Antitrust and Refusals To Deal after Nynex v. Discon

Donald M. Falk*

Your client really can say "no" without running afoul of the antitrust limitations.

NO ONE LIKES to lose business. On the large the antitrust laws condemn only other hand, nobody can do business with refusals that foreclose a customer or supplier everyone who might like to be a supplier or from a substantial amount of a market, or a dealer. At one time or another, every that involve agreements by horizontal company must turn others down when they competitors not to deal with a supplier, ask to enter into a business relationship, or customer, or another competitor. Although must break off one relationship to pursue a firm with a large market another. share—particularly a market share that Some spurned companies do not take approaches or reaches monopoly rejection well. Semantics alone can quickly levels—may find its conduct closely turn any rejection into a “refusal to deal,” scrutinized for anticompetitive effects under which sounds more sinister. Under some the rule of reason, most businesses may circumstances, a refusal to deal may support choose with whom to deal without a treble-damages action under the antitrust substantial antitrust risks. laws. Thus, an everyday fact of business life This relative security was placed in —one business saying “no” to another— jeopardy for about two years between the may come to have heightened significance Second Circuit and Supreme Court decisions for your clients. in NYNEX Corp. v. Discon Inc., 525 U.S. Every exclusive deal or requirements 128 (1998), vacating 93 F.3d 1055 (2d Cir. contract with one supplier (or distributor or 1996). In Discon, the Supreme Court other customer) could be characterized as a reversed a decision by the Second Circuit refusal to deal with the supplier’s that had suggested that a single contract competitors. Indeed, any contract at all between a single buyer and a single seller could be characterized as a refusal to deal might be illegal per se. with other suppliers to the extent of the This article first reviews antitrust business covered by the contract. principles and explains the threat that the The antitrust laws do not employ so Supreme Court parried in the Discon case. It expansive an analysis, however. By and then surveys the different antitrust analyses

*Donald M. Falk is a partner specializing in antitrust and appellate litigation at Mayer, Brown & Platt in Washington, D.C. Mr. Falk helped prepare an amicus brief supporting NYNEX in the Discon case in the Supreme Court.

This article is reprinted with permission from 46-3 PRACTICAL LAWYER 25 (2000). 1 of 7 that may bear on a refusal to deal. Many Per se Violations alleged refusals to deal are simply exclusive A very few practices are considered dealing arrangements or requirements so certain to be anticompetitive that they are contracts viewed through the lens of a losing condemned per se without any market competitor. A unilateral refusal to deal may analysis. These per se violations include take on different meaning, however, when it price-fixing or market division among is a monopolist that does the refusing, horizontal (that is, head-to-head) particularly if the refusal in some way competitors, or boycotts involving shores up the monopoly. And a concerted horizontal competitors. refusal to deal may indeed be a boycott that the antitrust laws condemn per se. But Likely Anticompetitive Effect antitrust does not impinge on most The rule of reason is a fluid concept, companies’ choices to deal, or not to deal, however. The scope of the required market with other companies. analysis varies with the circumstances of the conduct, so that some conduct may be ANTITRUST ANALYSIS IN A condemned with very little analysis. But the NUTSHELL • The antitrust laws forbid key to the rule of reason is some showing, at only those business practices that tend to the outset, that the challenged practice has restrain competition unreasonably, or that an actual or likely anticompetitive effect produce or reinforce a monopoly (or throughout a market. threaten to do so). When there is no question of monopoly, most practices are analyzed NYNEX v. DISCON • The Supreme Court under the “rule of reason.” decided to hear NYNEX v. Discon after the Second Circuit issued a remarkable decision Rule of Reason that suggested that a simple agreement by To analyze a business practice under one firm to use the services of another firm the rule of reason, you first must identify could amount to a “boycott” of the second and assess whether the practice causes (or firm’s competitors, and thus could be tends to cause) anticompetitive effects condemned per se. The plaintiff in the throughout a relevant market. (A relevant antitrust case, Discon, was in the business of market, stated simply, is the collection of removing obsolete telephone equipment. products and sellers to which a buyer NYNEX owned New York Telephone, a reasonably would turn, or buyers to which a leading local telephone company in New seller would turn). If the practice has no York and parts of Connecticut. NYNEX at anticompetitive effects, it is legal under the one time used Discon’s removal services, rule of reason. If there are anticompetitive but switched all of its business to a rival effects, however, you must weigh those removal service, AT&T Technologies. effects against any procompetitive benefits Discon then sued NYNEX, alleging several of the practice. A practice is condemned antitrust violations; the district court, under the rule of reason only if it is however, dismissed the action for failure to anticompetitive on balance. state a claim.

