The Durability of Formalism in Antitrust

• Author: Barak Orbach
• Position: Professor of Law and the Director of the Business Law Program, the University of Arizona College of Law
• Pages: 2197-2222

The Durability of Formalism in Antitrust Barak Orbach  ABSTRACT: Antitrust formalism consists of commitments to interpretations of the antitrust laws that require courts to discount and even disregard relevant competitive effects. The phenomenon is more known as the use of rigid rules resting on premises that are correct under some circumstances but not all. Examples of antitrust formalism include per se rules, the analysis of collusion, the interpretation of the distinction between horizontal and vertical restraints, the “direct-purchaser” doctrine, and Twombly ’s pleading standard. Competition-law rules that downplay competitive effects appear to run afoul of the goals of antitrust and, as such, antitrust formalism is counterintuitive. Antitrust formalism, however, has been a fixture in antitrust policy to which both liberal and conservative antitrust experts— lawyers and economists—have contributed since Congress enacted the Sherman Act. One way to describe antitrust formalism is that many individuals believe that their beliefs should define the law and that, in every generation, some individuals have the power or ability to promote such beliefs. This Essay explains the durability of formalism in antitrust law and policy through some of the key facets of the phenomenon.  Professor of Law and the Director of the Business Law Program, the University of Arizona College of Law. This Essay greatly benefited from comments and suggestions from Daniel Sokol, the participants at the Symposium Honoring Herbert Hovenkamp, and from the editors of the Iowa Law Review . 2198 IOWA LAW REVIEW [Vol. 100:2197 I. INTRODUCTION ........................................................................... 2198 II. SUBSTANTIVE ANTITRUST ........................................................... 2203 A. P RELIMINARIES ............................................................... 2203 B. T HE L EGAL F ORM : S INGLE F IRM VS . S EPARATE F IRMS ............ 2206 C. C ONSPIRACY : C ONCERTED A CTION VS . I NDEPENDENT OR I NTERDEPENDENT C ONDUCT .............................................. 2211 D. D ISTRIBUTION A RRANGEMENTS : H ORIZONTAL VS . V ERTICAL R ESTRAINTS .................................................................... 2213 III. PROCEDURAL GUIDANCE ............................................................ 2214 A. P RELIMINARIES ............................................................... 2214 B. P ROCEDURAL R EASONABLENESS : T HE R ULE OF R EASON VS . P ER S E .......................................................................... 2216 C. S TANDING ...................................................................... 2217 D. MATSUSHITA VS . TWOMBLY : I NFORMATION B EFORE AND A FTER D ISCOVERY ..................................................................... 2218 IV. CONCLUSION .............................................................................. 2221 I. INTRODUCTION “Antitrust formalism” consists of commitments to interpretations of the antitrust laws that require courts to discount and even disregard relevant competitive effects. Examples of antitrust formalism include the per se rule against price fixing 1 —and per se rules in general, 2 the Structure-Conduct-Performance (“SCP”) paradigm that inferred competitive conduct from market structures and considerably influenced antitrust policy in the 1950s and 1960s, 3 the “direct-purchaser” doctrine, 4 Twombly ’s pleading standard, 5 1. See United States v. Trenton Potteries Co., 273 U.S. 392, 398–99 (1927) (declaring price-fixing agreements among competitors per se unlawful). 2. See 2A PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 305, at 60 (3d ed. 2007) (“The so-called per se rules are the most ‘formal’ [though less than] might appear at first blush or in conventional usage.”). See generally Thomas G. Krattenmaker, Per Se Violations in Antitrust Law: Confusing Offenses with Defenses , 77 GEO. L.J. 165 (1988). 3. See Herbert Hovenkamp, United States Competition Policy in Crisis: 1890–1955 , 95 MINN. L. REV. 311, 350–66 (2009). See generally Kenneth G. Elzinga, New Developments on the Cartel Front , 29 ANTITRUST BULL. 3 (1984). 4. The direct purchaser doctrine provides that only direct purchasers have standing to bring an antitrust lawsuit under section 4 of the Clayton Act. See infra Part III.C. 5. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007) (holding that a complaint alleging agreement in restraint of trade must include enough “factual matter” to justify proceeding to discovery); see also infra Part III.D. 2015] THE DURABILITY OF FORMALISM 2199 and Linkline ’s rule regarding price squeezes. 6 By instructing courts to disregard competitive effects when they apply U.S. competition laws, antitrust formalism is somewhat paradoxical. 