Updating the Cartwright Act for the Twenty-first Century: Allowing Antitrust Claims for Unilateral Conduct

• Publication year: 2023
• Author: By Joshua P. Davis and Julie A. Pollock

UPDATING THE CARTWRIGHT ACT FOR THE TWENTY-FIRST CENTURY: ALLOWING ANTITRUST CLAIMS FOR UNILATERAL CONDUCT

By Joshua P. Davis and Julie A. Pollock¹

I. INTRODUCTION

California has long been a leader in legal regulation. It sets its own standards for automobile emissions, for example, affecting how manufacturers design and build cars.² It is often at the forefront of consumer privacy regulation.^{3 4} That should be unsurprising. Our federalist system encourages states to act as "experimental social laboratories."⁵

Further, California has a particularly strong claim to adopt its own policies. If it were a nation unto itself, it would have ranked as the fifth largest economy in the world in 2022,⁶ and it is trending toward fourth, behind only the rest of the United States, China, and Japan.⁷ Its influence on the law, then, is not out of proportion with its economic influence.

That commensurate relationship applies particularly well to antitrust. As one of the largest economies in the world, California can play a natural role in regulating how market actors compete. The U.S. Supreme Court recognized over forty years ago—in a case in which California was a plaintiff—that states may adopt their own antitrust laws.⁸ California has done so. Its doctrine varies in important ways from federal law, including, for example, by permitting indirect purchasers to recover damages⁹ and by condemning vertical price restraints as per se unlawful.¹⁰

These two divergences between federal and California law exemplify two ways in which California can contribute to effective antitrust enforcement. California law can enhance compensation and deterrence for conduct that also violates federal antitrust law. Often, indirect purchasers—and end-user consumers in particular—bear the brunt of antitrust violations, but federal law rarely affords them a means to recover their losses. Further, the prospect of liability to indirect purchasers under California law—in addition to legal exposure to direct purchasers under federal law—can help to deter antitrust violations before they occur.

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California law can also permit recovery when federal law would not. Vertical price restraints may inflate prices above competitive levels without sufficient countervailing procompetitive benefits. The costs and difficulties of prevailing under a rule of reason analysis, however, may mean that no one will file litigation challenging the price restraint or, if someone does, the litigation may fail when it should not.

This Article proposes that California chart its own course in an area it has not regulated to date: unilateral anticompetitive conduct. California's antitrust law, the Cartwright Act, applies to concerted conduct but not to unilateral anticompetitive behavior. In that way, it is narrower than federal antitrust law. The time may have come, however, for that to change.

II. OVERVIEW OF CARTWRIGHT ACT

California's primary antitrust statute is the Cartwright Act,¹¹ enacted in 1907 "as part of a wave of turn-of-the-century state and federal legislation intended to stem the power of monopolies and cartels."¹² In the period leading up to the law's passage, cartels operated openly in several key California industries—including lumber, baking, ice production, and electrical power—engaging in price fixing and other harmful concerted action.¹³Historic press reports indicate that Senator Cartwright introduced the legislation to combat the state's growing trust problem, at a time when existing common law prohibitions were thought to be ineffective.¹⁴ In May of 1907, the L.A. Times reported that the anticipated collapse of the "lumber trust" would be the greatest triumph for the new state law.¹⁵

It was in this economic context that the Cartwright Act was enacted. The statute in large part resembles Section 1 of the Sherman Act,¹⁶ outlawing a wide variety of anticompetitive conduct, including combinations or agreements to restrain trade, prevent competition, or fix prices.¹⁷ However, a key difference between the Cartwright Act and federal antitrust law is their approach to unilateral conduct. California's Cartwright Act addresses anticompetitive conduct only if it is concerted. Federal antitrust law applies to anticompetitive conduct whether it is concerted or unilateral. This Essay suggests it is time for California to extend its antitrust laws to unilateral conduct.

