Why Coercion Should Be a Defense in Section 1 Cases Involving Vertical Agreements - Chad Plumley

• Publication year: 1997

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Why Coercion Should be a Defense in Section 1 Cases Involving Vertical Agreements

I. Introduction

In recent years, antitrust analysis has shifted from historical reasons for wanting to stop agreements in restraint of trade, such as promotion of individual competition, to a more economic based analysis which focuses on efficiency and output.¹ This change in analysis has impacted how coercion is viewed in antitrust analysis. Traditionally, courts looked at whether a party had been coerced to determine if there was a violation of the Sherman Act.² In section 1 cases,³ where the emphasis is on whether there is an agreement, courts have used evidence of coercion to find an agreement between the parties even when one of the parties did not agree to the combination.⁴ The importance of coercion has been minimized in many areas of antitrust analysis,⁵ but some authors⁶ have argued that determining the existence of an agreement is crucial in a section 1 case that involves a vertical agreement.⁷

The first section of this Article discusses the historical precedents which led to the strict rule that courts apply to coercion cases involving vertical agreements.⁸ The first thing that will be examined is how early courts dealt with coercion in this context and how they applied their rule to various situations. The general rule in cases involving vertical agreements is that one who was coerced into an act by threats of force, either economic or other, has no defense to a section 1 violation.⁹ The key factor to examine throughout this Article is the role that the alleged coercing party played in the case. In many instances, it is this party who is the focus of the court's attention.¹⁰ It is the coercing party who is the target of the antitrust laws rather than the coerced party.

The second section of this Article deals with how various courts have analyzed the coercion issue in section 1 cases. The courts have stuck fairly rigidly to the rule that coercion cannot be used as a defense in a section 1 case involving a vertical agreement. However, the rule seems to take leave of its designed purpose in MCM Partners, Inc. v. Andrews-Bartlett & Associates, Inc.¹¹ This case involved a defendant who was coerced by a third party (the coercing party) into refusing to deal with the plaintiff.¹² It is a dramatic example of how the intended result of the rule fails in some situations. The case illustrates that where a defendant is being coerced into an action and is only acting out of self-preservation, the rule provides no relief. In fact, in this case, the coercing party was not even a party to the litigation.¹³ This section examines the background for the rule that the court in MCM Partners relied on in finding that coercion could not be used as a defense.

The third section of this Article deals with possible solutions to the problems which are associated with how the rule is applied to section 1 cases involving vertical agreements. The first step will be to determine if the change should be made by the legislature or the judiciary. The judiciary seems best suited to change the rule, because the change will be small and will probably be characterized as an exception. The second step will involve determining the scope of the exception. In this step, alternatives will be discussed including whether the exception will be an affirmative defense, or whether the plaintiff will have the duty to show that the exception does not apply. The third step will be to discuss other options if courts do not wish to make an exception. These options include providing a cause of action against the alleged coercing party after the coerced party has been found guilty of a violation under section 1. Finally, there is the question of the penalties that are imposed as a result of a violation of section 1. The penalty is treble damages,¹⁴ so in effect the party who was forced into acting is held accountable for the coercing party's malicious act. A solution would be to impose damages that reflect the actual loss of the plaintiff in cases involving vertical agreements where a defendant was coerced into the agreement or combination.

The conclusion of this Article will explain how the solutions presented in section 4 are consistent with the traditional goals and policies of the antitrust statutes. Factors that will be discussed are: (1) How the intent of the defendant is important in determining whether there has been a violation of the statute, and (2) Whether the goals of efficiency and output will be aided by an absolute ban on the use of coercion as a defense in a section 1 case involving a vertical agreement or combination. The result will be that an exception to the application of the coercion rule in cases like MCM Partners¹⁵ is necessary. None of the goals or policies of the antitrust statutes are met by punishing the coerced party for acts they did not voluntarily commit. If the courts refuse to make an exception, the courts should look at the punishment imposed—treble damages—to determine if it really deters parties who feel they have no other choice but to violate the statutes.

