Is the quick-look antitrust analysis in PolyGram Holding inherently suspect?

• Author: Verschelden, Catherine

1. INTRODUCTION II. BACKGROUND A. The Per Se Analysis B. Development of the Rule of Reason Analysis C. Development of Quick-Look Tests under the Rule of Reason Analysis 1. Supreme Court Discussion of the Quick-Look Analysis 2. Other Examples of the Supreme Court's Treatment of Quick-Look Analyses III. DISCUSSION OF THE RATIONALE AND CONCLUSIONS OF POLYGRAM HOLDING A. Commission's and Circuit Court's Analysis B. The Quick-Look Analysis and Outcome Were Correct 1. Commentary on PolyGram Holding by Academics and Practitioners a. Inherently Suspect Categorization b. Rejection of Free Riding Justification 2. PolyGram's Arguments Were Not Legally Sufficient IV. RECOMMENDATION V. CONCLUSION I. INTRODUCTION

   Congress enacted the Sherman Act (1) in 1890 to prohibit restraints of trade and to promote competition. (2) A critical element in the enforcement of the Sherman Act is consistency. With over 100 years of case law history, plaintiffs and defendants in antitrust litigation can normally find and skew case law or dicta to support their positions. Consistency is essential because antitrust litigation is typically very time consuming, detail oriented, and expensive. (3) If the parties to the lawsuit do not know what to expect from the court and what test or rule will apply to them, there will be perverse consequences: private plaintiffs, the Department of Justice, and the Federal Trade Commission ("Commission") may not be willing to bring antitrust lawsuits. (4) Similarly, defendant firms may be less likely to form joint ventures because of the risk that they may be held liable under the Sherman Act and face lengthy and costly lawsuits. The need for a consistent application of a designated rule for a given antitrust situation is clear. (5)

   Traditionally, courts have applied the Sherman Act to situations of allegedly anticompetitive behavior in the form of two analyses: per se and rule of reason. (6) But more recently, the traditional dichotomous approach to allegedly anticompetitive behavior has given way with the creation of the "quick-look" (7) analysis. Courts have recognized that many instances of allegedly anticompetitive behavior should be examined under an approach that is neither as harsh as a per se rule analysis nor as in-depth as a rule of reason analysis. (8) Courts have thus created a continuum of rules that are used to analyze "inherently suspect" and "presumptively unlawful" behavior. (9) But confusion remains over which rule a court should apply to a given situation.

   In PolyGram Holding Inc. v. Federal Trade Commission, (10) the question of which rule to apply is even murkier. Jose Carreras, Placido Domingo, and Luciano Pavarotti--otherwise known as the Three Tenors--performed concerts together in 1990, 1994, and 1998. (11) PolyGram Holding had notable success distributing the recording of the first concert, and Warner Communications also enjoyed success, though relatively less, distributing the second recording. (12) The companies agreed to distribute jointly the third recording and to consult one another on all marketing and promotional activities. (13) They retained their exclusive rights to the earlier recordings and were not restrained in their ability to promote them. (14) But, the companies were worried that those promotions would weaken sales of the jointly distributed recording because customers might be indifferent between the different recordings, viewing them as substitutes, and buy the recording that is cheapest, which would be one of the earlier recordings and not the jointly distributed recording. (15)

   To improve the third recording's sales prospects, the companies agreed to suspend temporarily all price discounting and advertising of the earlier recordings for two and a half months after the release of the new recording. (16) The parties hoped these measures would increase the likelihood for a successful release of the third recording, thereby enhancing the long-term success of all the recordings and strengthening the Three Tenors brand. (17) The distinguishing factor in this case was that the restraints were placed on the first two recordings, which were not owned by the joint venture. (18) These moratoriums restrained the manner in which products outside the joint venture competed. The Commission brought suit claiming that the moratoriums were anticompetitive and constituted a horizontal agreement to restrain trade. (19) Crucial to the outcome of the case was whether PolyGram could prove the restraints were ancillary to--reasonably necessary for the formation of--the joint venture and thus were procompetitive. This Note explores the rationale and correctness of the Commission's and the D.C. Circuit's analysis of the moratorium agreements.

