The Market-participant Exception to State-action Immunity from Antitrust Liability

JurisdictionUnited States,Federal
AuthorJarod M. Bona and Luke A. Wake
Publication year2014
CitationVol. 23 No. 1
THE MARKET-PARTICIPANT EXCEPTION TO STATE-ACTION IMMUNITY FROM ANTITRUST LIABILITY

Jarod M. Bona and Luke A. Wake1

I. INTRODUCTION

"The heart of our national economy has long been faith in the value of competition,"2 and as the United States Supreme Court put it, those "fundamental national values of free enterprise and economic competition" are embodied in federal antitrust laws.3 Antitrust enforcers and "private attorneys' general"4 work within this system to support competition by challenging anticompetitive conduct.

But a significant category of potentially-anticompetitive conduct often escapes antitrust scrutiny: state and local commercial activity. Governmental entities can, and do, enter the marketplace as competitors, and may have even stronger incentives than profit-maximizing firms to harm competition.5 Indeed, state and local entities have built-in advantages that may allow them to successfully monopolize, or otherwise injure competition. For example, a local entity could utilize a statutory monopoly on certain utilities to tie those monopolistic services to other products or services from a competitive market. Or, a governmental entity could use the power to tax to raise sufficient revenue to offer a product or service below cost for sufficient time to exclude other competitors from a market.

The reason that state and local anticompetitive conduct often avoids antitrust scrutiny is because the courts have applied a state-action immunity since the early 1940s.6 This doctrine exempts some government conduct—described more fully below—from federal antitrust law. Because monopoly is so profitable, an enterprising government could decide to solve its fiscal woes by entering a market and taking monopoly prices from consumers. And without a commercial-conduct exception to state-action immunity, governmental actors could get away with it.

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Last term, the U.S. Supreme Court, in Federal Trade Commission v. Phoebe Putney Health System, Inc., addressed the state-action immunity doctrine, but left open the following circuit-splitting question: Is there a market-participant exception to state-action immunity from the antitrust laws?7 In this article, we contend that state and local entities that engage in commercial conduct should abide by the same antitrust laws as their private-market competitors.8

II. What is state-action immunity?

In 1943, the U.S. Supreme Court held in Parker v. Brown that the federal antitrust laws do not apply to certain state conduct.9 This decision developed into what is now referred to as "state-action immunity," even though it is more aptly described as an exemption.10 The Parker Court upheld the obviously-anticompetitive California Agricultural Act, which the Supreme Court later characterized as a "state-supervised" market-sharing scheme.11 Importantly, the decision was grounded in statutory interpretation, but the doctrine has evolved such that federalism and state-sovereignty rationales control the doctrine's scope and development.12 Like all antitrust exemptions, the state-action-immunity exemption is disfavored, and only recognized "when it is clear that the challenged anticompetitive conduct is undertaken pursuant to a regulatory scheme that 'is the State's own.'"13

To determine whether to apply immunity in a traditional case, the Supreme Court adheres to a form of the test developed in California Retail Liquor Dealers Association v. Midcal Aluminum, Inc.14 First, the party seeking exemption must prove that the challenged restraint is "clearly articulated and affirmatively expressed as state policy," and second, the policy must be "actively supervised" by the State itself.15 Certain parties, like municipalities, need not prove "active supervision."16

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In the 1985 decision of Town of Hallie v. City of Eau Claire the Court lowered the bar for satisfying the first prong—"clear articulation and affirmative expression of state policy"— by holding that that it is satisfied where the governmental actor shows that their anticompetitive conduct is a foreseeable result of state legislation.17 The Court in Phoebe Putney, however, recently restored some teeth to the test when it expanded Community Communications Company v. Boulder18 to hold that grants of general corporate power to government entities is not a sufficient articulation and expression of state-sovereign policy to invoke an exemption from the antitrust laws.19

III. STATE-ACTION IMMUNITY SHOULD NOT APPLY TO MARKET-PARTICIPANT CONDUCT BY GOVERNMENTAL ENTITIES.
A. The History of the State-Action Immunity Doctrine Supports Applying the Antitrust Laws to State and Local Commercial Activity. 1. Union Pacific Railroad and Parker.

