American Needle and the Future of the Single Entity Defense Under Section One of the Sherman Act

• Published date: 01 September 2011
• Author: Nathaniel Grow
• DOI: http://doi.org/10.1111/j.1744-1714.2011.01119.x
• Date: 01 September 2011

American Needle and the Future of the

Single Entity Defense Under Section

One of the Sherman Act

Nathaniel Grow

n

INTRODUCTION

The Sherman Antitrust Act

1

is structured around a fundamental distinc-

tion between concerted and independent action.

2

Specifically, Section One

of the Sherman Act regulates concerted activities between two or more

entities, outlawing ‘‘[e]very contract, combination . . . or conspiracy, in re-

straint of trade,’’

3

a provision which has subsequently been limited to target

only ‘‘unreasonable’’ restraints of trade,

4

namely, those that are ‘‘inher-

ently . . . fraught with anticompetitive risk.’’

5

Meanwhile, the independent

actions of a single firm are addressed by the Sherman Act’s much narrower

Section Two, which only regulates the monopolization, or attempted

monopolization, of an industry.

6

r2011 The Author

American Business Law Journal r2011 Academy of Legal Studies in Business

449

American Business Law Journal

Volume 48, Issue 3, 449–501, Fall 2011

n

Assistant Professor of Legal Studies, TerryCollege of Business, University of Georgia. I wish

to thank Ann Morales Olaza

´bal, Robert Bird, and two anonymous reviewers for their helpful

comments on earlier drafts of this article.

1

15 U.S.C. § 1(2006).

2

Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 761 (1984).

3

15 U.S.C. § 1 (2006).

4

See, e.g., Gabriel A. Feldman, The Misuse of the Less Restrictive Alternative Inquiry in Rule of

Reason Analysis,58A

M.U.L.REV.561, 570 (2009) (describing the emerging analysis as finding a

practice unreasonable if there is a less restrictive alternative available).

5

Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768–69 (1984).

6

15 U.S.C. § 2 (2006).

This difference in scope between Sections One and Two of the

Sherman Act carries significant practical implications. Because many

Section One cases are decided under the rule of reasonFa notoriously

‘‘open-ended’’ and subjective standard requiring consideration of a

‘‘multitude of relevant factors’’ to determine whether a particular re-

straint’s pro-competitive benefits outweigh its anticompetitive effects

7

F

the outcome of Section One litigation can be extremely difficult

to predict. As a result, firms may struggle to assess the potential for

antitrust liability with any degree of certainty prior to entering into par-

ticular agreements.

8

Moreover, with its highly burdensome discovery pro-

cess, antitrust litigation under Section One is both extremely expensive

and time consuming.

9

In contrast, litigation under Section Two of the

Sherman Act is significantly rarer

10

and much more difficult for plaintiffs

to win.

11

Despite the practical significance of the distinction between con-

certed and independent action under the Sherman Act, courts have strug-

gled at times to determine whether certain challenged activities properly

fall within the ambit of Section One. For example, courts have disagreed

regarding the applicability of Section One to agreements between separate

legal entities within the same corporate umbrella, such as a parent corpo-

7

Gabriel Feldman, The Puzzling Persistence of the Single Entity Argument for Sports Leagues: Amer-

ican Needle and the Supreme Court’s Opportunity to Reject a Flawed Defense, 2009 WISC.L.REV.

835, 898 (noting further that the rule of reason ‘‘has been called the ‘antitrust equivalent of

Chinese water torture.’’’ (quoting In re Detroit Auto Dealers Ass’n, Inc., 955 F.2d457, 475–76

(6th Cir. 1992))).

8

E.g., Maurice E. Stucke, Does the Rule of Reason Violate the Rule of Law?, 42 U.C. DAVIS L. REV.

1375, 1422–29 (2009).

9

Edward D. Cavanagh, Detrebling Antitrust Damages: An Idea Whose Time Has Come?,61TUL.L.

REV.777, 809 (1987). Professor Cavanagh notes that ‘‘[a]ntitrust suits are frequently lengthy,

complicated and costly both in terms of monetary costs, including legal fees and related discovery

expenses, and nonmonetary costs, including dislocation of employees, decline in firm morale and

negative publicity.’’ Id. See also Feldman, supra note 7, at 839 (noting that ‘‘[d]iscovery in antitrust

cases has been referred to as ‘war’ . . . .’’ (quoting Frank H. Easterbrook, Discovery as Abuse,69

B.U. L. REV. 635, 635 (1989))).

10

Karen Jordan, Note, Forming a Single Entity: A Recipe for Success for New Professional Sports

Leagues,3V

AND.J.ENT.L.&PRAC. 235, 237 (2001).

11

See Edward Mathias, Comment, Big League Perestroika? The Implications of Fraser v. Major

League Soccer, 148 U. PA.L.REV. 203, 219–20 (1999) (noting that claims under Section 2 of

the Sherman Act are more difficult to prove than Section 1 claims).

450 Vol. 48 / American Business L aw Journal

ration and its less than wholly owned subsidiary.

12

Similarly, the activities of

joint venturesFentities created by two or more firms for the purpose of

jointly engaging in some economic activity

13

Fcan also pose significant

conceptual difficulty under Section One.

14

On the one hand, joint ventures

will typically operate as, and appear to be, a single firm in the market. On

the other hand, however, joint ventures are often closely managed by

multiple separate, sometimes competing firms, raising the potential for the

sort of collusive activity prohibited by Section One.

The U.S. Supreme Court has only rarely addressed the parame-

ters for distinguishing between unilateral and concerted conduct

under the Sherman Act. Until recently, the Court’s most definitive treat-

ment of the issue came in the 1984 case of Copperweld Corp. v. Independence

Tube Corp.

15

In Copperweld, the Court determined that Section One did

not apply to agreements between a corporation and its wholly owned

subsidiary.

16

The Court reasoned that because the parent corporation

and subsidiary shared a ‘‘complete unity of interest’’

17

Finsofar as the

parent could assert full control over the subsidiary whenever it wantedF

their collusion did not deprive ‘‘the marketplace of the independent

centers of decisionmaking that competition assumes and demands.’’

18

Thus, the two were more properly ‘‘viewed as a single economic

unit.’’

19

Subsequent lower courts have extended the Copperweld ‘‘single en-

tity’’ concept beyond just a parent corporation and its wholly owned sub-

sidiary. For example, courts relying on Copperweld have found that Section

One of the Sherman Act did not apply to alleged collusion between sister

12

See infra notes 68–75 and accompanying text.

13

Herbert Hovenkamp, Exclusive Joint Ventures and Antitrust Policy, 1995 COLUM.BUS.L.REV.

1, 2.

14

See Thomas A. Piraino, Jr., The Antitrust Analysis of Joint Ventures After the Supreme Court’s

Dagher Decision,57EMORY L.J. 735, 738–46 (2008) (discussing the various ambiguities in stan-

dards applied to joint venture conduct under the Sherman Act).

15

467 U.S. 752 (1984).

16

Id. at 777.

17

Id. at 771.

18

Id. at 769.

19

Id. at 772 n.18.

2011 / American Needle and the Future of the Single Entity Defense 451