II. Historical Sources of the Coercion Rule

This section traces the origin of the coercion rule.¹⁶ First, the Supreme Court cases that created and developed the rule will be examined, followed by circuit court cases which have expanded and interpreted the rule, and finally a few district court cases.

A. The Supreme Court

The Supreme Court first established the rule that coercion could not be a defense in a section 1 case involving a vertical agreement or combination in United States v. Paramount Pictures, Inc.¹⁷ This case marks the first time the Court examined the issue of coercion as a defense. The Court held:

There is some suggestion . . . that large exhibitors with whom the defendants dealt fathered the illegal practices and forced them onto the defendants. But . . . that circumstance if true does not help the defendants. For acquiescence in an illegal scheme is as much a violation of the Sherman Act as the creation and promotion of one.¹⁸

This rule is the lynch pin that all of the other cases hold on to regarding the use of coercion in a section 1 case involving a vertical agreement or combination. Every case in this area either cites to this holding or bases its holding on Paramount Pictures.¹⁹ The Court's holding in Paramount Pictures focused on defendants who were far from innocent, as evidenced by the facts of the case. For instance, the major defendants entered into an agreement with the Department of Justice in 1940 that gave the defendants three years to come into compliance.²⁰ The defendants did not comply, and the government initiated the action.²¹ The defendants in this case were large corporations engaged in the business of producing movies.²² They clearly were in a position to resist any threats or coercion. In addition, the complaint itself contained both section 1 and section 2 claims against the defendants.²³ The allegations included price fixing and other practices that were designed to control the film industry.²⁴ The Court was presented with a defendant who could refuse to acquiesce to the coercion applied by another party, unlike the defendants in MCM Partners.

The next Supreme Court case to take up the issue was Albrecht v. Herald Co.,²⁵ where a newspaper carrier sued a newspaper for conspiring with two other companies to take the carrier's customers away.²⁶ The defendant newspaper, the alleged coercing party, was the only party that was sued.²⁷ The two parties that carried out the plan, the coerced parties, were not involved.²⁸ The Court stated in a footnote that the carrier could have claimed a combination between it and the newspaper when it finally adopted the prices the newspaper wanted it to charge.²⁹ This theory was based on United States v. Parke Davis & Co.³⁰ The theory was that a conspiracy had been created merely because the carrier acquiesced to the newspaper's demands.³¹ Here again, the Court was not presented with a defendant who was coerced into action and unable to resist the coercion.

The Supreme Court again considered the issue of coercion in Perma Life Mufflers, Inc. v. International Parts Corp.³² This case involved the establishment of a combination between two parties through unwilling acquiescence of business demands.³³ International was a large national muffler distributor and had created the trade name Midas.³⁴ International set up franchises throughout the country and allowed them to use the Midas trade name as long as they followed the terms of their franchise agreements.³⁵ When the plaintiff, Perma Life, a local distributor, broke one of the conditions of its franchise agreement, International canceled the agreement.³⁶ Perma Life sued, claiming a section 1 violation.³⁷ The Court cited to Albrecht v. Herald Co. ³⁸ and found that the plaintiff's acquiescence to International's demands was the basis of the agreement. "Each petitioner can clearly charge a combination between Midas and himself, as of the day he unwillingly complied with the restrictive franchise agreements."³⁹ This case, like Albrecht, was based on the use of coercion to establish an agreement when the person or party being coerced is initiating the suit and the alleged coercer is the target of the suit. This case can be distinguished, because there was a franchise agreement and Perma Life did agree to a business relationship with International, even if part of the agreement was enforced through coercion. Perma Life was not a defendant, and the franchise agreement shows that it voluntarily entered into business relations with International.

The Supreme Court cases discussed above show a tendency by the Court to address the coercion issue in limited circumstances. In fact, two of the three cases, Albrecht and Perma Life, deal with...