Giving teeth to Sherman Act enforcement in the intrabrand context: weaning courts off their interbrand addiction post-Sylvania.

• Author: Rodes, Carlo Luis

INTRODUCTION

The evasion of antitrust liability for anticompetitive conduct in the intrabrand market is a frequent occurrence, which receives little to no attention from courts. (1) Within many intrabrand markets, anticompetitive and monopolistic conduct is a real threat, if not already a reality, and deserves more attention from the courts than it currently receives.

To illustrate the problem, imagine two companies (X and Y) that wish to provide distribution/dealership services for a group of manufacturers of distinct, but similar, products. Imagine, for example, that X and Y both want to open car dealerships in the same geographic area and BMW, Mercedes, and Lexus would all like to have their cars sold by either X or Y. (2) Because the car companies just want their inventory sold, they do not care which one sells their cars. Now let us assume that X has more bargaining power than Y from having leased potential car lots in locations that are more attractive and accessible and can thereby promise the car companies a superior presence in the local luxury automobile market. This sway is enough for X to convince the manufacturers to enter into exclusive distributorship agreements whereby the manufacturer agrees with X that it will not allow competing dealers to sell its products where other dealers might compete with X, (3) which of course includes Y.

Due to X's business acumen and excellent locations, X is able to convince all three of the manufacturers to agree to exclusive distributorships. (4) For the duration of each agreement, Y, or any other competitor who wishes to enter this market, will be unable to procure cars to sell from that particular manufacturer. The more exclusive agreements a firm like X is able to secure, the less variety of luxury cars other would-be dealers will have, thus drawing customers away from them and toward X. Eventually, new dealers seeking to enter the luxury car market will find it nearly impossible to contract with one of these manufacturers to sell their cars due to X's exclusive distributorships. Additionally, if the majority of the luxury automobile manufacturers deal exclusively with X, entrants into the luxury dealership business will find themselves with only a few, less popular brands, hardly worth selling. Downstream customers will also lose out-decreased competition among the dealerships due to the exclusive arrangements will manifest itself in higher sticker prices and monopolistic premiums.

So, can Y bring a claim under section 1 (5) or 2 (6) of the Sherman Act for anticompetitive dealing or monopolization against X? Although it technically could under the current antitrust regime, Y's chances of surviving a motion to dismiss or summary judgment would be small. (7) As a result, firms in the intrabrand market that are the victims of collusion among competing distributors and their suppliers have little hope of vindicating their right to participate in a competitive market. Thus, ironically, the very laws created to foster competition and punish unreasonable restraints of trade offer the very loopholes through which intrabrand distributors are legally pushed out of the market because, according to the courts, it serves a greater, "pro-competitive" good of increased interbrand competition and efficiency.

This Note's analysis is particularly germane in two oft-occurring circumstances. It applies in markets with few distributors and many manufacturers. It also applies, with much overlap, to any market where a distributor is offering an indispensable service to its supplier, and based on its recognition of its own necessity, the distributor insists on exclusive vertical nonprice agreements. These agreements prevent the supplier from allowing other distributors to carry its goods or provide its services--effectively driving the distributor's competitors out of the market. For example, this same issue has arisen in the ticket vending market (involving companies such as Ticketmaster) as well as in the movie theater business, both of which will be discussed below. (8)

The problem, if not yet apparent, is that under the Supreme Court's current jurisprudence, there is little to no enforcement of such anticompetitive agreements under the Sherman Act given the Court's infatuation with effects on interbrand competition and its apathy toward intrabrand competition.

This Note addresses the practical impact of this trend, particularly as it applies to what should be considered anticompetitive behavior, and explains why such behavior is in dire need of increased scrutiny by the courts. Anticompetitive behavior that just happens to fall short of the letter of the law, yet violates its spirit, should not be sanctioned by that same law.

