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Can State Action Provide an Antitrust Defense If Such Action Violates the Commerce Clause?

Reprinted from the December 1998 issue of Antitrust Report

The state action defense shields regulated firms from liability under the Sherman Act where the private conduct being challenged is authorized or compelled by state law and is actively supervised by the state. Several courts have held that private parties may invoke this defense even where the state eventually rescinds the operative rule or where the state has taken action in violation of state law. In these circumstances, the courts have typically held that a private party should not be subject to liability under the Sherman Act if it has "reasonably relied" upon a prior state action having the "appearance of legality."

By contrast, where state action is found to discriminate against interstate commerce and violate the Commerce Clause of the U.S. Constitution, it has generally been assumed that private parties have no immunity from antitrust liability. The courts, however, have rarely addressed this question, and a limited immunity may be appropriate. As explained below, where a private defendant has reasonably relied upon the state's action, the regulated firm generally should not be subject to liability for treble damages for conduct undertaken while a state rule or policy having the "appearance of legality" was in effect.

This article is divided into four parts. The first section summarizes the state action doctrine. The second reviews the cases conferring state action immunity where the state action has been rescinded or invalidated under state law. The third briefly discusses the Commerce Clause and a 1994 court decision summarily rejecting the state action defense where the plaintiff alleged that the underlying Georgia statute violated the Commerce Clause. The final section offers a suggested compromise. It argues that private defendants reasonably relying on state action ordinarily should not be subject to criminal liability or liability for treble damages if the state action authorizing or compelling their conduct is later held to violate the Commerce Clause. In general, however, treble damages should be imposed on conduct occurring after the state action is held to be unconstitutional. Furthermore, where the state action runs afoul of the Commerce Clause, plaintiffs should be free to seek injunctive relief prohibiting anticompetitive conduct.

The Basic Principles Underlying State Action Immunity

The Supreme Court first articulated the state action doctrine in Parker v. Brown. 1 Relying upon principles of federalism and state sovereignty, the Court held that the Sherman Act did not apply to the anticompetitive conduct of a state acting through its legislature. 2 Emphasizing that the Sherman Act was intended "to prohibit private restraints on trade," 3 the Court refused to infer an intent to "nullify a state's control over its officers and agents" in activities directed by the legislature. On that basis, the Court allowed the State of California to establish a cartel for raisin production that was designed to benefit California producers. 4

In Parker, the Supreme Court emphasized that restraints on competition qualify for immunity only to the extent that they constitute "state action or official action directed by a state." 5 The Court declared that "a state does not give immunity to those who violate the Sherman Act by authorizing them to violate it, or by declaring that their action is lawful." 6

Parker itself did not involve a challenge to conduct by private defendants. Subsequent case law established, however, that private entities may claim state action immunity if their otherwise unlawful activity was directed and supervised by the state. 7

Private conduct is covered by the state action defense only if the party claiming immunity shows that its conduct satisfies two requirements. "A state law or regulatory scheme cannot be the basis for antitrust immunity unless, first, the State has articulated a clear and affirmative policy to allow the anticompetitive conduct, and second, the State provides active supervision of anticompetitive conduct undertaken by private actors." 8 These two requirements are closely related. "Both are directed at ensuring that particular anticompetitive mechanisms operate because of a deliberate and intended state policy." 9

The critical point, however, is that ever since Parker, state action immunity has rested upon principles of federalism. As the Supreme Court later reaffirmed, "the doctrine that federal antitrust laws are subject to supersession by state regulatory programs" has evolved based upon "the principle of freedom of action for the States, adopted to foster and preserve the federal system." 10

The Potential Survival of Antitrust Immunity Where State Action Is Rescinded or Invalidated under State Law

