Inferring Agreement in Hub-And-Spoke Conspiracies

• Author: Benjamin Klein
• Position: Professor Emeritus of Economics, UCLA, and Visiting Professor, UCLA Law School
• Pages: 127-164

INFERRING AGREEMENT IN HUB-AND-SPOKE

CONSPIRACIES

B

ENJAMIN

K

LEIN

*

The presence of a hub-and-spoke conspiracy critically depends on whether

a horizontal agreement exists among the spokes, commonly stated as whether

there is evidence of a “rim” that connects the spokes. This “rim requirement”

is now well-established antitrust law, with courts often rejecting per se hub-

and-spoke claims based on an absence of sufficient evidence (or factual alle-

gations, at the motion-to-dismiss stage) that the spokes agreed among them-

selves to comply with the hub’s contract demands.

1

This article shows that the

circumstantial evidence a court may properly use to infer such an agreement

in a hub-and-spoke-conspiracy case is substantially more limited than the cir-

cumstantial evidence a court may use in a standard horizontal-conspiracy

case.

To survive a motion to dismiss, a plaintiff’s allegations of agreement based

on circumstantial evidence must include, in addition to parallel behavior,

“plus factors” that “raise[ ] a suggestion of a preceding agreement.”

2

Courts

have identified a number of plus factors, most importantly, whether the de-

fendants had “any rational motive” to conspire, and whether each defendant’s

conduct, absent a conspiracy, was not “consistent with the defendant’s inde-

pendent interest.”

3

* Professor Emeritus of Economics, UCLA, and Visiting Professor, UCLA Law School. I

have benefited significantly from comments by Jonathan Barnett, Andrew Gavil, Mark Grady,

Lee Greenfield, Barak Orbach, and Josh Wright.

1

Recent decisions that have rejected hub-and-spoke claims based on insufficient evidence of

an agreement among the spokes include In re Musical Instruments & Equipment Antitrust Litiga-

tion, 798 F.3d 1186, 1193 (9th Cir. 2015); Total Benefits Planning Agency, Inc. v. Anthem Blue

Cross & Blue Shield, 552 F.3d 430, 435–36 (6th Cir. 2008); R.J. Reynolds Tobacco Co. v.

Cigarettes Cheaper!, 462 F.3d 690, 696–97 (7th Cir. 2006); and PepsiCo, Inc. v. Coca-Cola Co.,

315 F.3d 101, 110–11 (2d Cir. 2002).

2

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007).

3

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). To survive

summary judgment, the evidence presented must “‘tend[ ] to exclude the possibility’ that the

alleged conspirators acted independently.” Id. at 588 (quoting Monsanto Co. v. Spray-Rite Serv.

Corp., 465 U.S. 752, 753 (1984)). A comprehensive review of plus factors used to infer agree-

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NTITRUST

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OURNAL

[Vol. 83

The Supreme Court outlined the circumstantial evidence that may be used

to infer agreement 80 years ago in Interstate Circuit,

4

a case that is high-

lighted in virtually every antitrust casebook and that continues to be widely

cited in antitrust litigation. Interstate Circuit, a film exhibitor with close to a

monopoly in first-run exhibition in several Texas cities, demanded that film

distributors introduce certain restrictions, most importantly, doubling mini-

mum admission prices in the contracts they entered into with later-run exhibi-

tors operating in Interstate Circuit cities. Although there was no direct

evidence in the record of meetings, conversations, or exchanged documents

indicating the distributors communicated with one another regarding joint ac-

ceptance of the Interstate Circuit contract demands, the Court concluded that

the existence of such a horizontal agreement could be inferred from circum-

stantial evidence.

