Is the Quick-Look Antitrust Analysis in PolyGram Holding. Inherently Suspect? Catherine Verschelden

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1 Is the Quick-Look Antitrust Analysis in PolyGram Holding Inherently Suspect? Catherine Verschelden I. INTRODUCTION II. BACKGROUND A. The Per Se Analysis B. Development of the Rule of Reason Analysis C. Development of Quick-Look Tests under the Rule of Reason Analysis Supreme Court Discussion of the Quick-Look Analysis Other Examples of the Supreme Court s Treatment of Quick-Look Analyses III. DISCUSSION OF THE RATIONALE AND CONCLUSIONS OF POLYGRAM HOLDING A. Commission s and Circuit Court s Analysis B. The Quick-Look Analysis and Outcome Were Correct Commentary on PolyGram Holding by Academics and Practitioners a. Inherently Suspect Categorization b. Rejection of Free Riding Justification PolyGram s Arguments Were Not Legally Sufficient IV. RECOMMENDATION V. CONCLUSION J.D. Candidate, 2007, University of Iowa College of Law; B.S., Kansas State University. I would like to thank my parents for their continuous support and helpful comments. I also am indebted to Professor Herbert Hovenkamp for introducing me to the story of the Three Tenors and for his invaluable guidance and feedback.

2 448 The Journal of Corporation Law [Winter I. INTRODUCTION Congress enacted the Sherman Act 1 in 1890 to prohibit restraints of trade and to promote competition. 2 A critical element in the enforcement of the Sherman Act is consistency. With over 100 years of case law history, plaintiffs and defendants in antitrust litigation can normally find and skew case law or dicta to support their positions. Consistency is essential because antitrust litigation is typically very time consuming, detail oriented, and expensive. 3 If the parties to the lawsuit do not know what to expect from the court and what test or rule will apply to them, there will be perverse consequences: private plaintiffs, the Department of Justice, and the Federal Trade Commission ( Commission ) may not be willing to bring antitrust lawsuits. 4 Similarly, defendant firms may be less likely to form joint ventures because of the risk that they may be held liable under the Sherman Act and face lengthy and costly lawsuits. The need for a consistent application of a designated rule for a given antitrust situation is clear. 5 Traditionally, courts have applied the Sherman Act to situations of allegedly anticompetitive behavior in the form of two analyses: per se and rule of reason. 6 But more recently, the traditional dichotomous approach to allegedly anticompetitive behavior has given way with the creation of the quick-look 7 analysis. Courts have recognized that many instances of allegedly anticompetitive behavior should be examined under an approach that is neither as harsh as a per se rule analysis nor as in-depth as a rule of reason analysis. 8 Courts have thus created a continuum of rules that are used to analyze inherently suspect and presumptively unlawful behavior. 9 But confusion remains over which rule a court should apply to a given situation. 1. Sherman Act, 15 U.S.C. 1 (2000). 2. Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 HASTINGS L.J. 65, 67 (1982) (stating that it is unanimously agreed that Congress enacted these laws to encourage competition ). 3. See 1 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW 207, at 254 (2d ed. 2000) (noting that antitrust discovery itself is often time-consuming and expensive ). 4. See 4 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW 916, at 87 (2d ed. 2006) (emphasizing the importance of consistent legal criteria that are relatively easy to follow, and predictability ). 5. See ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF 7 (1978) (arguing that mutually incompatible and incorrect antitrust premises regarding the preservation and suppression of competition have resulted in increasingly bizarre results ). 6. Nat l Soc y of Prof l Eng rs v. United States, 435 U.S. 679, (1978) (explaining that the two complementary categories of antitrust analysis center on activities that are so clearly anticompetitive that they are declared illegal per se, without further query, and activities whose competitive impact is determined through a rule of reason analysis). 7. Cal. Dental Ass n v. Fed. Trade Comm n, 526 U.S. 756, 781 (1999) (noting that a quick-look analysis consists of a quicker look at conduct than a more sedulous one or full rule of reason analysis). 8. Cal. Dental Ass n v. Fed. Trade Comm n, 128 F.3d 720, 727 (9th Cir. 1997) vacated, 526 U.S. 756 (1999) (stating that a quick-look analysis is designed for restraints that are not per se unlawful but are sufficiently anticompetitive on their face that they do not require a full-blown rule of reason inquiry ); see also 7 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW 1508, at 390 (2d ed. 2003) (stating that a rule of reason analysis may not always require intensive fact finding and balancing of pro-competitive and anticompetitive effects). 9. See, e.g., PolyGram Holding, Inc. v. Fed. Trade Comm n, 416 F.3d 29, 31 (D.C. Cir. 2005) (exemplifying presumptively unlawful behavior); Gordon v. Lewistown Hosp., 423 F.3d 184, 210 (3d Cir. 2005) (providing an example of inherently suspect behavior).