Even where a state action is rescinded by state officials or is found to be inconsistent with state law, courts have often found that private defendants have immunity from antitrust liability for conduct undertaken prior to the rescission or invalidation of the state law or regulation. In 1975, for example, the Oklahoma Corporation Commission approved or mandated certain rate changes relating to outdoor lighting, which were then implemented by the local public utility. Rival providers of outdoor lighting services then filed suit in federal court, alleging that the utility had engaged in monopolization. In 1983, while the antitrust suit was still pending, the Oklahoma Supreme Court overturned the prior action of the Commission. Nevertheless, the Tenth Circuit, in Lease Lights, Inc. v. Public Service Co. of Oklahoma, 11 found that the utility's conduct prior to the ruling by the Oklahoma Supreme Court was protected by the state action defense. In the court's view, "there should be a defense for those reasonably relying on the appearance of legality when a state agency's exercise of power is unauthorized." 12 "To rule otherwise would require regulated industries to seek judicial review of every order of a regulatory agency to ensure that compliance does not later subject them to antitrust liability." 13

In allowing state action immunity even for conduct stemming from regulatory action undertaken in violation of state law, the courts have invoked the principles of federalism underlying Parker itself. The Ninth Circuit, in an opinion by Judge (now Justice) Kennedy, stated: "A state's antitrust immunity springs from an essential principle of federalism, the necessity to respect a sovereign capacity in the several states." 14 In light of this purpose, "it follows that actions otherwise immune should not forfeit that protection merely because the state's attempted exercise of its power is imperfect in execution under its own law." 15 The Ninth Circuit then quoted the following passage from an article by Professor Areeda:

State laws intended to displace the antitrust laws may delegate to public agencies or officials the power to act, decide, or regulate in order to achieve anticompetitive results. Of course, state law "authorizes" only agency decisions that are substantively and procedurally correct. Errors of fact, law or judgment by the agency are not "authorized," and state tribunals will normally reverse erroneous acts or decisions. If the antitrust court demand unqualified "authority" in this sense, it will inevitably become the standard reviewer of governmental agencies whenever it is alleged that the agency, though possessing the power to engage in the challenged conduct, has exercised its power erroneously. 16

Thus, "'[o]rdinary' errors or abuses in the administration of powers conferred by the state should be left for state tribunals to control." 17 In City of Columbia v. Omni Outdoor Advertising Inc., 18 the Supreme Court agreed with Professor Areeda's assessment: "[I]n order to prevent Parker from undermining the very interests of federalism it is designed to protect, it is necessary to adopt a concept of authority broader than what is applied to determine the legality of the municipality's action under state law."

Similarly, where a state action has been rescinded, courts have recognized that it may be inappropriate to impose liability on regulated firms that acted in compliance with the state law or policy while it was in effect. For example, in Yeager's Fuel, Inc. v. Pennsylvania Power & Light Co., 19 a bureau within the Pennsylvania Public Utilities Commission ("PUC") had approved an electric utility's decision to offer builders and developers cash grants and other incentives to install electric heating systems. A group of heating oil dealers later challenged the utility's conduct under the antitrust laws and pointed out that the PUC had recently adopted new regulations prohibiting the use of cash incentives and setting aside the bureau's prior policy. Citing Lease Lights and other authority, the court held that this policy reversal by the PUC did not eliminate the utility's state action immunity for past conduct authorized by the bureau's policy. The court declared that "a private defendant reasonably relying on apparently lawful government action should not be deprived of state action immunity if the government later reverses its position." 20

The Dormant Commerce Clause and its Impact on the State Action Defense

By its terms, the Commerce Clause of the U.S. Constitution 21 authorizes Congress to "regulate Commerce with foreign Nations, and among the several States." On its face, the Commerce Clause says nothing about the protection of interstate commerce in the absence of any action by Congress. Yet "the Clause has long been recognized as a self-executing limitation on the power of the States to enact laws imposing substantial burdens on such commerce." 22 This "negative" or "dormant" implication of the Commerce Clause "prohibits state taxation . . . or regulation . . . that discriminates or unduly burdens interstate commerce and thereby 'impede[s] free private trade in the national marketplace.'" 23 The clause "precludes a state from mandating that its residents be given a preferred right of access, over out-of-state consumers, to natural resources located within its borders or to the products derived therefrom." 24

Thus, in New England Power, the Supreme Court struck down an order of the New Hampshire Public Utility Commission prohibiting New England Power from exporting energy, where the state asserted that the energy was required for use within New Hampshire. The Court stated that this is exactly the type of economic protectionism disallowed under the Commerce Clause. 25

