In a narrowly divided 5-4 decision, the U.S. Supreme Court has ruled that a nonprofit dental association's rules restricting members' price and quality advertising should not have been invalidated on the basis of an abbreviated, "quick-look" antitrust analysis. California Dental Association v. FTC, U.S. Sup. Ct., No. 97-1625 (May 24, 1999).
Antitrust scrutiny of challenged competitive restraints has traditionally involved application of one of two standards. Certain narrowly defined categories of naked anti-competitive restraints (such as price fixing, market division and group boycotts) are considered illegal per se, without regard to their competitive effects in particular cases. All other challenged restraints are governed by a "rule of reason" analysis in which the reasonableness of the restraint is assessed in light of its actual competitive effects in the particular circumstances. In recent years, however, courts have fashioned an abbreviated, or "quick-look," rule of reason analysis designed for restraints that do not fall within the narrow categories of restraints deemed per se unlawful, but that are sufficiently anti-competitive that they do not require a factually intensive, full-blown rule of reason inquiry.
California Dental involved the application of this "quick-look" standard by the Federal Trade Commission (FTC) in invalidating on competitive grounds advertising restrictions imposed by a California non-profit dental association on its members. The association's rules prohibited members (which accounted for approximately 75 percent of the state's dentists) from false or misleading advertising. In an administrative enforcement action, the FTC concluded -- on the basis of a "quick-look" analysis -- that the association unreasonably restrained competition by interpreting these advertising guidelines to restrict truthful, nondeceptive advertising, particularly advertising about across-the-board price discounts and service quality. The U.S. Court of Appeals for the Ninth Circuit affirmed, upholding the FTC's reliance on the "quick-look" analysis.
A divided Supreme Court vacated the Court of Appeals' decision, concluding that a more extensive rule of reason inquiry into the competitive effects of the challenged advertising restrictions was necessary. The majority made clear that it was not rejecting application of an abbreviated rule of reason analysis in all cases, but that a challenged restraint could properly be condemned under a "quick-look" analysis only if the restraint's anti-competitive effect is "obvious." If the challenged restraint "might plausibly be thought to have a net procompetitive effect, or possibly no effect at all on competition," the majority reasoned, then condemnation on the basis of a "quick-look" analysis would be inappropriate.
Applying these standards to the challenged advertising restrictions, the majority concluded that the association's rules were, at least on their face, designed to avoid the anti-competitive effects of false or deceptive advertising. According to the majority, the dangers of false or misleading advertising were particularly pronounced given the nature of the market for professional services (where quality claims cannot be objectively calibrated or monitored), and could conceivably justify somewhat overbroad restrictions on even truthful, nondeceptive advertising. In the majority's view, it was not "intuitively obvious" that the advertising restrictions would have a net anti-competitive effect and, therefore, a "less quick look" was required to judge the lawfulness of the advertising restrictions.
The dissenting Justices took issue not with the majority's statement of the general legal standards but with the majority's application of those standards to the challenged advertising restraints. In the dissent's view, the FTC and Court of Appeals applied traditional rule of reason analysis and their findings of anti-competitive effect were supported by substantial evidence. Indeed, the dissent suggested that the case was so clear that it did not warrant Supreme Court review at all. The dissent found unpersuasive, and unsupported by the record evidence, the majority's claim that the advertising restrictions could plausibly be thought to have the pro-competitive effect of preventing false or misleading advertising. In another section of its opinion, the Supreme Court also unanimously held that the FTC's jurisdiction to regulate unfair methods of competition extends to non-profit associations, such as the California Dental Association, that provide substantial economic benefits to their for-profit members.
The U.S. Department of Justice has filed a civil antitrust action against American Airlines alleging that American monopolized and attempted to monopolize airline passenger service to and from the Dallas/Fort Worth International Airport (DFW) by engaging in below-cost pricing and other predatory conduct to eliminate competition from low-cost carriers. United States v. AMR Corp., Civ. Action No. 99-1180-JTM (filed May 13, 1999).
The government's complaint alleges that American, the second largest airline in the United States, dominates air passenger transportation to and from DFW, which is a major "hub" for American's hub-and-spoke route system. The complaint alleges that transportation between DFW and other cities (city pairs) are distinct markets for antitrust purposes, that there are high barriers to entry into these markets, and that American enjoys monopoly power over them.
The government claims that American unlawfully abused its alleged monopoly power by predatory actions to exclude the competitive threat posed by new low-cost carriers (such as Vanguard, Sun Jet and Western Pacific), which enjoyed a lower cost structure than American and which had commenced service in several American-dominated city pairs. The complaint alleges that, beginning in 1993, American adopted a strategy of responding to new entry by low-cost carriers by increasing capacity and reducing fares in the affected city pairs well beyond what would have made business sense other than as a means of driving the new entrants out of the market. By making otherwise unprofitable capacity expansions and reducing fares below cost, the government claims, American intended to and did drive low-cost carriers out of the affected markets. The government further alleges that American intended to and did recoup the short-term losses it incurred as a result of this strategy by promptly reducing capacity and raising fares to monopolistic levels once the low-cost carrier had exited the market.
The complaint seeks permanent injunctive relief restraining American from engaging in the alleged predatory conduct and "imposing restraints on American to remedy the effects of its past predation."
A complaint by a class of airline passengers challenging as anti-competitive the actions of Northwest Airlines to implement its "hub-and-spoke" route system states a valid cause of action under Sections 1 and 2 of the Sherman Act, the U.S. District Court for the Eastern District of Michigan has ruled. Chase v. Northwest Airlines Corp., 1999 WL 248936 (E.D. Mich. April 23, 1999).