3 2007] Is PolyGram s Quick Look Analysis Inherently Suspect? 449 In PolyGram Holding Inc. v. Federal Trade Commission, 10 the question of which rule to apply is even murkier. Jose Carreras, Placido Domingo, and Luciano Pavarotti otherwise known as the Three Tenors performed concerts together in 1990, 1994, and PolyGram Holding had notable success distributing the recording of the first concert, and Warner Communications also enjoyed success, though relatively less, distributing the second recording. 12 The companies agreed to distribute jointly the third recording and to consult one another on all marketing and promotional activities. 13 They retained their exclusive rights to the earlier recordings and were not restrained in their ability to promote them. 14 But, the companies were worried that those promotions would weaken sales of the jointly distributed recording because customers might be indifferent between the different recordings, viewing them as substitutes, and buy the recording that is cheapest, which would be one of the earlier recordings and not the jointly distributed recording. 15 To improve the third recording s sales prospects, the companies agreed to suspend temporarily all price discounting and advertising of the earlier recordings for two and a half months after the release of the new recording. 16 The parties hoped these measures would increase the likelihood for a successful release of the third recording, thereby enhancing the long-term success of all the recordings and strengthening the Three Tenors brand. 17 The distinguishing factor in this case was that the restraints were placed on the first two recordings, which were not owned by the joint venture. 18 These moratoriums restrained the manner in which products outside the joint venture competed. The Commission brought suit claiming that the moratoriums were anticompetitive and constituted a horizontal agreement to restrain trade. 19 Crucial to the outcome of the case was whether PolyGram could prove the restraints were ancillary to reasonably necessary for the formation of the joint venture and thus were procompetitive. This Note explores the rationale and correctness of the Commission s and the D.C. Circuit s analysis of the moratorium agreements. II. BACKGROUND A. The Per Se Analysis The per se rule of illegality is reserved for activities like naked price fixing, for which there is no beneficial effect and the actor cannot justify the significant impairment 10. PolyGram Holding, 416 F.3d at Id. at Id. (noting that the albums were classical music best sellers for years). 13. Id. 14. Id. 15. See PolyGram Holding, 416 F.3d at 32 (noting that PolyGram was concerned that promotional activities related to the earlier recordings would adversely affect the sales of the third recording). 16. Id. (stating that the moratorium ran from Aug. 1 through Oct. 15, 1998). 17. Id. at 32, See McChesney, infra note 113 and accompanying text (noting that restraints placed on the marketing efforts of joint venture participants in their individual capacities are rarely seen in antitrust litigation). 19. PolyGram Holding, 416 F.3d at 32.

4 450 The Journal of Corporation Law [Winter of competition with a legitimate excuse or efficiency defense. 20 Courts forgo a detailed inquiry in these cases because activities like price fixing are known and so likely to restrain trade that the inquiry is not worth the time and expense of conducting an incredibly complicated and prolonged economic investigation into the entire history of the industry involved. 21 Once the plaintiff proves the existence of a naked price restraint, the inquiry ends, and the conduct is deemed unlawful. 22 Even if the defendant offers a procompetitive justification in a naked price-fixing case, the court will still apply the per se rule of illegality. 23 That decision is a result of courts value judgments regarding the extremely slim chances that enhanced competition will result from a restraint that is facially and inherently anticompetitive. 24 B. Development of the Rule of Reason Analysis Almost from the start of American antitrust jurisprudence, the Supreme Court has set a tone of practicality and common sense. It began with the Court s application of a reasonableness standard to the Sherman Act in Standard Oil v. United States 25 in The Sherman Act has a generality and adaptability that allows its application to be flexible and not go into detailed definitions which might either work injury to legitimate enterprise or through particularization defeat its purposes by providing loopholes for escape. 27 It does not restrain a party s freedom of action. 28 The Sherman Act only prohibits unreasonable restraints of trade. 29 As a result, direct agreements that restrain AREEDA & HOVENKAMP, supra note 8, 1509, at 403 (explaining that naked restraints are properly condemned under a per se rule because they essentially have no redeeming social benefits ); see also E. THOMAS SULLIVAN & HERBERT HOVENKAMP, ANTITRUST LAW, POLICY AND PROCEDURE: CASES, MATERIALS, PROBLEMS (5th ed. 2003) (stating that a conduct s inherent nature may warrant it being deemed per se illegal). 21. N. Pac. Ry. Co. v. United States, 356 U.S. 1, 5 (1958); see also FEDERAL TRADE COMMISSION & DEPARTMENT OF JUSTICE, ANTITRUST GUIDELINES FOR COLLABORATIONS AMONG COMPETITORS 3 (2000), available at See 7 AREEDA & HOVENKAMP, supra note 8, 1509, at 396 (stating that per se condemnation does not require proving market power or anticompetitive purpose and effects); see also SULLIVAN & HOVENKAMP, supra note 20, at 189 (stating that the per se analysis functions as a rule of evidence in that once conduct is classified as inherently anticompetitive, the inquiry ends and the reasonableness of the restraint or actual competitive effect is irrelevant). 23. Arizona v. Maricopa County Med. Soc y, 457 U.S. 332, 351 (1982) (arguing that claims of enhanced competition are so unlikely to prove significant in any particular [price-fixing] case that we adhere to the [per se] rule of law that is justified in its general application ). 24. Id U.S. 1, 60 (1911) (holding that the combination of oil companies conspiring to monopolize the market and raise prices unreasonably restrained trade and was thus unlawful). 26. See 7 AREEDA & HOVENKAMP, supra note 8, 1500, at 335 (noting the focus on reasonableness in antitrust jurisprudence began with Standard Oil); see also Standard Oil, 221 U.S. at 60 (stating that the standard of reason... was intended to be the measure used for the purpose of determining whether in a given case a particular act had or had not brought about the wrong against which [ 1 of the Sherman Act] provided ). 27. Appalachian Coals, Inc. v. United States, 288 U.S. 344, 360 (1933) (emphasizing that the Sherman Act set[s] up the essential standard of reasonableness ). 28. See 7 AREEDA & HOVENKAMP, supra note 8, 1501, at 343 (summarizing most definitions of restraint of trade as focusing on competitive impact and not on a party s uninhibited freedom of action). 29. See United States v. Visa U.S.A., Inc., 344 F.3d 229, (2d Cir. 2003) (noting that the unreasonableness view has endured for more than a hundred years).