The cases interpreting the Commerce Clause reflect a policy of promoting free trade among the states. 26 For the most part, the Commerce Clause has been construed to prevent individual states from taking actions to shield their in-state businesses from competition by out-of-state firms. "Discrimination against interstate commerce in favor of local business or investment is per se invalid, save in a narrow class of cases in which the [state or municipality] can demonstrate, under rigorous scrutiny, that it has no other means to advance a legitimate local interest." 27

The courts have rarely been forced to consider whether a state action that violates the Commerce Clause could nevertheless provide antitrust immunity for conduct occurring while the state law was in effect. One case involving state action immunity and the Commerce Clause is Pine Ridge Recycling, Inc. v. Butts County, Ga. 28 The plaintiff there was attempting to build a solid waste landfill that would compete with a facility operated by a county through its solid waste management agency. Essentially, the plaintiff alleged that the county had a monopoly in the local waste disposal market and had unlawfully sought to block entry by a new firm seeking to develop a competing facility. Not surprisingly, the defendants argued that the county's actions were authorized by Georgia law and that they were entitled to antitrust immunity under Parker. In ruling on a motion to dismiss, however, the district court rejected this defense, holding that if Georgia law authorized local governments "to exclude all competition in the waste disposal market within their jurisdiction," then the state law would violate the Commerce Clause. 29 The court refused to interpret the Georgia statute in a manner that would render it unconstitutional, holding that the statute did not authorize local governments to exclude competitors from the local waste disposal markets. Consequently, the defendants' "conduct [was] not entitled to state action immunity." 30

In Pine Ridge Recycling, the court rejected the state action defense outright. In that case, however, the plaintiff was barred from seeking treble damages by the Local Government Antitrust Immunity Act. 31 Since the plaintiff could seek only injunctive relief and attorneys' fees, and since the court interpreted the Georgia law so as to avoid conflict with the Commerce Clause, the court was not faced with a situation in which the defendants could argue that they reasonably relied upon a state law later invalidated under the Commerce Clause. Consequently, Pine Ridge Recycling provides very little guidance on the extent to which state action immunity covers private conduct undertaken pursuant to state law invalidated under the Commerce Clause.

A Suggested Approach

As explained above, the courts have already recognized that "actions otherwise immune [under the state action doctrine] should not forfeit that protection merely because the state's attempted exercise of its power is imperfect in execution under its own law." 32 This "applies to errors of law, fact, or judgment, [and] errors of either substance or procedure." 33

In part, this approach springs from principles of federalism. 34 If a federal antitrust court has to determine whether a state agency has acted in accordance with a state constitution or state legislation, the federal court would inevitably become the "standard reviewer" of actions by state agencies. Thus, as Professor Areeda suggested, "'ordinary' errors or abuses in the administration of powers conferred by the state should be left for state tribunals to control." 35

Obviously, these principles of federalism have much less force where the state action is alleged to violate the U.S. Constitution. The federal courts are the preferred tribunal for the adjudication of such claims. Accordingly, if principles of federalism were the only factor, there would be virtually no justification for preserving the state action defense where the state law violates the Commerce Clause or any part of the U.S. Constitution. Principles of federalism are not the only consideration, however. In applying the state action defense to regulatory decisions implemented in violation of state law, the courts have also focused on the legitimate reliance interests of private defendants. As stated by the Tenth Circuit, "there should be a defense [to antitrust liability] for those reasonably relying on the appearance of legality when a state agency's exercise of power is unauthorized." 36 In appropriate cases, the same legitimatereliance interests could militate in favor of granting limited immunity for past conductundertaken pursuant to a state law invalidated under the Commerce Clause.

37 the plaintiff challenged a state bar disciplinary rule banning lawyer advertising, a prohibition that had been incorporated into one of the rules of the Arizona Supreme Court. Ultimately, the Court held that insofar as this rule prohibited attorneys from advertising to availability and terms of their legal services, it violated the First Amendment. Nevertheless, the Court also held that since the ban on advertising was an affirmative command of the Arizona Supreme Court, the defendant had antitrust immunity. 38