2 of 7 Reading “Boycott” a Little Too Broadly legitimate business justification for its In reversing the dismissal of choice. The Court closely confined the Discon’s claims, the Second Circuit stated epithet “boycott” to circumstances involving that the mere agreement between NYNEX horizontal agreements among direct and AT&T Technologies could amount to competitors. an agreement to boycott Discon, and thus Thus, after Discon, the law might be condemned per se. The Second governing refusals to deal once again Circuit noted that the complaint alleged that requires a plaintiff challenging a single NYNEX had selected AT&T Technologies buyer’s selection of suppliers to prove harm, over Discon for improper, anticompetitive not only to a single competitor, but to the reasons. In the Second Circuit’s view, competitive process as a whole. because NYNEX’s decision to pick one supplier over another was not bolstered by RULE OF REASON ANALYSIS FOR any procompetitive rationale, or at least REFUSALS TO DEAL • The antitrust none that appeared on the face of Discon’s status of refusals to deal at first blush seems complaint, the action could go forward, and somewhat contradictory. On one hand, might even proceed under a per se group courts long have recognized that any boycott theory. The Second Circuit’s business has an absolute right to choose not decision appeared to have no limits: Any to deal with any other business. That right change in vendors, and certainly any exists only if the company makes the exclusive dealing arrangement, could decision to refuse dealings entirely on its amount to a boycott by that definition, and own, however. If a disappointed supplier could be held illegal per se, so long as a can paint the decision not to deal in terms of court found no legitimate reason for the an agreement with another business—such purchasing decision. In that topsy-turvy as an exclusive or requirements contract that view, any refusal to deal with one supplier effectively fences out the spurned could be transformed into a boycott by the company—the refusal to deal, in whatever refusing party together with the firm it chose form it may take, becomes subject to the instead of the refused party. rule of reason analysis that applies to most agreements between businesses. Reining It In Fortunately the Supreme Court did The Basics not permit the Second Circuit’s Discon The rule of reason presents decision to remain on the books for long. substantial hurdles to someone seeking to The Court recognized that the Second impose liability under the antitrust laws, Circuit’s broad application of the per se rule however. In the typical rule of reason would discourage firms from changing analysis, a plaintiff must show at the suppliers even where the competitive threshold that the challenged practice (such process suffered no harm. In reversing the as the refusal to deal) in fact harmed Second Circuit decision, the Court made competition in a relevant market. If that clear that an agreement by a single buyer to showing is made, the defendant may offer purchase goods and services from a single evidence of any efficiencies or other supplier could not be condemned per se procompetitive effects resulting from the even if the buyer could not prove a arrangement. The factfinder then weighs the