5 2007] Is PolyGram s Quick Look Analysis Inherently Suspect? 451 trade and ancillary agreements 30 that restrain trade are analyzed differently. 31 Ancillary or partial restraints of trade are not necessarily unlawful if they are reasonably necessary to secure the main purpose of a legitimate contract. 32 This understanding promotes and facilitates the conduct of business and the contracting between businesses and business persons. 33 It also indicates that antitrust laws will not overly restrict the workings of free enterprise. A full rule of reason analysis evaluates the purpose and the effect of the allegedly anticompetitive behavior. 34 The analysis can be broken down into three steps. The first issue is whether the defendant has market power in a defined relevant market for goods or services and whether the defendant has used that power to affect adversely competition through increased prices or decreased output. 35 If the plaintiff meets these requirements, the second step shifts the burden to the defendant to prove that the challenged restraint has procompetitive justifications. 36 If the defendant meets this burden, the plaintiff must prove that the restraint is not reasonably necessary to attain the procompetitive justification or that a less anticompetitive restraint may be used to attain the procompetitive justification. 37 The market analysis question in step one is the primary distinguishing factor between a rule of reason analysis and a per se analysis. The requirement is also the most costly, in terms of time, effort, and money, for plaintiffs to prove. 38 The practical result of the requirement is that defendants usually prevail in a full rule of reason analysis. 39 Thus, which antitrust rule a court applies may be outcome determinative where the only options are a cursory per se analysis or a full rule of reason analysis PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW 1912, at 320 (2d ed. 2005) (defining a restraint as ancillary when it is reasonably related to a joint venture or transaction that, at least upon initial examination, promises to increase output, reduce costs, improve product quality, or otherwise benefit consumers ). 31. United States v. Addyston Pipe & Steel Co., 85 F. 271, (6th Cir. 1898), aff d, 175 U.S. 211 (1899) (noting that ancillary restraints ultimately result in procompetitive effects, while direct restraints always result in anticompetitive effects). 32. Id. (noting that when a business person sells property and places restraints on what the buyer can do with the property, the seller s conduct is reasonable and not a restraint on competition because the seller is merely preventing an increase of competition of his own creating ). 33. See Nat l Soc y of Prof l Eng rs v. United States, 435 U.S. 679, 689 (1978) (noting that [t]he longrun benefit of enhancing the marketability of the business itself and thereby providing incentives to develop such as enterprise outweighed the temporary and limited loss of competition ). 34. SULLIVAN & HOVENKAMP, supra note 20, at United States v. Visa U.S.A., Inc., 344 F.3d 229, 238 (2d Cir. 2003) (describing the steps in the rule of reason analysis). 36. Id. 37. Id. 38. See Phillip Areeda, The Changing Contours of the Per Se Rule, 54 ANTITRUST L.J. 27, 28 (1985) (noting that proving markets and power is difficult, complex, expensive and time-consuming ). 39. Thomas A. Piraino, Jr., Reconciling the Per Se and Rule of Reason Approaches to Antitrust Analysis, 64 S. CAL. L. REV. 685, 691 (1991) (stating that plaintiffs face a significant disadvantage and are often deterred from filing valid claims). 40. See Timothy J. Muris, California Dental Association v. Federal Trade Commission: The Revenge of Footnote 17, 8 SUP. CT. ECON. REV. 265, 309 (2000) (stating that after California Dental, [c]ategorization retains importance, but it no longer determines the outcome ).