2. BACKGROUND

   1. The Per Se Analysis

      The per se rule of illegality is reserved for activities like naked price fixing, for which there is no beneficial effect and the actor cannot justify the significant impairment of competition with a legitimate excuse or efficiency defense. (20) Courts forgo a detailed inquiry in these cases because activities like price fixing are known and so likely to restrain trade that the inquiry is not worth the time and expense of conducting "an incredibly complicated and prolonged economic investigation into the entire history of the industry involved." (21) Once the plaintiff proves the existence of a naked price restraint, the inquiry ends, and the conduct is deemed unlawful. (22) Even if the defendant offers a procompetitive justification in a naked price-fixing case, the court will still apply the per se rule of illegality. (23) That decision is a result of courts' value judgments regarding the extremely slim chances that enhanced competition will result from a restraint that is facially and inherently anticompetitive. (24)

   2. Development of the Rule of Reason Analysis

      Almost from the start of American antitrust jurisprudence, the Supreme Court has set a tone of practicality and common sense. It began with the Court's application of a reasonableness standard to the Sherman Act in Standard Oil v. United States (25) in 1911. (26) The Sherman Act has a "generality and adaptability" that allows its application to be flexible and "not go into detailed definitions which might either work injury to legitimate enterprise or through particularization defeat its purposes by providing loopholes for escape." (27) It does not restrain a party's freedom of action. (28) The Sherman Act only prohibits unreasonable restraints of trade. (29) As a result, direct agreements that restrain trade and ancillary agreements (30) that restrain trade are analyzed differently. (31) Ancillary or partial restraints of trade are not necessarily unlawful if they are reasonably necessary to secure the main purpose of a legitimate contract. (32) This understanding promotes and facilitates the conduct of business and the contracting between businesses and business persons. (33) It also indicates that antitrust laws will not overly restrict the workings of free enterprise.

      A full rule of reason analysis evaluates the purpose and the effect of the allegedly anticompetitive behavior. (34) The analysis can be broken down into three steps. The first issue is whether the defendant has market power in a defined relevant market for goods or services and whether the defendant has used that power to affect adversely competition through increased prices or decreased output. (35) If the plaintiff meets these requirements, the second step shifts the burden to the defendant to prove that the challenged restraint has procompetitive justifications. (36) If the defendant meets this burden, the plaintiff must prove that the restraint is not reasonably necessary to attain the procompetitive justification or that a less anticompetitive restraint may be used to attain the procompetitive justification. (37)

      The market analysis question in step one is the primary distinguishing factor between a rule of reason analysis and a per se analysis. The requirement is also the most costly, in terms of time, effort, and money, for plaintiffs to prove. (38) The practical result of the requirement is that defendants usually prevail in a full rule of reason analysis. (39) Thus, which antitrust rule a court applies may be outcome determinative where the only options are a cursory per se analysis or a full rule of reason analysis. (40)

   3. Development of Quick-Look Tests under the Rule of Reason Analysis

      As courts have moved away from the dichotomous approach to antitrust analysis, they have applied the quick-look (41) analysis in situations "when the great likelihood of anticompetitive effects can easily be ascertained." (42) In other words, the quick-look analysis is applicable when "an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets." (43) In situations where actors take anticompetitive steps and proffer no plausible justification or only very weak justifications for their conduct, use of a quick-look analysis is advantageous.

      After a plaintiff alleges that the defendant-actors violated the antitrust laws, quick-look shifts the burden to the defendant-actors to offer a competitive justification for their conduct. As the conduct and its effects become more obviously anticompetitive, they trigger a more abbreviated analysis. (44) If the defendant-actors' justification is plausible, the plaintiff must show either that the conduct likely harmed consumers or present actual market data. The defendant-actors then must prove that, on the balance, the conduct was procompetitive, not anticompetitive.

      Quick-look analyses take short cuts to get to the defined issue. In the process, they may relieve plaintiffs from defining the relevant market, showing market power, or from proving actual anticompetitive effects. If, for example, a plaintiff can prove actual adverse...