For these reasons, the state action defense should have some vitality even where the operative state law or regulation impermissibly discriminates against interstate commerce. Where a private defendant has acted in "reasonable reliance" on a state action having the "appearance of legality," that party generally should not be subject to antitrust liability for conduct undertaken prior to a determination that the state law or regulatory action is unconstitutional. In other words, neither criminal liability nor liability for treble damages should be imposed where the defendant's conduct has been authorized by state law and where the state has actively supervised the conduct in question. Of course, if and when the state law is invalidated, the anticompetitive conduct should end. If it does not, the state action defense should be eradicated, and the plaintiff should be free to seek treble damages from the time of the court's decision forward. In addition, state action that violates the Commerce Clause should never provide a defense to a claim for injunctive relief. Regardless of whether there has been a final adjudication under the Commerce Clause, plaintiffs should be free to seek a temporary restraining order or preliminary injunction under the antitrust laws so as to prevent continuing antitrust violations. If necessary, permanent injunctive relief should also be granted if such relief is appropriate under the antitrust laws and if state action shielding a defendant from liability violates the Commerce Clause.

1. 317 U.S. 341 (1943).

2. Id. at 350-51. See also Town of Hallie v. City of Eau Claire, 471 U.S. 34, 38 (1985).

3. Town of Hallie, 471 U.S. at 38.

4. Parker, 317 U.S. at 351. Parker involved a producer and packer of raisins who requested an injunction against enforcement of a state marketing program. The express purpose of the program was to restrict competition among the raisin growers and maintain prices.

In addition to deciding the state action immunity issue, the Court was faced with a Commerce Clause challenge. The raisin producers and packers argued that the raisin crop marketing program had the effect of substantially burdening interstate commerce, since approximately 95% of the California raisin crop finds its way into interstate or foreign commerce. After noting that Congress had not already spoken on the issue of raisin crop marketing (and had therefore not preempted this field of regulation), the Court found that there was no Commerce Clause concern insofar as the regulation affected the raisins only before they were processed and packed for interstate sale and shipment. Using the analysis then applied to Commerce Clause questions, the Court held that although the ultimate effect of the regulation on interstate commerce may have been substantial, the state program had its effects before the raisins entered the stream of commerce. The Court also found that California's program "was not aimed at nor did it discriminate against interstate commerce, although it undoubtedly affected the commerce by increasing the interstate price of raisins and curtailing interstate shipments . . . ." Id. at 367.

5. Id. at 351; ABA Section of Antitrust Law, Antitrust Law Developments 1071 (4th ed. 1997).

6. 317 U.S. at 351.

7. See, e.g., FTC v. Ticor Title Ins. Co., 504 U.S. 621 (1992); Patrick v. Burget, 486 U.S. 94 (1988).

8. Ticor, 504 U.S. at 631. To qualify as a "clear articulation" of policy, the state's approval of a regulated firm's anticompetitive conduct must be explicit. See Columbia Steel Casting Co. v. Portland General Electric Co., 103 F.3d 1446 (9th Cir. 1996), amended and reh'g en banc denied, 111 F.3d 1427 (9th Cir. 1997), cert. denied, 118 S. Ct. 1688 (1998).

9. 504 U.S. at 636. Where active state oversight is absent, the Court has not hesitated to impose antitrust liability. In California Retail Liquor Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97 (1980), the State of California had established a plan for wine pricing that required wine producers to file fair trade contracts or price schedules with the state. Wholesalers were prohibited from selling wine to a retailer at prices other than those set forth in the price schedule or fair trade contract. Midcal, a wholesale wine distributor, was charged by the department of Alcoholic Beverage Control with selling wine for less than the effective price schedule established for that particular type of wine. Midcal thereafter filed suit, asking for an injunction against the state's wine-pricing scheme.

The Supreme Court held that California's system for wine pricing violated the Sherman Act. Midcal, 445 U.S. at 103. Having so held, the next issue to be decided was whether the state's involvement in the price-setting program was sufficient to grant the Department of Alcoholic Beverage Control state action antitrust immunity under Parker. After setting forth the test for immunity (the challenged restraint must be clearly articulated and affirmatively expressed as state policy; and the policy must be actively supervised by the state), the Court held that California's price maintenance program was not actively supervised by the state: "[t]he State simply authorizes price setting and enforces the prices established by private parties. . . . The national policy in favor of competition cannot be thwarted by casting such a gauzy cloak of state involvement over what is essentially a private price-fixing arrangement." Id. at 105-106 (emphasis supplied).