3 of 7 procompetitive and anticompetitive effects quantitative and qualitative aspects. A firm to determine whether the practice on balance with a market share of 30 percent or less is anticompetitive (and thus violates the generally will not have market power no antitrust laws). An antitrust counselor matter what the other circumstances of the undertakes the same analysis from an market may be. Many markets, of course, objective point of view. are fully competitive despite the presence of firms with higher market shares. And some Alternatives Matter courts will use a higher market share Because any practice outside the per threshold, up to 40 percent, before se categories is legal if it does not harm the undertaking a more searching rule of reason competitive process as a whole, for practical analysis. A 25-30 percent level is a useful purposes most firms retain absolute freedom threshold for antitrust concern. A firm with to refuse to deal with others even if the a market share that low or lower should be refusal can be characterized as an agreement able to choose or refuse to deal with anyone with the firm that got the business instead. it wants without facing any substantial Because a refusal to deal can violate the antitrust risk. A firm with a higher share, antitrust laws only if it injures competition while very likely not in violation of the in a market as a whole, to raise antitrust antitrust laws, is more likely to face concerns the company doing the refusing litigation and to find it difficult to curtail must control a substantial share of a relevant that litigation before full discovery has taken market. Otherwise, its decision to send its place, particularly if the challenged business one way rather than another will agreement has a duration of more than a not pose a plausible threat to competition in year or two. For your clients that have the market that encompasses supplying market shares greater than the 25 percent those needs, because suppliers would have level, you should ensure that shifts in plenty of other places to turn. If the business relationships, and particularly any suppliers have enough alternative customers new exclusive arrangements or requirements to be able to compete in the market without contracts, are analyzed with respect to the needing access to the refusing firm’s market in which the party on the other side business, the refusal to deal cannot have participates. anticompetitive effects. The same goes for Thus, when NYNEX shifted firms that refuse to sell to other companies, business from Discon to AT&T rather than refuse to buy. If the spurned Technologies, the market of concern was not buyer has sufficient alternate sources of local telephone service (in which NYNEX supply, the refusal of one company to do had a regulated monopoly), but rather the business cannot affect the market. removal services market in which Discon participated. Although the Supreme Court How Big Is Big? did not decide the rule-of-reason issues, it Accordingly, in most circumstances, noted that despite NYNEX’s dominant only a firm that has market power in the position in local telephone service, the relevant market could even possibly present removal services market appeared to have a competitive problem by refusing to deal extremely low barriers to entry, which with one or more prospective suppliers. The meant that actual or potential competitors analysis of market power has both might provide a competitive check on

4 of 7 AT&T Technologies despite the advantage You need to analyze both the market that firm derived from its arrangement with structure viewed from the perspective of the NYNEX. disappointed (or soon-to-be-disappointed) supplier, and to look at entry barriers and REFUSALS TO DEAL BY other market constraints on your client in its MONOPOLISTS • Some refusals to deal own market position. Analyses of this type by single buyers (or sellers) may face more are critical to prevent your large-market- intense antitrust scrutiny. When a firm not share clients from stumbling into a treble- only has market power, but has a monopoly, damages lawsuit. a refusal to deal may take on greater competitive significance. Obviously, if the Anticompetitiveness Is Bad, monopolist controls a market, any refusal to Not Monopolies deal may effectively exclude companies Refusals to deal can take a more from access to that market. sinister character in the hands of an actual monopolist. The possession of a monopoly is not illegal by itself. The antitrust laws What Makes a “Monopoly”? forbid a company only from engaging in Like “market power,” “monopoly” is anticompetitive acts in an effort to acquire a concept that is easier stated than or maintain a monopoly. A monopolist that explained. A responsible analysis of threatens to refuse to deal with companies monopoly power must take into account that also deal with its competitors (or barriers to entry, pricing constraints from companies that pose potential threats to the adjacent markets, and a variety of other monopoly) may commit a monopolization phenomena. The first and simplest step of a offense. For example, if (in an updated litigation risk analysis, however, focuses on hypothetical) NYNEX refused to deal with market share thresholds. Most courts will Discon unless Discon shifted its local not find monopoly power unless the accused telephone service away from a nascent firm has at least a 70 percent market share, competitor of NYNEX (say, RCN), that and many would require a higher threshold. refusal in some circumstances might amount By contrast, a few courts have held that to a monopolization offense, or at least shares as low as 50 percent could support a might support a non-frivolous and therefore finding of monopoly power. It would seem quite burdensome monopolization claim. impossible for that to be so unless, perhaps, That would be so particularly if the market consisted of one large firm and (hypothetically) Discon represented a key dozens of niche players. You need to be toehold customer to a new entrant, or if the familiar with the standards applied in the conditional refusal were part of a pattern jurisdictions in which your clients operate. repeated with other firms. A refusal to deal that is viewed as Analyzing the Refusal part of a monopolization scheme is more A cautious approach requires likely to trigger liability than most other enhanced market analysis of your clients’ refusals. Foreclosing competition even on refusals to deal if they have market shares the margin has a much more significant exceeding 50 percent, especially if they competitive effect when a monopoly is in control more than 70 percent of a market. place than otherwise.