The Supreme Court issued its Parker decision—the genesis of the state-action exemption—in the wake of an important case decided just two years before: In Union Pacific Railroad Company v. United States, the Court applied the Elkins Act—a federal competition statute regulating interstate commerce carriers—to certain rebates and concessions by Kansas City, Kansas, in its capacity as a commercial participant.20 The Court rejected the city's attempt to entangle its market conduct with its "municipal interests," and explained that "the promotion of civic advancement may not be used as a cloak to screen the granting of discriminatory advantages to shippers."21 In other words, Kansas City had to follow federal competition laws, just like every other market player.

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Two years later, when the Court in Parker held for the first time that the federal antitrust laws do not—as a matter of statutory interpretation—apply to the state "as sovereign," it expressly distinguished a government entity acting as a market participant: "[W]e have no question of the state or its municipality becoming a participant in a private agreement or combination by others for restraint of trade."22 Indeed, many years later, the Court in City of Columbia v. Omni Outdoor Advertising acknowledged this limitation by finding that Parker distinguished "States in their governmental capacities as sovereign regulators" from their capacity "as a commercial participant in a given market."23 Thus, from the doctrine's origins, the Court never contemplated that states and municipalities could use state-action immunity as a shield when they were engaged as actual participants in a market.

2. City of Lafayette.

Years after Parker, in City of Lafayette, the Court addressed policy issues related to a market-participant exception to state-action immunity when it rejected a broad antitrust exclusion for local governments.24 This case involved antitrust counterclaims against Louisiana cities that owned and operated electric-utility systems, both inside and outside city limits.25 The Court referred back to the case preceding Parker—Union Pacific—and explained that "it has not been regarded as anomalous to require compliance by municipalities with the substantive standards of other federal laws which impose such sanctions upon 'persons.'"26

Significantly, the Court rejected the argument that the intent of the antitrust laws is to protect the public only from private abuses and not from municipal activity.27 The Court explained that "[e]very business enterprise, public or private, operates its business in furtherance of its own goals."28 Even though municipally-owned utilities may have public goals, "the economic choices made by public corporations in the conduct of their business affairs . . . are not inherently more likely to comport with the broader interests of national economic well-being than are those of private corporations . . . ."29 Indeed, the counterclaim's allegations "illustrate the impact which local governments, acting as providers of services, may have on other individuals and business enterprises with which they inter-relate as purchasers, suppliers, and sometimes, as here, competitors."30 Finally, the Court expressed worry that when a massive number of local government units— 62,437 in 1972—"act as owners and providers of services" without antitrust restrictions, there is the "potential of serious distortion of the rational and efficient allocation of resources, and the efficiency of free markets which the regime of competition embodied in the antitrust laws is thought to engender."31

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Notably, the Court's concern about freeing municipal activity from antitrust scrutiny arose from municipal commercial conduct not local regulatory activity. The Court did not want to exempt public entities that "inter-relate" with a market 'as purchasers, suppliers, and . . . competitors' from the federal competition regime."32

Chief Justice Warren E. Burger, concurring, went even further by arguing that the case should simply turn on the fact that the cities were engaging in commercial activity: There is "nothing in Parker v Brown . . . or its progeny, which suggests that a proprietary enterprise with the inherent capacity for economically disruptive anticompetitive effects should be exempt from the Sherman Act merely because it is organized under state law as a municipality."33 The Chief Justice expressed his belief that immunizing municipal commercial activity from the antitrust laws "would inject a wholly arbitrary variable into a 'fundamental national economic policy.'"34 Moreover, he recognized the crucial distinction in the existing doctrine "between a State's entrepreneurial personality and a sovereign's decision . . . to replace competition with regulation."35 "[T]he running of a business enterprise is not an integral operation in the area of traditional government functions."36

3. Jefferson County Pharmaceutical Association.

Five years later—in a case that doesn't receive enough attention in this area—the Court in Jefferson County Pharmaceutical Association, Inc. v. Abbott Laboratories held that federal antitrust law applied to "state purchases for the purpose of competing against private enterprise."37 There, an association of...

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