7 Notwithstanding, formalism under many names has been a fixture in antitrust policy since the enactment of the Sherman Act. Formalism, interpretations of reality that discount the significance of actual circumstances, is a practical working instrument used in law, economics, and other disciplines. 8 Debates over the merit of formalism were common in the past century and may appear somewhat baffling. 9 It is practically impossible to consider all circumstances and, therefore, standard analytical methods rely on presumptions, assumptions, models, and procedures. It is obvious—or at least should be obvious—that both rigid formalism that curtails the ability of courts to exercise discretion and informality that leaves courts with unguided discretion tend to lead to arbitrary outcomes and cannot persistently serve society. 10 It is also quite obvious that informality and formalism are not distinct approaches, rather they are two ends of a spectrum. 11 Stated differently, there is probably no serious controversy that some formalism is required to structure a meaningful decision-making process and that exclusion of sources of information may 6. Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438, 457 (2009) (holding that that “price squeeze” claims cannot be brought under the federal antitrust laws unless the defendant firm has a separate antitrust duty to deal with the plaintiffs in the first place). 7. Indeed, writing for the Court in Eastman Kodak , Justice Blackmun suggested that formalism was foreign to antitrust, stating that “[l]egal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law.” Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 466–67 (1992). Justice Blackmun’s dictum paraphrased Justice Holmes’s famous line from Lochner : “General propositions do not decide concrete cases.” Lochner v. New York, 198 U.S. 45, 76 (1905) (Holmes, J., dissenting); see also John J. Flynn, The Role of Rules in Antitrust Analysis , 2006 UTAH L. REV. 605, 605–06 (“Rule rigidity and concept calcification are curious afflictions for a field of law conceived by Congress as one granting the courts power to fashion antitrust rules in light of the common law’s experience with restraints of trade.”). 8. See, e.g. , Frederick Schauer, Formalism , 97 YALE L.J. 509, 510 (1988) (“At the heart of the word ‘formalism,’ in many of its numerous uses, lies the concept of decisionmaking according to rule .”); Cass R. Sunstein, Must Formalism Be Defended Empirically? , 66 U. CHI. L. REV. 636, 639 (1999) (“Formalism . . . entails an interpretive method that relies on the text of the relevant law and that excludes or minimizes extratextual sources of law.”). 9. See generally Roscoe Pound, Mechanical Jurisprudence , 8 COLUM. L. REV. 605 (1908); Frederick Schauer, Formalism: Legal, Constitutional, Judicial , in THE OXFORD HANDBOOK OF LAW AND POLITICS 428 (2008); Sunstein, supra note 8. 10. See generally Daniel A. Farber, The Inevitability of Practical Reason: Statutes, Formalism, and the Rule of Law , 45 VAND. L. REV. 533 (1992). 11. See Louis Kaplow, Rules Versus Standards: An Economic Analysis , 42 DUKE L.J. 557, 610–20 (1992) (clarifying that rules and standards tend to represent degrees of discretion, not types of legal norms). 2200 IOWA LAW REVIEW [Vol. 100:2197 impair the quality of the decision-making. 12 The actual choice is of the degree of formalism: what information may be excluded from the analysis? Antitrust formalism combines formalistic rationales from law and economics. When both rationales are pressed to the extreme, antitrust policy does not respond to actual economic realities. This Essay explains the durability of the phenomenon. To understand antitrust formalism, consider the contrast between “per se” and “rule of reason” in antitrust analysis. Congress enacted the Sherman Act to serve as a statutory common law framework, 13 yet it outlawed “[e]very contract . . . in restraint of trade,” leaving no apparent room for discretion for courts. 14 Many courts, however, refused to apply a formalistic approach and developed a reasonableness standard. In Addyston Pipe , Judge Taft famously criticized this “relaxation of the rules,” which he believed “set sail on a sea of doubt.” 15 The Supreme Court settled the issue in Standard Oil, where it endorsed the “rule of reason.” 16 In doing so, the Court formalized two defined categories of antitrust analysis: “per se” and “rule of reason.” 17 12. See generally DANIEL KAHNEMAN, THINKING, FAST AND SLOW (2011); William J. Baumol & Richard E. Quandt, Rules of Thumb and Optimally Imperfect Decisions , 54 AM. ECON. REV. 23 (1964); Paul Krugman, Two Cheers for Formalism , 108 ECON. J. 1829 (1998). 13. See generally Barak Orbach, How Antitrust Lost Its Goal , 81 FORDHAM L. REV. 2253 (2013). On the development of antitrust common law in specific circumstances, see Rebecca Haw Allensworth, The Influence of the Areeda–Hovenkamp Treatise in the Lower Courts and What It Means for Institutional Reform in Antitrust , 100 IOWA L. REV. 1919 (2015); Roger D. Blair & Christine Piette Durrance, Licensing...