Part I begins this analysis by setting forth the governing legal standards for anticompetitive conduct under sections 1 and 2 of the Sherman Act, focusing in particular on the rule of reason analysis employed by the Supreme Court as to nonprice vertical restraints in Continental T. V., Inc. v. GTE Sylvania Inc. (9) and on the requirements of a monopolization claim.

Part II expands upon the legal analysis in Part I and applies it to the hypothetical set forth above, as well as to Ticketmaster and movie theaters. This Part will show the various ways in which dominant distributors in intrabrand markets are able to evade liability under the Sherman Act despite anticompetitive intent and conduct. It also reveals how the Chicago School of Economics has influenced the Court's treatment of intrabrand competition and has led to a jurisprudence that readily overlooks anticompetitive actions, so long as they take place within the intrabrand market. (10)

Finally, Part III recommends a possible solution that can have a positive impact on enforcement of anticompetitive conduct falling outside the strict language of the rules, while violating their spirit and allowing for unreasonable restraints of trade in the intrabrand distribution market. Using Lorain Journal Co. v. United States (11) as a classic example of an anticompetitive vertical restraint case, this Part concludes that courts should move beyond their current preoccupation with economic and procompetitive impacts on the interbrand market and focus on alternative ways of considering the intrabrand problem, especially when it is the distributor who wishes to impose the vertical restraint on its supplier, and not the other way around. (12) Analyzing these vertical nonprice restraints in the framework of group boycotts and unilateral refusals to deal, instead of only focusing on intrabrand competition, is a first step toward preventing this kind of Sherman Act evasion.

1. THE LEGAL FRAMEWORK GOVERNING INTERBRAND AND INTRABRAND COMPETITION AND MONOPOLIES

   This Part will set forth the governing legal standard for anticompetitive conduct under sections 1 (contracts in restraint of trade) and 2 (monopolies in restraint of trade) of the Sherman Act. It will discuss the use of a nonprice vertical restraint--the exclusive distributorship--as a means of creating monopoly-like conditions without a technical violation of the Sherman Act. It will focus in particular on the rule of reason analysis, developed by the Supreme Court in Sylvania, as it pertains to nonprice vertical restraints and on the requirements of a monopolization claim. This foundational discussion will set the stage for Part II, where I will develop the argument that the Supreme Court's current antitrust jurisprudence, including use of the rule of reason and its preoccupation with stimulating interbrand competition at any cost, is permitting anticompetitive behavior that should be punished under the Sherman Act.

   An exclusive distributorship exists when a supplier or manufacturer agrees with a dealer that it will not allow competing dealers to sell its products where other dealers might compete with it. (13) There has been an overwhelming amount of case law demonstrating that a manufacturer may grant exclusive distributorships, even if it results in the diminution or elimination of intrabrand competitors, provided that there is not enough evidence to make out a monopolization claim under the Sherman Act. (14) Furthermore, "[p]er se rules of illegality are appropriate only when they relate to conduct that is manifestly anticompetitive." (15) Thus, exclusive dealerships are evaluated under the rule of reason since such arrangements are vertical nonprice restraints of trade. (16)

   1. The Rule of Reason Analysis

      The rule of reason is the standard for determining whether a practice restrains trade in violation of section 1 of the Sherman Act. (17) Section 1 of the Sherman Act states in relevant part:

      Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States ... is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony.... (18) Aspects such as the particularities of the relevant business under consideration and "the restraint's history, nature, and effect" should be taken into account under the rule of reason analysis. (19) Another important consideration is whether the businesses involved have market power. (20) The purpose of this rule is to "distinguish[] between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer's best interest." (21) Therefore, in order [t]o establish a cause of action for an unreasonable restraint of trade under the rule of reason, the plaintiff must show" that there is an agreement between two or more persons or business entities, that the intent behind that agreement is to unreasonably restrain competition, and that the restraint actually injures competition. (22)

      There are further aspects of the intrabrand market that need to be touched on before...