6 452 The Journal of Corporation Law [Winter C. Development of Quick-Look Tests under the Rule of Reason Analysis As courts have moved away from the dichotomous approach to antitrust analysis, they have applied the quick-look 41 analysis in situations when the great likelihood of anticompetitive effects can easily be ascertained. 42 In other words, the quick-look analysis is applicable when an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets. 43 In situations where actors take anticompetitive steps and proffer no plausible justification or only very weak justifications for their conduct, use of a quick-look analysis is advantageous. After a plaintiff alleges that the defendant-actors violated the antitrust laws, quicklook shifts the burden to the defendant-actors to offer a competitive justification for their conduct. As the conduct and its effects become more obviously anticompetitive, they trigger a more abbreviated analysis. 44 If the defendant-actors justification is plausible, the plaintiff must show either that the conduct likely harmed consumers or present actual market data. The defendant-actors then must prove that, on the balance, the conduct was procompetitive, not anticompetitive. Quick-look analyses take short cuts to get to the defined issue. In the process, they may relieve plaintiffs from defining the relevant market, showing market power, or from proving actual anticompetitive effects. If, for example, a plaintiff can prove actual adverse effects, the plaintiff can forgo a detailed market analysis. 45 Quick-look analyses decrease the amount of detail and analysis required for full rule of reason analyses while still giving defendants an opportunity to justify their behavior. Quick-look analyses are efficient because they are tailored to the challenged conduct in each individual case. 46 The depth and detail of the quick-look analysis reflect the specifics of the case at hand as well as judicial knowledge of previous effects of similar fact patterns on competition. The object is to see whether the experience of the market has been so clear, or necessarily will be, that a confident conclusion about the principal tendency of a restriction will follow from a quick (or at least quicker) look, in place of a more sedulous one. 47 For example, traditional agreements between competitors to reduce output or discontinue price competition are normally dealt with under a per se AREEDA & HOVENKAMP, supra note 8, 1508, at 390 (dividing the quick-look tests into three categories: instantaneous balancing, facial judgments, and categorical or presumptive propositions within the rule of reason ). 42. Cal. Dental Ass n v. Fed. Trade Comm n, 526 U.S. 756, 770 (1999) (citing circuit courts that have applied the quick-look approach in similar evidentiary situations: Law v. Nat l Collegiate Athletic Ass n, 134 F.3d 1010, 1020 (10th Cir. 1998) where a practice has obvious anticompetitive effects and Chicago Prof l Sports Ltd. P ship v. Nat l Basketball Ass n, 961 F.2d 667, (7th Cir. 1992) after assessing and rejecting logic of proffered procompetitive justifications ). 43. Id. at However, if for example, the defendants prove the conduct is part of a procompetitive cooperative venture, the analysis broadens, and the scrutiny deepens. Polk Bros., Inc. v. Forest City Enters., Inc., 776 F.2d 185, 189 (7th Cir. 1985). The plaintiff may have to prove more of the elements of a full rule of reason analysis. 45. See Fed. Trade Comm n v. Indiana Fed n of Dentists, 476 U.S. 447, (1986) (noting that the Commission s failure to engage in a detailed market analysis was not fatal to its case because market definition and market power are merely surrogates for anticompetitive effects, which were shown). 46. PolyGram Holding, Inc. v. Fed. Trade Comm n, 416 F.3d 29, 34 (D.C. Cir. 2005). 47. Cal. Dental, 526 U.S. at 781.

7 2007] Is PolyGram s Quick Look Analysis Inherently Suspect? 453 approach, but when the restraints are not purely naked as in California Dental, 48 a rule of reason analysis is necessary. When applying the simpler, quicker, and more economical quick-look analysis instead of a full rule of reason analysis, courts must carefully analyze the facts at issue to give certain facts that require more than cursory treatment 49 their due. 1. Supreme Court Discussion of the Quick-Look Analysis In California Dental Association v. Federal Trade Commission, the Supreme Court first recognized the validity of quick-look under the rule of reason analysis. 50 While the Court remanded the case to the Ninth Circuit for a lengthier examination of the proffered justification for the restraint at issue, the Court importantly did not condemn the application of the quick-look analysis or its lack of market analysis. 51 Rather, it emphasized practicality and flexibility in the application of a rule of reason analysis and downplayed the differences between per se, quick-look, and rule of reason analyses by suggesting they represent specific names on a fluid spectrum or a sliding scale in appraising reasonableness 52 in antitrust analysis. The essential requirement of the analysis is that it should be an enquiry meet for the case, looking to the circumstances, details, and logic of a restraint. 53 In California Dental, the members of a dental association made an agreement that effectively ended all advertising on the basis of quality or cost in order to protect consumers from misleading advertisements. 54 Bans on price advertising are generally condemned as anticompetitive because such advertising is fundamentally linked to price competition and the ability to increase output by attracting new consumers. 55 But the Court held that the threat of misled consumers could be a valid justification for the advertising restriction because significant informational asymmetries existed between dentists and consumers. 56 Consumers faced an inevitably difficult task of making informed decisions because they lacked the expertise required to appraise the professional services of a dentist. 