Four historical developments since enactment of the Cartwright Act over a century ago are particularly relevant:

1. Microeconomics. The first is the influence of microeconomics on antitrust doctrine. One might plausibly call it a colonization in that microeconomic theory has come to dominate the doctrine.
2. Empirical Evidence. The second is the recognition (albeit only partial) that empirical evidence should drive microeconomic analysis in antitrust. California could play a leadership role in focusing on market realities—rather than theoretical assumptions—in regulating anticompetitive behavior.
3. Market Power. The third is the increase in recent decades in market power of dominant firms, including among the largest technology companies. Legislators, government regulators, small and medium-sized businesses, and private citizens are all coming to appreciate the economic—and other—harms that dominant firms can cause.
4. Forced Arbitration. The fourth is the U.S. Supreme Court's love affair with forced arbitration. The Court has read into the Federal Arbitration Act (the "FAA") a policy in favor of pre-dispute mandatory arbitration clauses that robs many plaintiffs of any meaningful ability to enforce their legal rights, including in antitrust cases.¹⁸

These historical trends all can provide justifications for California to build on its leadership in antitrust enforcement by prohibiting the unilateral abuse of market power.

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Microeconomics. Beginning in the 1970s, scholars, judges, and scholar-judges¹⁹ began to transform antitrust doctrine. It went from a general and somewhat vague prohibition on unfair competition in the market to a relatively structured set of rules promoting efficiency, as economists define it. The limitation of the Cartwright Act to concerted conduct could be understood—if perhaps only ex post—as an effort to focus on particularly harmful actions. We have learned in the more than hundred years since its enactment about the dangers of unilateral conduct. Dominant market actors can use anticompetitive means to generate and profit from market inefficiencies. Just as conspiracies can be harmful, so can be unilateral action.²⁰ It may take two to tango, but it doesn't take two to deliberately cause economic harms.

Empirical Evidence. For a long time, antitrust analyses assumed that most anticompetitive conduct is difficult to sustain and market power is difficult to acquire and maintain. To a significant extent, they still do. Recent empirical research, however, has shown that market power is common.^{21 22} Often, it can be detected through direct evidence of anticompetitive effects, including the exclusion of rivals, artificially suppressed output, and artificially inflated prices. This empirical evidence creates new opportunities for preventing and policing unilateral conduct that causes anticompetitive harms.

Market Power. Recent years have also witnessed a rise in market power in the United States and elsewhere. More than 75 percent of U.S. industries have become more concentrated in the past two decades.²³ Market concentration has been particularly striking in the large technology companies that constitute the so-called FAANG, that is, Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet). They have attracted the ire of many Americans in part because of legitimate concerns about the anticompetitive harms they may cause (although also admittedly in part because of a perception in some quarters that they have political biases that they do not appear to possess).

Market concentration has increased with the growth of digital economies, and single technology companies often possess massive shares of digital markets. For instance, Google owns approximately 90% of the search engine market.²⁴ Amazon accounted for 74% of all e-commerce transactions in the United States in the first quarter of 2019.²⁵Google and Facebook together took in 90% of new online advertising dollars in 2016.²⁶ Google and Apple together also own essentially the entire market for smart phone application platforms, with the iOS App Store accounting for 65% of app-based revenue in 2018, and Google Play Store accounting for approximately 36%.²⁷ This increase in market power by a handful of technology companies augments the risk of anticompetitive harms and, with it, the need for antitrust laws that regulate unilateral, anticompetitive conduct.

Moreover, there are some who have been calling for more vigorous merger enforcement as U.S. markets become more concentrated,²⁸ with notable mergers in the technology sector including Google's 2006 acquisition of YouTube, Facebook's 2012 acquisition of Instagram, and Microsoft's 2016 acquisition of LinkedIn.²⁹ Yet in California, where many large technology companies are headquartered, courts have largely eliminated the Cartwright Act's application to mergers.³⁰ The California Supreme Court determined more than three decades ago that a "combination" for the purposes of the Cartwright Act consists of two independent entities engaging in anticompetitive conduct, and thus does not include mergers.³¹The California Supreme Court stated that "the Attorney General's view that the Cartwright Act applies to mergers is not supported."³² This decision has been affirmed by at least one court of appeals, which held that although federal law prohibits anticompetitive mergers, single-firm monopolization is not legally cognizable under the Cartwright Act.³³

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California is uniquely situated to play a leadership role in antitrust enforcement in the technology industry. The...