Uneasy labeling.

AuthorWidiss, Deborah A.
PositionAntitrust classification of vertical agreement - Case Note

Discon, Inc. v. NYNEX Corp., 93 F.3d 1055 (2d Cir. 1996), petition for cert. filed, 65 U.S.L.W. 3694 (U.S. Apr. 3, 1997) (No. 96-1570).

[E]asy labels do not always supply ready answers.(1)

In antitrust, the initial classification of a challenged business arrangement can make or break a case. Certain types of agreements have been deemed so patently anticompetitive that they are condemned as per se illegal. Agreements that do not fit into per se categories are evaluated under a balancing test, the "rule of reason." In theory, rule-of-reason analysis requires a careful examination of the competitive impact of a specific agreement; in practice, however, the challenged agreement is rarely struck down.(2)

In Discon, Inc. v. NYNEX Corp.,(3) the Second Circuit expressed a legitimate concern that remanding a challenge to a supplier-purchaser agreement for adjudication under the rule of reason might allow a potentially anticompetitive agreement to be upheld without proper scrutiny. But the court's response--shoehorning a vertical agreement into a category of horizontal restraints traditionally considered per se illegal--establishes a dangerous precedent. The decision further blurs an already fuzzy line between vertical and horizontal restraints, thereby increasing the possibility that agreements that actually promote competition could be wrongly condemned as per se illegal. The unnecessary expansion of the scope of a per se rule means that in future cases, the initial classification of similar agreements could receive even greater emphasis--and carry even higher stakes.

I

Discon, a business that removed obsolete telephone equipment, challenged a decision by NYNEX and its wholly owned subsidiaries to purchase such removal services from Discon's competitor, AT&T Technologies. Discon contended that NYNEX made the arrangement with AT&T Technologies as part of a strategy to increase its profits by exploiting its position as a regulated monopoly.(4) An independent investigation by the Federal Communications Commission (FCC) found that NYNEX replicated the alleged profit-shifting scheme in numerous contexts.(5) The district court, however, granted NYNEX's motion for dismissal on the ground that the complaint failed to specify concerted actions that amounted to an agreement.(6)

The Second Circuit reversed, finding the meetings between NYNEX and AT&T Technologies alleged in the complaint sufficiently probative of a conspiracy to defeat a motion to dismiss.(7) The court classified the challenged supplier-purchaser arrangement as--in antitrust parlance(8)--a two-party vertical non-price agreement.(9) Such agreements are generally labeled as "exclusive dealerships."(10) Exclusive dealerships are not per se illegal; they are considered under the rule of reason (and generally upheld as reasonable), because they can promote interbrand competition that may offset the harm they can do to intrabrand competition.(11) But rather than simply remanding the case as an "exclusive dealership" controversy, the court indicated that the arrangement should be characterized instead as a "two-party group boycott."(12) It then concluded that Discon had stated a cause of action "at least" under the rule of reason and "possibly" under the per se rule applied to group boycotts "if the restraint of trade `has no purpose except stifling competition.'"(13) This is the first case in which the Second Circuit has suggested that a two-party group boycott could be per se illegal, a change in antitrust law that may have far-reaching implications.

II

Discon distorts modern group boycott doctrine by applying the label to NYNEX's vertical agreement. Group boycotts generally refer to agreements among horizontal competitors.(14) Twenty years ago, the Second Circuit held that a two-party vertical agreement may be considered a horizontal group boycott (though not a per se illegal boycott) if it sought to disadvantage a competitor of one of the parties.(15) Subsequently, the Supreme Court clearly rejected this reasoning: "[A] restraint is horizontal not because it has horizontal effects but because it is the product of a horizontal agreement."(16) In Discon, the panel relied on the earlier Second Circuit precedent without addressing the apparent contradiction.(17)

Read literally, the Discon court's characterization of a group boycott as a vertical agreement that seeks to disadvantage a horizontal competitor could swallow up the exclusive dealership category. The court, however, emphasized that "in general" two-firm vertical agreements should be scrutinized as exclusive dealerships and reaffirmed that in the "vast majority of cases" such agreements have both a "pro-competitive intent and effect."(18) Yet it did not provide any criteria to distinguish two-party group boycotts from exclusive dealerships. In its petition for certiorari, NYNEX seized on the court's observation that in this case "no such pro-competitive rationale appear[ed] on the face of the complaint,"(19) to contend that Discon established an "entirely unsatisfactory and unpredictable rule of law" under which a jilted...

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