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Antitrust Policy and Horizontal Collusion in the 21St Century William E Loyola Consumer Law Review Volume 9 | Issue 2 Article 13 1997 Antitrust Policy and Horizontal Collusion in the 21st Century William E. Kovacic Prof., George Mason University School of Law Follow this and additional works at: http://lawecommons.luc.edu/lclr Part of the Antitrust and Trade Regulation Commons 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 price fixing 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 cartel 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 cartels 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 tacit collusion, 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
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