57 The dental association argued that the advertising 48. Id. at Id. at 773 (referring to the lower court s failure to properly analyze the defendant s proffered procompetitive justification and the Court s subsequent remand for further investigation). 50. Muris, supra note 40, at 304 (noting that the Court had never before explicitly recognized a quicklook analysis that employs an abbreviated market analysis to scrutinize competitors agreements). 51. Cal. Dental, 526 U.S. at 779 (stating that a full market analysis is not required here and that it does not follow that every case attacking a less obviously anticompetitive restraint (like this one) is a candidate for plenary market examination ). 52. Id. at 780 (stating that the different analyses are not as rigid and fixed as they nominally appear to be); id. (citing P. AREEDA, ANTITRUST LAW 1507, at 402 (1986) ( There is always something of a sliding scale in appraising reasonableness, but the sliding scale formula deceptively suggests greater precision than we can hope for.... Nevertheless, the quality of proof required should vary with the circumstances. )). 53. Cal. Dental, 526 U.S. at Id. at Id. at 773; see also Fed. Trade Comm n in re Cal. Dental Ass n, 121 F.T.C. 190, 311 (1996) (stating that the restraints not only deny dentists a common avenue of attracting new patients and thus are likely to decrease output, but also deprive consumers of information they value and of healthy competition for their patronage ). 56. Cal. Dental, 526 U.S. at Id. at

8 454 The Journal of Corporation Law [Winter restrictions had a procompetitive effect at best, or no effect on competition at worst, because consumers inevitable problem would not be compounded by false and misleading information. 58 The Court emphasized that differences in fact patterns must be taken into account when assessing antitrust liability. The Court criticized the Ninth Circuit for not distinguishing the restrictions on professional advertising at issue from traditional bans on price advertising and for not recognizing that these restrictions could affect competition differently than a normal restriction on price advertising to the extent that the restrictions at issue could be procompetitive. 59 The Ninth Circuit categorized the restrictions as naked price restraints and limitations on output and then rejected the proffered procompetitive justification without considering the professional context and without proof of anticompetitive effects. 60 The Court stressed that in unusual and complicated situations, courts must have a solid theoretical foundation for concluding that certain acts indeed have anticompetitive effects before shifting the burden to the defendant to prove procompetitive effects. 61 In summary, the Court criticized the Ninth Circuit s quick-look analysis because it was an indulgently abbreviated review where plausible procompetitive effects of the restrictions existed and were not explored thoroughly. 62 But the Court did not go so far as to require a full blown rule of reason analysis with a plenary market examination for every case attacking a less obviously anticompetitive restraint, rather than a quick-look analysis. 63 California Dental is not a setback per se for the quick look movement because the Court remanded the case for a refined and expanded quick-look analysis and rejected the necessity of a market power analysis required in a full rule of reason analysis. 64 The opinion exemplifies the principle that the required quality of proof in a quick-look analysis cannot be generalized, but must be decided on a case by case basis Other Examples of the Supreme Court s Treatment of Quick-Look Analyses The Court has applied a quick-look analysis to several fact patterns. 66 In National Collegiate Athletic Association v. Board of Regents of University of Oklahoma, 67 the NCAA agreed to limit the number of college football games that could be televised, limit the number of televised football games per college, and fix the payment that colleges received from the television networks. 68 Even though this horizontal agreement 58. Id. at Id. at Id. at , Cal. Dental, 526 U.S. at 775 n.12 (emphasizing that when the factual circumstances surrounding a restraint are somewhat complex, assumption alone will not do, and the court must have a theoretical basis for determining that the effects are actually anticompetitive before shifting the burden). 62. Id. at Id. at Stephen Calkins, California Dental Association: Not a Quick Look But Not the Full Monty, 67 ANTITRUST L.J. 495, (2000). 65. See Cal. Dental, 526 U.S. at 780 (citing P. AREEDA, ANTITRUST LAW 1507, at 402 (1986) (stating that the circumstances determine the quality of proof required)). 66. Id. at Nat l Collegiate Athletic Ass n v. Bd. of Regents of Univ. of Okla., 468 U.S. 85 (1984). 68. Id. at

9 2007] Is PolyGram s Quick Look Analysis Inherently Suspect? 455 constituted naked price and output restraints, the Supreme Court refused to apply the per se illegal rule because the inherent characteristics of intercollegiate sports require ancillary restraints. 69 The Court applied a quick-look rule of reason analysis because joint production was necessary to deliver the product college football to the public. 70 Given that many of the NCAA s regulations are procompetitive, the Court cited the necessity of allowing the NCAA to justify the output and price restraints. 71 However, a full rule of reason analysis was unnecessary: this naked restraint on price and output requires some competitive justification even in the absence of a detailed market analysis. 72 The NCAA argued that the restraints were necessary to protect live attendance at football games that did not appear on television. 73 The Court rejected the justification because it indicated the NCAA s belief that ticket sales could not compete in the market. 74 The idea that competition should be restrained to protect inferior and unwanted products was inconsistent with the basic policy of the Sherman Act. [T]he Rule of Reason does not support a defense based on the assumption that competition itself is unreasonable. 