Antitrust and the supremacy clause.

AuthorSquire, Richard

INTRODUCTION I. VIOLATION AND PREEMPTION RUN TOGETHER: ANTITRUST CONFLICT UP TO NOW A. Parker's Invisible Preemption Doctrine B. The Parker Line's Implied Exemption Cases C. "Violation" as the Source of the Court's Municipality Mishaps D. A Bad Choice Between Ignoring Conflict and Inventing "Violation" II. DEFINING THE SHERMAN ACT'S PREEMPTIVE REACH A. Congress's Antitrust "Purposes and Objectives" B. Preemption Criteria Suggested by Previous Commentators C. Limiting Criteria that Vindicate Congressional Intent 1. Laws with mixed beneficiaries 2. Laws that pursue "fair" or "reasonable" prices: A public cost theory of active supervision D. Antitrust Preemption Applied CONCLUSION INTRODUCTION

To decide if a federal statute blocks enforcement of a state law, the Supreme Court normally asks whether the state law conflicts with the purpose of the federal statute and thus is preempted under the Supremacy Clause. But in cases of conflict between state economic regulation and the Sherman Antitrust Act, the Court has eschewed its standard preemption approach. Instead, the Court applies its doctrine of "state-action immunity," under which a state regulation is unenforceable only if it arises from or causes a "violation" of the same federal antitrust rules that restrict the market conduct of private firms.

The Court's "violation" requirement is ill-suited to preemption questions because the antitrust rules for market participants rest on assumptions that do not apply to trade restraints imposed instead by lawmakers. For example, although a primary objective of the Sherman Act is to prevent firms from acquiring unchecked monopoly power, courts do not deem mere possession of monopoly an antitrust violation. The reason is that firms in otherwise competitive markets often acquire temporary monopoly power through innovation that benefits consumers. Monopolies protected by state economic regulation, by contrast, rarely reward innovation, and by definition are shielded from the market forces that make most monopolies temporary. But because of the violation requirement, courts have repeatedly dismissed federal antitrust challenges to state laws creating monopolies, even if the state does not regulate the price the monopolist charges. In this way, the violation requirement causes courts to excuse state schemes that involve no illegal market conduct but nonetheless clash with federal antitrust policy.

The violation requirement stems from the Court's broader failure in its state-action immunity cases to ask whether the enforceability of federal or state law is at stake. In a challenge to the enforcement of federal antitrust law the question of an antitrust violation is pertinent: such a challenge begins when a market participant is (or fears being) accused of violating the Sherman Act, and that party defends on grounds that the Act contains an implicit exemption for conduct which furthers a valid state regulatory scheme. But if a market participant instead invokes the Sherman Act to challenge enforcement of state law, an alleged state law violation is the source of the controversy, and the only federal question is whether the state law conflicts with the purpose of the Act and therefore is preempted. In that case the question whether there has been market conduct that violates federal antitrust law is usually irrelevant and often misleading, as challenges to state laws protecting monopolies illustrate.

The Court's confusion of violation and preemption also explains why the Court's antitrust decisions involving municipalities have been especially controversial. Municipalities can act as market participants and thus sometimes violate the Sherman Act, and they also can enact economic regulation that conflicts with the Act. But the Court has overlooked this fundamental distinction; indeed, in one case it suggested that a municipality violated the Sherman Act--and therefore was subject to triple damages--merely for enacting regulation that reduced economic competition, as of course most regulation does. That decision forced Congress to immunize municipalities against all antitrust claims for damages. Despite this congressional rebuke, the Court has continued to conflate the distinct questions of antitrust violation and preemption, thereby revealing that it has yet to identify the root of its troubles in its state-action immunity jurisprudence.

