Antitrust Federalism and State Restraints of Interstate Commerce: An Essay for Professor Hovenkamp

• Author: Alan J. Meese
• Position: Ball Professor of Law and Cabell Research Professor, William and Mary Law School
• Pages: 2161-2195

2161

Antitrust Federalism and State Restraints

of Interstate Commerce: An Essay for

Professor Hovenkamp

Alan J. Meese

I. INTRODUCTION ........................................................................... 2161

II. THE STATUS OF STATE-IMPOSED RESTRAINTS UNDER THE SHERMAN

ACT ............................................................................................. 2163

III. DUAL FEDERALISM AND LIBERTY OF CONTRACT IN 1890 ........... 2168

IV. THE FALL OF DUAL FEDERALISM AND LIBERTY OF CONTRACT ... 2182

V. APPLYING THE SHERMAN ACT TO STATE RESTRAINTS IN A

POST-1937 WORLD ..................................................................... 2186

VI. CONCLUSION .............................................................................. 2194

I. INTRODUCTION

Professor Hovenkamp has made important and insightful contributions

to the literature on antitrust federalism, antitrust history, and the influence of

evolving theories of political economy on antitrust doctrine and constitutional

law. This Essay builds upon these contributions, particularly as they relate to

the appropriate federal antitrust response to state regulation that

unreasonably restrains interstate commerce. Under modern constitutional

law, states may restrain interstate commerce by imposing restrictions on price

or banning reasonable, wealth-creating restraints. Congress could preempt

such restraints, but the Supreme Court has repeatedly held that the Sherman

Act does not nullify such legislative interference with free competition. The

Court has justified these results by invoking considerations of “federalism”

and “state sovereignty.” Thus, the Court has imputed to Congress a refusal to

exercise the full scope of its commerce power out of deference to state

regulatory prerogatives.

 Ball Professor of Law and Cabell Research Professor, William and Mary Law School.

2162 IOWA LAW REVIEW [Vol. 100:2161

As Professor Hovenkamp has explained, however, such congressional

intent is entirely fictional. During the 1890s, the constitutional regime of

“dual federalism” enforced by judicial interpretations of the Commerce

Clause prevented the overlap between federal and state regulation that makes

preemption possible. This Essay elaborates upon this (correct) conclusion,

clarifying the nature of dual federalism during antitrust’s formative era. The

Essay also suggests that due process protection for liberty of contract

prevented states from banning reasonable private restraints of intrastate

commerce, restraints that facilitated the operation of interstate markets. The

Congress that passed the Sherman Act would have assumed that states had no

authority to regulate commerce subject to the Sherman Act or reasonable

intrastate restraints beyond the scope of Congress’s power.

Of course, the constitutional framework in place during antitrust’s

formative era collapsed in 1937, when the Supreme Court abandoned liberty

of contract and ceased placing meaningful limits on Congress’s commerce

power . At the sam e time (and t his is less well-known), the Court “unshackled”

the states, weakening the Dormant Commerce Clause and allowing states to

impose restraints on interstate commerce that pre-1937 case law would have

condemned.

The simultaneous expansion of Congress’s commerce power and

relaxation of Dormant Commerce Clause standards created overlapping

regulatory authority and thus opened the door to Sherman Act preemption

of state restraints. Professor Hovenkamp has signaled openness to such

preemption, at least where state restraints produce interstate spillovers. This

Essay briefly reviews the strong case for such preemption as well as the

counterarguments against it. The Essay also offers an alternative approach

that would void restraints that produce meaningful spillovers, avoid Sherman

Act preemption of much state law, and eliminate much of the overlap between

state and federal jurisdiction that gives rise to the federalism concerns that

preemption opponents invoke.

Part II of this Essay reviews modern doctrines governing the Sherman

Act’s treatment of state-imposed restraints. Part III discusses the constitutional

landscape that Congress faced when it passed the Sherman Act in 1890,

particularly dual federalism and liberty of contract. This Part also examines

how these principles informed antitrust doctrine during antitrust’s formative

era. Part IV details the collapse of this constitutional regime during the 1930s.

Part V frames the interpretive questions posed by this collapse and articulates

the competing arguments for and against Sherman Act preemption. This Part

then offers an alternative approach that would nullify state restraints that

produce significant spillovers, while minimizing federalism concerns.

2015] ANTITRUST FEDERALISM & STATE RESTRAINTS 2163

II. THE STATUS OF STATE-IMPOSED RESTRAINTS UNDER THE SHERMAN ACT

The Sherman Act forbids contracts and other arrangements that

unreasonably restrain “trade or commerce among the several [s]tates.”1 The

classic example is a railroad cartel that charges non-competitive rates for the

interstate transportation of goods or passengers.2 What, though, if states

themselves interfere with free competition and restrain trade? Such

interference can take three forms. First, states can authorize private parties to

engage in anticompetitive conduct themselves by, for example, legalizing

horizontal price fixing or mergers that result in monopoly.3 Second, states can

compel private parties to restrain trade, by, for instance, requiring firms to

charge prices above the competitive level. Third, states can ban conduct

within interstate commerce that federal courts have previously determined to

be reasonable and thus lawful under the Sherman Act. A contemporary

example of this third category is state bans on minimum resale-price

maintenance (“rpm”), despite the Supreme Court’s holding that the practice

often creates wealth and is analyzed under the Rule of Reason.4

The Sherman Act condemns restraints in the first category, despite

ostensible state approval, unless the state “actively supervises” the resulting

prices or other conduct.5 In Parker v. Brown, the Supreme Court evaluated the

second type of restraint: California’s coercive restriction on farmers’ raisin

output.6 Over 90% of the state’s raisin crop was exported from the state, and

a private cartel producing the same result would have violated the Sherman

Act.7 Nonetheless, the Supreme Court unanimously held that the Sherman

Act does not preempt such legislation, rejecting the contrary argument by the

1. 15 U.S.C. § 1 (2012).

2. See, e.g., United States v. Joint Traffic Ass’n, 171 U.S. 505 (1898).

3. Cf. N. Sec. Co. v. United States, 193 U.S. 197, 332–33 (1904) (rejecting an argument

that state-law validity of a merger immunized a transaction from Sherman Act attack).

4. Compare Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 890–92, 899

(2007) (rejecting a per se rule banning minimum rpm because the practice often produces

competitive benefits), with California v. Bioelements, Inc., No. 10011659 (Cal. Super. Ct. Jan. 11,

2011), available at http://oag.ca.gov/system/files/attachments/press_releases/n2028_bioelements

_final_judgment.pdf (issuing a consent decree banning minimum rpm under state law). State statutes

authorizing indirect purchaser suits to enforce state antitrust laws provide another example. See

HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY: THE LAW OF COMPETITION AND ITS PRACTICE 817

(4th ed. 2010) (characterizing th ese statutes as “[t]he most difficult preemption challenge facing

state antitrust in recent years”).

5. See, e.g., Fed. Trade Comm’n v. Ticor Title Ins. Co., 504 U.S. 621 (1992) (condemning

state-authorized price fixing where states did not “actively supervise” resulting p rices). Where

states do “actively supervise” pricing, the Court treats the resulting prices as though the state itself

imposed them. Id. at 634–35. In such cases, the restraint in question falls into the second category

discussed in the text.

6. Parker v. Brown, 317 U.S. 341, 344 (1943).

7. Id. at 345, 350 (assuming such restrictions “would violate the Sherman Act if [they] were

organized and made effective solely by virtue of a [private] contract”).