75 The Court ultimately condemned the television plan because it prevented competition and consumer preferences from determining what product would be consumed. 76 In National Society of Professional Engineers v. United States 77 and Federal Trade Commission v. Indiana Federation of Dentists, 78 the Supreme Court applied quick-look analyses that reflected the principle that no elaborate industry analysis is required to demonstrate the anticompetitive character of certain competitors agreements. 79 In Professional Engineers, an association of engineers agreed to prohibit both discussion and negotiation of prices with potential customers and submission of bids for projects until customers had selected and hired their engineers. 80 The ban on competitive bidding restrained trade because it prevented price comparison by customers. 81 The association argued that competitive bidding on engineering services would lead to imprecise and deceptive bids and would encourage shoddy and inferior work resulting in threats to the 69. Id. at 100 (stating it would be inappropriate to apply a per se rule to this case ). 70. Id. at 101 (noting as critical that the case involved an industry in which horizontal restraints on competition are essential if the product is to be available at all ). 71. Id. at 103. But see Calkins, supra note 64, at 523 (arguing that the Court failed to adequately explain why a naked restriction on price or output should not be condemned as per se illegal ). 72. Nat l Collegiate Athletic Ass n, 468 U.S. at 110; see also 11 AREEDA & HOVENKAMP, supra note 30, 1914, at 355 (stating that the defendant has the opportunity, despite the restraint s inherent and presumed anticompetitive character, to show that what seems to be a per se unlawful restraint actually does, in this particular case, lead to increased output or reduced prices ). 73. Nat l Collegiate Athletic Ass n, 468 U.S. at Id. 75. Id. at (quoting Nat l Soc y of Prof l Eng rs v. United States, 435 U.S. 679, 696 (1978)). 76. Id. at 120 (stating that by curtailing output and blunting the ability of member institutions to respond to consumer preference, the NCAA has restricted rather than enhanced the place of intercollegiate athletics in the Nation s life ). 77. Nat l Soc y of Prof l Eng rs v. United States, 435 U.S. 679 (1978). 78. Fed. Trade Comm n v. Ind. Fed n of Dentists, 476 U.S. 447 (1986). 79. See Prof l Engineers, 435 U.S. at 692; Ind. Dentists, 476 U.S. at Prof l Engineers, 435 U.S. at Id. at 695.

10 456 The Journal of Corporation Law [Winter public safety and the ethics of the profession. 82 The Court rejected this justification, calling it nothing less than a frontal assault on the basic policy of the Sherman Act, which reflects that [t]he heart of our national economic policy long has been faith in the value of competition. 83 In Indiana Dentists, the Federation members agreed to withhold a service from their patients: the release of x-rays to their insurance companies. 84 Several factual circumstances led the Court to apply a rule of reason analysis. The context was a professional association. 85 The agreement did not explicitly fix a price. 86 The Court found that the agreement s economic impact was not immediately obvious. 87 The Federation argued that insurers using x-rays to determine whether or not to pay for dental treatments would erroneously decline to pay for necessary treatments and that patients would be deprived of fully adequate care. 88 The Court rejected the Federation s proffered quality of care justification because the agreement prevented the market from properly functioning by not allowing patients to ultimately determine the optimal price and output of x-rays. 89 The Court denied that competition, which would be full access to x-rays in an unrestricted market, would result in imprudent and harmful results for consumers. 90 The Court condemned the agreement as unlawful, but failed to discuss whether proof of market power was necessary since the Commission had proved actual anticompetitive effects. 91 The Supreme Court s reluctance to apply a per se rule to naked restraints underlies and illustrates the rising importance of the quick-look analysis. The trend is analyzing naked and nearly naked restraints in more detail within the context of their factual circumstances, but without launching a full rule of reason analysis and demanding the Full Monty. 92 This position, which values efficiency, detail, and practicality, is also shared and promoted by the Commission and the Department of Justice. The discussed case law demonstrates the vast and sometimes conflicting information available on antitrust analysis. The Supreme Court cases illustrate the movement away from full rule of reason analyses that require proof of market power and actual anticompetitive effects. 93 But the Court s vague terminology and broad principles are 82. Id. at Id. at 695 (quoting Standard Oil Co. v. Fed. Trade Comm n, 340 U.S. 231, 248 (1951), on the policy of the Sherman Act). 84. Ind. Dentists, 476 U.S. at Id. at 458 (noting the Court s reluctance to condemn as per se illegal a professional association s practices as illustrated in Professional Engineers). 86. Id. at Id. at Id. at Ind. Dentists, 476 U.S. at 462 (noting that [t]he Federation is not entitled to pre-empt the working of the market by deciding for itself that its customers do not need that which they demand ). 90. Id. at 463 (explaining that the Federation s argument that society is better off with a restrained marketplace is contrary to the principles of the Sherman Act). 91. Id. at 461 (stating that actual anticompetitive effects are legally sufficient, despite no elaborate market analysis, to condemn restraint as unlawful). 92. See Calkins, supra note 64, at (defining the Full Monty as an analysis with formal proof of market power, complete with market definitions, economics testimony, measurement of entry conditions, and the like ). 93. For explanation on the development of the quick-look rule of reason analysis, see supra Part II.C.