Like other major airlines, Northwest operates a "hub-and-spoke" route system. A passenger wishing to travel on Northwest between New York and Columbus, for example, must make an intermediate stop at Detroit (a Northwest hub), and purchase a combination ticket covering both legs (New York/Detroit and Detroit/Columbus) of the through route. The complaint alleged that, because of Northwest's market power over transportation to and from its hubs (such as Detroit), the direct fares for the separate hub-spoke legs of such flights (such as New York/Detroit) substantially exceeded the through fares for spoke-to-spoke flights (such as New York/Detroit/Columbus). To avoid the more expensive fares applicable to and from hub cities, passengers engaged in the practice of purchasing a less expensive ticket for spoke-to-spoke service, but using the ticket for only one hub-to-spoke leg of the service. The complaint alleged that, to enforce its rate disparities and preserve monopoly rates for travel to and from hub cities, Northwest conspired with independent travel agents and with the Airline Reporting Corporation (ARC) -- a firm organized by the major airlines to accredit travel agents and serve as a clearinghouse to settle ticket sales -- to prevent passengers from using less expensive spoke-to-spoke tickets for hub-to-spoke travel. Among other things, the complaint alleged, these efforts included refusing to sell spoke-to-spoke tickets for hub-to-spoke travel, requiring passengers to check baggage through to the final spoke destination, and canceling return tickets of those passengers who traveled only part way on a spoke-to-spoke ticket.
Northwest and ARC moved to dismiss the plaintiff passengers' Section 1 (conspiracy in restraint of trade) and Section 2 (monopolization) claims as legally insufficient. The District Court granted the motion only in limited respects.
With respect to the plaintiffs' Section 1 conspiracy count, the court found that no actionable conspiracy could exist between Northwest and independent travel agents because the travel agents played no role whatsoever in formulating Northwest's alleged "refusal to sell" policy, but were simply dealers or distributors which involuntarily complied with Northwest's sales policy in order to avoid termination as distributors of Northwest's services. The court further ruled that, as a matter of law, Northwest could not conspire with ARC because it was an agent of Northwest, and conspiracy required an agreement among independent actors. But the court declined to dismiss the Section 1 claim because, in its view, the complaint could be construed to allege a conspiracy between Northwest and other airline members of ARC.
The court also held that the complaint adequately alleged an actionable Section 2 monopolization claim against Northwest's "refusal to sell" policy. The court rejected Northwest's arguments that the complaint failed to allege any anti-competitive conduct, and that Northwest's challenged policies were simply designed to prevent the carrier from competing against itself. In practical effect, the court reasoned, Northwest's "refusal to sell" policy had the effect of restricting intrabrand competition (i.e., competition between Northwest's hub-to-spoke service and its spoke-to-spoke service), and this intrabrand competition was potentially significant in checking the exploitation of Northwest's alleged monopoly power over travel to or from hub cities. The court acknowledged that restraints on intrabrand competition may be justified when necessary to promote interbrand competition. It concluded, however, that Northwest's dominant position in the relevant interbrand market (air routes originating or terminating at a Northwest hub) rendered Northwest's restrictions on intrabrand competition potentially harmful in artificially inflating the price that passengers pay for travel to and from Northwest hub cities. In short, the court concluded that restrictions on intrabrand competition could be unlawful where interbrand competition was limited.
Civil Penalties Imposed for Violations of Hart-Scott-Rodino Pre-Merger Requirements
In two recent cases, both resolved by proposed consent judgments, the government has imposed substantial monetary penalties for violations of the pre-merger notification and waiting-period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act). Parties entering into merger or acquisition transactions subject to the HSR Act must provide the government with specified information about the transaction and its competitive effects, and await the termination of a specified waiting period before consummating the transaction.
In one case, a New York merchant banking firm and one of its general partners have agreed to pay $2,785,000 to settle charges that the company failed to include in its HSR Act filing a key internal document that assessed the competitive effects of the company's proposed acquisition of another firm and that was relied on by the purchasing firm in deciding to proceed with the acquisition. United States v. Blackstone Capital Partners II Merchant Banking Fund L.P., Civ. Action No. 1:99CV00795 (D.D.C. filed Mar. 30, 1999). The government alleged that its rules clearly required the submission of the omitted document, that the purchaser withheld the document in order to avoid federal antitrust scrutiny of the acquisition, and that submission of the document would likely have caused the government to challenge the proposed acquisition prior to its consummation. The government named an individual general partner of the purchaser as a defendant in the case because the individual had certified the accuracy of the company's HSR Act filing even though he allegedly was aware of, and had assisted in preparing, the omitted document, and because he had provided the government inconsistent answers when it investigated the matter.
In another enforcement action, two companies involved in an acquisition subject to the HSR Act rules have agreed to pay $225,000 each as a civil penalty to settle charges that they failed to comply with the Act's waiting-period requirements. United States v. Laitram Corp., Civ. Action No. 1:99CV00912 (filed April 12, 1999). According to the government's complaint, the companies agreed to the proposed acquisition on September 30, 1998, and filed their required HSR Act notifications on October 14, 1998, but unlawfully began to consummate the acquisition as early as October 10, 1998, well before the termination of the statutory waiting period under the HSR Act. The complaint alleged that the unlawful premature control of the acquired company included, among other things, a reorganization of the combining companies, reassignment of the acquired company's officers to positions with the purchaser, and collaborative review of other proposed acquisitions under consideration by the purchaser.
* Association for Transportation Law, Logistics and Policy Association Highlights (Vol. 22, No. 5, July-August1999)