10. Ticor, 504 U.S. at 633. Many state action cases involve conduct of "a nonsovereign state representative," such as an administrative board. Hoover v. Ronvin, 466 U.S. 558, 568 (1984). In such cases, the two-pronged analysis discussed above is used to determine whether the displacement of competition is approved and overseen by the state. If, however, "the conduct is that of the sovereign itself" (i.e., the state legislature or state supreme court), "the danger of unauthorized restraint of trade does not arise." Id. at 569. Thus, "where the conduct at issue is in fact that of the state legislature or supreme court," it is unnecessary to "address the issues of 'clear articulation' and 'active supervision.'" Id.

11. 849 F.2d 1330 (10th Cir. 1988), cert. denied, 488 U.S. 1019 (1989).

12. Id. at 1334 (citing Phillip Areeda & Herbert Hovenkamp, Antitrust Law 6 212.4b, at 132 (Supp. 1987).

13. Id.

14. Llewellyn v. Crothers, 765 F.2d 769, 774 (9th Cir. 1985).

15. Id.

16. Id. at 774 (quoting Phillip Areeda, Antitrust Immunity for "State Action" After Lafayette, 95 Harv. L. Rev. 435, 449-50 (1981)).

17. Id. at 453. See also Davis v. Southern Bell Tel. & Tel. Co., 755 F. Supp. 1532, 1541-42 (S.D. Fla. 1991).

18. 499 U.S. 365, 372 (1991).

19. 22 F.3d 1260, 1269 (3d Cir. 1994).

20. Yeager's Fuel, 22 F.3d at 1269 (citations omitted).

21. U.S. Const., art. I, ' 8, c1. 3.

22. South-Central Timber Development, Inc. v. Wunnicke, 467 U.S. 82, 87 (1984).

23. General Motors Corp. v. Tracy, 519 U.S. 278, 287 (1997) (citations omitted).

24. New England Power Co. v. New Hampshire, 455 U.S. 331, 338 (1982).

25. 455 U.S. at 339. Congress may, however, "permit the states to regulate the commerce in a manner which would otherwise not be permissible." Southern Pac. Co. v. Arizona ex rel. Sullivan, 325 U.S. 761, 769 (1945). Any such Congressional authorization must be clearly delineated. See, e.g., South-Central Timber Development, Inc. v. Wunnicke, 467 U.S. 82 (1984).

26. See, e.g., Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520, 529 (1959).

27. C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 392 (1994). See also Wyoming v. Oklahoma, 502 U.S. 437, 454 (1992). If a state or municipal law does not discriminate against interstate commerce, there is a second line of inquiry under the Commerce Clause. Essentially, the court must determine "whether the ordinance imposes a burden on interstate commerce that is 'clearly excessive in relation to the putative local benefits.'" C & A Carbone, 511 U.S. at 390 (quoting Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970)).

28. 855 F. Supp. 1264 (M.D. Ga. 1994).

29. Id. at 1271 (citing C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383 (1994)).

30. Id.

31. 15 U.S.C. ' 35(a).

32. Llewellyn v. Crothers, 765 F.2d 769, 774 (9th Cir. 1985).

33. Davis, 755 F. Supp. at 1541.

34. City of Columbia, 499 U.S. at 372; Davis, 755 F. Supp. at 1541-42.

35. Phillip Areeda, Antitrust Immunity for "State Action" After Lafayette, 95 Harv. L. Rev. 435, 453 (1981).

36. Lease Lights Inc., 849 F.2d at 1334 (emphasis added).

37. 433 U.S. 350 (1977).

38. Id. at 359-63. See also Preferred Communications, 754 F.2d at 1415 n.14. At least one district court has held that a municipal ordinance that violates the Commerce Clause may still give rise to a state action defense. See Bonollo Rubbish Removal, Inc. v. Town of Franklin, 886 F. Supp. 955, 965 (D. Mass. 1995) (although a municipal ordinance preventing competition in the waste disposal industry violated the Commerce Clause, the private defendants that had contracted with the municipality did not have antitrust liability; they were entitled to state action immunity and to protection under the Noerr-Pennington doctrine).

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