11 2007] Is PolyGram s Quick Look Analysis Inherently Suspect? 457 difficult to apply in particular situations, especially because antitrust analysis is fact intensive. 94 The Court has not provided a clear framework for quick-look analyses. Individual courts thus inconsistently make presumptions, shift burdens of proof, and ask different questions at different points in time. 95 The next Part evaluates how the Commission and the D.C. Circuit applied the quick-look analysis in PolyGram Holding and whether the analysis was consistent with antitrust precedent. III. DISCUSSION OF THE RATIONALE AND CONCLUSIONS OF POLYGRAM HOLDING A. Commission s and Circuit Court s Analysis The Commission successfully brought a suit against PolyGram and Warner 96 in 2001 for violating section 5 of the Federal Trade Commission Act (F.T.C. Act). 97 PolyGram appealed to the District of Columbia Circuit Court of Appeals. The circuit court first stated that a section 5 case would receive the same analysis as a case brought under section 1 of the Sherman Act. 98 The court denied PolyGram s petition for review of the Commission s Final Order and accepted the Commission s finding that defendants agreement was unlawful using the quick-look analysis as set forth in In re Massachusetts Board of Optometry. 99 The Commission determined that it was obvious from the inherent nature of advertising and discounting moratoriums that they would likely harm consumers. 100 As a result, the Commission labeled the restraints inherently suspect, which referred not to the inherent nature of the conduct, but to its similarity to another practice that the Commission recognized as per se illegal. 101 Inherently suspect is conduct that appears likely, absent an efficiency justification, to restrict competition and decrease output [and] is to be presumed unreasonable. 102 The Commission then shifted the burden of proof to PolyGram to suggest a 94. See, e.g., Cal. Dental Ass n v. Fed. Trade Comm n, 526 U.S. 756, 781 (1999) (explaining that the appropriate analysis for a given situation is an enquiry meet for the case, looking to the circumstances, details, and logic of a restraint ). 95. See, e.g., id. at 775 (explaining that the lower court wrongly presumed anticompetitive effects from the advertising restrictions and wrongly shifted the burden to the defendant to prove a procompetitive justification). 96. PolyGram Holding, Inc. v. Fed. Trade Comm n, 416 F.3d 29, 32 (D.C. Cir. 2005). 97. Federal Trade Commission Act, 15 U.S.C. 45 (2000) (prohibiting unfair methods of competition ). 98. PolyGram Holding, 416 F.3d at Id. at 32-33, 36, 39; In re Mass. Bd. of Optometry, 110 F.T.C. 549, 604 (1988) (creating a decision tree analysis that asks whether the restraint is inherently suspect, whether there is a plausible efficiency justification for the restraint, and whether that justification is valid) PolyGram Holding, 416 F.3d at 37 (noting that the moratoriums on advertising and discounting are suspiciously like a [per se illegal] naked price fixing agreement between competitors ); id. (explaining the rationale behind suspicion of bans on advertising, which serves to inform the public of the availability, nature, and prices of products and services, and thus performs an indispensable role in the allocation of resources in a free enterprise system as written in Bates v. State Bar of Ariz., 433 U.S. 350, 364 (1977)) Id. at (explaining that the rebuttable presumption of illegality arises not necessarily from anything inherent in a business practice but from the close family resemblance between the suspect practice and another practice that already stands convicted in the court of consumer welfare ) Id. at (quoting In re PolyGram Holding, No. 9298, at *22-24 (F.T.C. July 24, 2003), available at

12 458 The Journal of Corporation Law [Winter plausible competitive justification for the moratoriums. 103 Proper justifications had to illustrate why practices that are competitively suspect as a general matter may not be expected to have adverse consequences in the context of the particular market in question; or they may consist of reasons why the practices are likely to have beneficial effects for consumers. 104 PolyGram s proffered justification was that the moratoriums increased the three recordings long-term profitability and enhanced the Three Tenors brand. 105 PolyGram s goal was to prevent free-riding from the marketing of the joint recording. 106 Assuming the joint promotions would increase consumer interest in the third recording, PolyGram and Warner feared that consumers would buy the earlier recordings instead of the joint recording because they were cheaper and were near-perfect substitutes for most consumers. 107 PolyGram argued, that absent the moratoriums, sales for all the recordings would be depressed and the likelihood of future joint venture products such as a boxed set or a greatest hits album would be low. 108 While admitting the justification had some appeal, the court, like the Commission, rejected the free-riding argument for the simple reason that the free-riding sought to be eliminated represented competition from products that were outside of the joint venture. 109 As seen in Professional Engineers and Indiana Dentists, the court referred to the justification as nothing less than a frontal assault on the basic policy of the Sherman Act. 110 The court explained that [a] restraint cannot be justified solely on the ground that it increases the profitability of the enterprise that introduces the new product, regardless whether that enterprise is a joint venture or a solo undertaking. 111 The thrust is that if the product would not survive in a free market and successfully face the rigors of competition absent the restraints, the product should fail because it did not offer any beneficial value to consumers. 