In this Article I show how the Supreme Court, by running together questions of antitrust violation and preemption, has failed to identify conflict between state economic regulation and federal antitrust policy. In particular, I show how the Court's state-action immunity doctrine, while useful for determining whether otherwise illegal market conduct advances a state regime, does not reveal whether a state regime should be deemed preempted. I thus derive rules of antitrust preemption to replace that doctrine when the question is the enforceability of state rather than federal law. Unlike the Court's violation requirement, my approach vindicates the Supremacy Clause because it identifies those state laws that clash with Congress's objective to prevent marketplace wealth transfers from consumers to producers. My approach also recognizes that Congress intended lawmakers to enjoy greater latitude than private firms to restrain trade. This fact plus differences in incentives suggests that state lawmakers unlike private firms should be able to harm consumers in order to enrich non-producers or impose "fair" prices. My approach is therefore deferential when an economic goal other than producer enrichment is evident on the face of a state regulatory scheme. But when a state suspends price competition among producers and thereby creates a monopoly or the equivalent of a cartel, the high degree of conflict with federal antitrust policy weighs in favor of preemption.

Disentangling questions of antitrust violation and preemption also clears up another confusing aspect of current doctrine. The Supreme Court has held that a party who seeks state-action immunity must show that public officials "actively supervise" private market participants. When a party seeks relief from enforcement of the Sherman Act, such supervision is useful evidence that the state intended the party's conduct. But when a party instead seeks relief from enforcement of state law, the Court has been unable to explain why active supervision should matter, a problem obscured by the Court's general failure to break out antitrust preemption as a distinct category of claim. I observe that a state which takes control over market prices incurs costs the state could avoid if its only goal were to confer monopoly profits on producers. These costs are pricing distortions, higher administrative expenses, and constituency protest. A state's willingness to incur these costs thus suggests that the state's regulatory objectives do not clash with federal antirust policy. My proposed preemption doctrine therefore allows states to suspend price competition among producers if the state also steps in to set market prices.

  1. VIOLATION AND PREEMPTION RUN TOGETHER: ANTITRUST CONFLICT UP TO NOW

    The Sherman Act makes it a federal crime for a person engaged in interstate commerce to make an agreement "in restraint of trade" or to "monopolize." (1) When the Act was passed in 1890, the only meaning of "monopoly" at common law was an exclusive trading position granted or held by a government. (2) During the Act's first fifty years, however, courts had little occasion to consider the Act's impact on state-created monopolies and other state (and local (3)) regulatory schemes. (4) But beginning in the 1930s, the Supreme Court broadened its definition of interstate commerce and, by implication, the set of economic activities within the Sherman Act's reach. (5) Antitrust's second half-century therefore saw more than a dozen cases in which the Court sought to resolve alleged conflict between the Sherman Act and state economic regulation. The Court decided most of these cases by applying its "state-action immunity" doctrine, also called the Parker doctrine for its genesis in the 1943 case Parker v. Brown. (6) Beginning with Parker, the Court has consistently confused the distinct questions whether the Act prohibits market conduct and whether it preempts state law. While the doctrine formed by Parker and its progeny has attracted extensive criticism--including a congressional rebuke--neither the Supreme Court nor previous commentators have recognized how that doctrine's multiple deficiencies stem from this single point of confusion.

    1. Parker's Invisible Preemption Doctrine

      Parker was a preemption case: the only question in it was whether federal law rendered a state regulatory regime unenforceable. But one could easily read the Court's opinion without noticing. (7) California had created a scheme in which state officials enriched raisin farmers by restricting raisin sales and thereby raising prices. (8) Farmer Brown, fearing fines or imprisonment under California law if he honored sales contracts signed before the scheme took effect, sued state officials to block the scheme's enforcement. (9) Although federal law allows private parties such as Brown to sue for triple damages if they are injured by conduct the Sherman Act prohibits, (10) Brown did not allege that California or its officials had violated the Act. Instead, Parker sought injunctive relief on grounds that the raisin regime was unenforceable under the dormant commerce clause. (11) On appeal, the Supreme Court also asked for briefing on "whether the state statute involved is rendered invalid by the action of Congress in passing the Sherman Act." (12) A congressional statute renders a state law invalid by operation of the Supremacy Clause; (13) the Court was thus asking a preemption question.

      When the Court issued its opinion, however, it failed to mention the Supremacy Clause or any form of the term...

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