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

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 same time (and this 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 these 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 prices). 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”). 2164 IOWA LAW REVIEW [Vol. 100:2161 United States, as amicus curiae. 8 Invoking the Constitution’s “dual system,” in which states are “sovereign,” the Court declined to impute to Congress an intent to ban the restraint, which “derived its authority and its efficacy from the legislative command of the state and was not intended to operate or become effective without that command,” even though that “command” restrained interstate commerce as much as analogous and illegal private conduct. 9 Nearly five decades later, the Court reiterated that Parker rested upon: “principles of federalism and state sovereignty,” and held that the Sherman Act did not ban anticompetitive restraints imposed “as an act of government.” 10 Subsequently the Court applied similar logic to the third category of state-imposed restraints, namely, bans on private wealth-creating conduct. 11 In Exxon Corp. v. Governor of Maryland , the Court rejected antitrust preemption of Maryland’s ban on vertical integration and procompetitive price discrimination by gasoline refiners, both of which were lawful under federal antitrust law. 12 The Court conceded that the bans had an “anticompetitive effect” and interfered with “economic liberty,” the latter of which, the Court said, was the central policy of the Sherman Act. 13 Nonetheless, the Court opined that antitrust preemption would “effectively destroy” states’ ability to regulate economic activity. 14 In so holding, the Court implicitly equated “regulation” with coercive interference with wealth-creating activity. In California v. ARC America , the Court rejected Sherman Act preemption of state antitrust regulation, namely, a provision allowing indirect purchasers to recover damages...