5 of 7 business or by pressuring third parties to do CONCERTED REFUSALS TO DEAL, so. Even then, there are exceptions to the per OR “GROUP BOYCOTTS” • The final se rule. The Supreme Court and other courts category of refusals to deal is the category have suggested that the participants in some that the Supreme Court focused on in alleged “boycotts” would have to have Discon. An agreement among horizontal market power in order to render the competitors to refuse to deal with one or concerted refusal to deal illegal per se. That more third parties may amount to a group certainly is the case, for example, with joint boycott or price-fixing, each of which is a buying organizations that may deny access per se antitrust violation. to some of their members’ competitors without antitrust risk unless they control Work Stoppage Analogy some input that is essential to the Many lawyers without much competition engaged by members and antitrust background, and indeed many excluded firms alike. Before your clients businessmen, are aware of the antitrust enter into any kind of agreement with their consequences of concerted action among competitors to refuse to deal with anyone competitors. Nonetheless, one hears with for any reason, however, you should be sure disquieting frequency casual suggestions to subject the proposed action to searching that an “industry” should refuse to deal with antitrust analysis. Of all varieties of refusals some subset of suppliers or customers that is to deal, the concerted ones are the most causing some grief. Most of these likely to attract government prosecution as suggestions, fortunately, are not well as private litigation. communicated to other competitors, and fewer still result in agreement or—what can CONCLUSION • No one can deal with amount to the same thing in terms of everyone, and your clients generally can litigation expense, if not in terms of antitrust choose with whom to deal. Your clients liability—parallel behavior without an need to be very careful before agreeing with agreement. Some businessmen seem to their competitors to refuse to do business believe that they can band together with with anyone for any reason. If a client may their competitors and essentially go on strike have market power, you should subject any as if they were members of a labor union. contemplated exclusive dealing arrangement But organized labor has an exemption from to antitrust analysis. The key is to be sure the antitrust laws. The rest of us do not, as a that exclusivity does not foreclose other group of lawyers in the District of Columbia suppliers from access to an excessive found to their chagrin when they were held proportion of the market. If a client has a liable for illegal price-fixing based on their monopoly, or a large market share (certainly concerted refusal to participate in (i.e., their over 70 percent, possibly as low as 50 boycott of) the criminal appointed counsel percent) that might support a program until the pay rate was raised. monopolization claim, concerns with exclusive deals are heightened. Of particular Identifying the Real Thing importance, however, the client should not The classic group boycott per enter into arrangements by which another se offense involves joint efforts to party agrees not to do business with one of disadvantage competitors by denying them the client’s competitors.

6 of 7 PRACTICE CHECKLIST FOR Antitrust and Refusals To Deal after Nynex v. Discon

For a brief period, there was concern in antitrust circles that the Second Circuit's decision in NYNEX Corp. v. Discon would render even the most innocent refusals to deal as per se illegal "boycotts" for antitrust analysis. Fortunately, the Supreme Court has rejected this view, and a plaintiff has to prove harm to the competitive process as a whole within the context of a rule of reason analysis.

• Under a rule of reason analysis:

Q The plaintiff must show that the refusal to deal harmed competition in the relevant market. (As a practical matter, this means that the company doing the refusing must control a substantial share of the relevant market);

Q Once harm to the relevant market is shown, the defendant may then offer evidence of procompetitive effects resulting from the arrangement;

Q Alternatives matter. If the complaining supplier has a sufficient pool of other customers to compete in the relevant market, the refusal to deal cannot have had anticompetitive effects.

• What happens when a monopolist refuses to deal?

Q The scrutiny will be more intense if the refuser has a monopoly. Again, as a practical matter, this is not a problem unless the refuser's market share exceeds 70 percent (some courts require even more);

Q If your client has a monopoly, that doesn't mean that the refusal to deal constitutes an antitrust violation. Monopolies are not illegal in and of themselves. The key is whether the refusal was part of an anticompetitive scheme to create the monopoly.

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