's alleged antitrust violations observ- 13346 U.S. 537 (1954). ing that employees could have been economic beneficiaries "4306 U.S. at 226. of the conduct), cert. denied, 495 U.S. 947 (1989). ,SId. at 227. as 31 U.S.C. §§ 3729-31 (1994); see also William E. Kovacic, Whistleblower Bounty Lawsuits as Monitoring Devices in 26 328 U.S. 781 (1946). Government Contracting,29 LOYOLA L.A. L. REv. 1799 (1996) 17Id. at 809. (discussing False Claims Act bounty mechanism). 39 To compute this number, I treated multiple 11Id. at 810. indictments arising from the same prosecution as one enforcement event. 19334 U.S. 131 (1948). 4" 41 U.S.C. §§ lOa-10d (1994). 20Id. at 142. 42 See Federal Acquisition Regulations, 48 C.FR. § 14.401 (1996) 21346 U.S. at 541. (specifying procedures for the opening of sealed bids). - 465 U.S. 752 (1984). 42 The bid opening process is hardly the only cartel-reinforcing feature of the public 23 Id. at 768. procurement process. For example, the government's structuring of bids for infant formula appar- 24See ES Dev., Inc. v. RWM Enters., 939 F.2d 547,554 (8th Cir. ently played a central role in generating the price increases 1991) ("[Ain antitrust plaintiff may prove the existence of a that motivated the FTC's prosecution of infant formula pro- combination or conspiracy by providing either direct or cir- ducers. SeeAmericanHomeProds., 5 Trade Reg. Rep. (CCH) cumstantial evidence sufficient to 'warrant a... finding that 23,209 (FTC 1992). the conspirators had a unity of purpose or common design 43 15 U.S.C. § 45(a)(1) (1994). and understanding, or a meeting of the minds in an unlawful arrangement."' (quoting American Tobacco Co. v. United See Neil W. Averitt, The Meaning of "Unfair Methods ofCom- States, 328 U.S. 781, 810 (1946))), cert. denied, 502 U.S. petition" in Section 5 ofthe Act, 1097 (1992). 21 B.C. L. REv. 227,243 (1980). 25475 U.S. 574(1986). 45 15 U.S.C. § 1 (1998).

1997 FeatureArticle * 109 See e.g., FTC v. Cement Instit., 333 U.S. 683,720-21 (1948). 139 (dicta regarding the "FrC's duty to define conditions under which price uniformity conduct would be "unfair" ab- 47 See e.g., FTC v. Motion Picture Advertising Serv., 344 U.S. sent an agreement.") 392, 394-95 (1953). '0 See I Federal Trade Commission, Anticipating the 21st Cen- 4' See E.I. Du Pont de Nemours & Co. v. FTC, 729 F.2d 128, 139 tury: Competition Policy in the New High Tech, Global Mar- (2d Cir. 1984); Boise Cascade Corp. v. FTC, 637 F2d 573, ketplace, 1996 WL 293773 (F.T.C.) Guide/Report (May 1996) 581 (9th Cir. 1980). (FrC staff report on results of FTC hearings). 9 See Baker, supra note 8. See generally DuPont, 729 F.2d at

110 e Loyola Consumer Law Reporter Volume 9, number 2 ANTI TRUST LAW FOR THE NEW M I L L E N N I U M

AN EXAMINATION OF LEADING IssuEs IN ANTITRUST ENFORCEMENT POLICY FOR TIE APPROACHING AGE

The Honorable Hubert L. Will Conference

TlE PROPER GoALs OF ANTITRUST: WHEN PUBLIC AND PRIVATE INTERESTS

COLLIDE ...... PAGE 112

TmE DETECTION AND PUNISHMENT OF TACIT COLLUSION...... PAGE 151

U.S. ANTITRUST LAWS AND THE GLOBAL MARKET: NATIONAL AND EXTRATERRITORIAL

EN ORC.EMENPT ...... PAGE 169

1997 ConferencePresentation e 111 THE PROPER GOALS OF ANTITRUST: WHEN PUBLIC AND PRIVATE INTERESTS COLLIDE

The antitrust laws were designed to protect the free enterprisesystem in an age where there were few regulatory barriersand requirements. Today, we live in a world brimming with government regulation. This gap between 19th century theory and 20th century reality has generated ongoing debate over the interpretationof the antitrust laws themselves.

Introduction: Mr. William T. Gotfryd Presenters: Mr. Ralph Nader Professor Richard Epstein Professor Eleanor Fox

112 * Loyola Consumer Law Reporter Volume 9, number 2