The circumstantial evidence on which the Court in Interstate Circuit based

its inference of agreement included, in addition to the distributors’ uniform

parallel behavior in accepting Interstate Circuit’s contract demands, several

plus factors: (1) universal distributor doubling of minimum later-run-exhibi-

tion prices was a “radical departure from the previous business practices of

the industry”;

5

(2) the lack of “any persuasive explanation, other than agreed

concert of action,”

6

for the distributors’ parallel actions; (3) Interstate Cir-

cuit’s contract demands were made in a letter sent simultaneously to all the

film distributors, which included all the distributors as co-addressees, so that

“from the beginning each of the distributors knew that the proposals were

under consideration by the others”;

7

and (4) while the distributors may have

had a joint interest in increasing later-run prices, complying with Interstate

Circuit’s contract demands was contrary to each film distributor’s individual

economic interests, absent assurance that all distributors would similarly com-

ply. “Each was aware that all were in active competition and that without

substantially unanimous action . . . there was risk of a substantial loss of the

business and good will of the subsequent-run and independent exhibitors.”

8

Based on this circumstantial evidence, the Court concluded that “[i]t taxes

credulity to believe” the distributors would “have accepted and put into opera-

tion with substantial unanimity such far-reaching changes in their business

ment is provided in William E. Kovacic et al., Plus Factors and Agreement in Antitrust Law, 110

M

ICH

. L. R

EV

. 393 (2011).

4

Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939).

5

Id. at 222.

6

Id. at 223.

7

Id. at 222.

8

Id.

2020] I

NFERRING

A

GREEMENT IN

H

UB

-

AND

-S

POKE

C

ONSPIRACIES

129

methods without some understanding that all were to join, and we reject as

beyond the range of probability that it was the result of mere chance.”

9

I argue in this article that, contrary to the Court’s reasoning, the plus factors

identified in Interstate Circuit cannot be applied to infer agreement because

what was involved was an alleged hub-and-spoke conspiracy—not a purely

horizontal conspiracy. To properly determine whether such circumstantial evi-

dence can be used to infer agreement in the context of a hub-and-spoke con-

spiracy, one must explicitly consider the vertical relationship between the hub

and spokes and exclude the possibility that parallel spoke behavior is “nothing

more than a series of separate, similar vertical agreements.”

10

Determining whether a fact pattern should be considered circumstantial evi-

dence of a horizontal agreement or merely a series of purely vertical agree-

ments is often difficult. As the Ninth Circuit perceptively observed in In re

Musical Instruments & Equipment Antitrust Litigation (Guitar Center), in

hub-and-spoke cases, “the line between horizontal and vertical restraints can

blur.”

11

This article clarifies how this line should be drawn by focusing on

evidence of the key distinguishing economic condition—the hub’s ability to

unilaterally enforce its vertical contract demands. Inference of an agreement

must refute the possibility that the hub’s vertical contract enforcement sanc-

tion is sufficient, by itself, to obtain universal spoke compliance without any

agreement among the spokes.

To illustrate, consider a simple vertical contract restraints case, such as the

resale price maintenance contracts that were the subject of Leegin.

12

One obvi-

ously cannot infer a horizontal agreement among the retailers to accept

Leegin’s demand for resale price maintenance solely based on parallel re-

tailer acceptance of the demand, combined with the circumstantial “plus fac-

tors” that (1) Leegin communicated its contract demand simultaneously to all

retailers, (2) each retailer’s decision to stop discounting was a major change

from its previous practices, and (3) each retailer’s acceptance of the Leegin

contract demand to stop discounting appears contrary to the retailer’s self-

interests, absent all retailers similarly agreeing to stop discounting.

These facts should not be considered circumstantial evidence of an agree-

ment among retailers because Leegin can terminate the supply of its products

to retailers that do not comply with its contract demand. If the additional prof-

its a retailer could earn in the short run from noncompliance (before Leegin

9

Id. at 223.

10

Toys “R” Us, Inc. v. FTC, 221 F.3d 928, 935 (7th Cir. 2000). This was the defendants’

argument in response to the hub-and-spoke claim in Toys “R” Us.

11

In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d 1186, 1192 (9th Cir. 2015)

(Guitar Center).

12

Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007).