112 Under long-established antitrust jurisprudence, defenses based on competition being undesirable will not be entertained. 113 Without a plausible justification for the restraints, the Commission and the court 103. Id. at In re PolyGram Holding, No at * PolyGram Holding, 416 F.3d at Id Id. at 38 (stating the likelihood, in the absence of the moratoriums, that a consumer, after learning of the new album through the joint venture s advertising, might decide that he would be just as happy with an older concert album, especially if the older album were then available at a discount ) Id. at Id. at (stating that [a]t first glance PolyGram s contention has some force ) PolyGram Holding, 416 F.3d at 38 (quoting Nat l Soc y of Prof l Eng rs v. United States, 435 U.S. 679, 695 (1978) (rejecting as a frontal assault the argument that competitive bidding results in inferior work products)); see Fed. Trade Comm n v. Ind. Fed n of Dentists, 476 U.S. 447, 463 (1986) (rejecting as a frontal assault the argument that access to more information in the form of x-rays will lead to inadequate treatment of customers) PolyGram Holding, 416 F.3d at 38; see also Law v. NCAA, 134 F.3d 1010, 1023 (10th Cir. 1998) (stating that increasing output, creating operating efficiencies, making a new product available, enhancing product or service quality, and widening consumer choice are acceptable justifications for what would otherwise be anticompetitive agreements, but mere profitability or cost savings are not valid defenses) PolyGram Holding, 416 F.3d at 38 (stating that if the only way a new product can profitably be introduced is to restrain the legitimate competition of older products, then one must seriously wonder whether consumers are genuinely benefited by the new product ) Fred S. McChesney, Singing in the Shadows of Law: The Three Tenors Case, 49 ANTITRUST BULL. 633, 650 (2004).

13 2007] Is PolyGram s Quick Look Analysis Inherently Suspect? 459 condemned the restraints as unlawful without requiring any market analysis. 114 However, the court noted that the Commission additionally found that the facts did not support the proffered justification. 115 The moratoriums neither affected the amount of promotional activities for the new recording nor increased the likelihood of a future joint project. 116 These factual findings further supported the Commission s and the circuit court s finding that the moratoriums were unreasonable restraints of trade under section 5 of the F.T.C. Act and section 1 of the Sherman Act. 117 Even though the analysis stopped after PolyGram s failure to proffer a cognizable justification, the court noted, but did not comment on, the Commission s discussion in its opinion of what would have been the next step in the analysis. 118 The Commission would have had to engage in a more searching analysis of the market circumstances surrounding the restraint 119 and have been required to make a more detailed showing that the restraints at issue are indeed likely, in the particular context, to harm competition. 120 The Commission noted that the showing requires neither proof of actual anticompetitive effect nor a full market analysis. 121 B. The Quick-Look Analysis and Outcome Were Correct 1. Commentary on PolyGram Holding by Academics and Practitioners a. Inherently Suspect Categorization The Commission s treatment of inherently suspect behavior has given rise to suspicion, distrust, and outrage in the antitrust community. 122 The fear has been that the Commission s form of a quick-look analysis is merely an expanded per se analysis under which it can challenge potentially any form of nonmerger behavior without the need for a detailed market definition and rigorous structural analysis of the restraint s effect in that market. 123 While the categorization does ultimately appear to be applied 114. PolyGram Holding, 416 F.3d at 33. Only if the competitive harm wrought by the restraint is not readily apparent from the nature of the restraint itself, or the charged party offers a plausible competitive justification for the restraint, must the Commission, under this approach, engage in a more searching analysis of the market circumstances surrounding the restraint. Id Id. at Id Id. (stating that the Commission confirmed its initial conclusion with the closer inspection) PolyGram Holding, 416 F.3d at Id In re PolyGram Holding, No. 9298, *32 (F.T.C. July 24, 2003), available at Id. (citing Cal. Dental Ass n v. Fed. Trade Comm n, 526 U.S. 756, 779 (1999) for authority) James A. Keyte & Neal R. Stoll, Markets? We Don t Need No Stinking Markets! The FTC and Market Definition, 49 ANTITRUST BULL. 593, 611 (2004) (stating [t]he future of quick-look analysis... is necessarily unpredictable and murky because courts will struggle to articulate the outer boundaries of inherently suspect behavior) Id.

14 460 The Journal of Corporation Law [Winter according to the Commission s subjective judgment, 124 the categorization is significantly reserved for only the small class of behavior for which anticompetitive effects are highly likely, and thus the social and policy costs of foregoing a market analysis are low. 125 The corresponding confusion surrounding what acts qualify 126 and how firms are to know ex ante whether their acts will qualify as inherently suspect may benefit society and be procompetitive because it may deter firms from engaging in acts that are almost per se illegal. Regardless of the strength of the confusion argument, PolyGram Holding does not present such a scenario because the inherently suspect conduct clearly constituted a price fix even if it was not the smoke-filled-room sort of price fixing that would automatically evoke application of a per se standard. 127 A second argument against the use of the inherently suspect framework is that courts already employ a structured full rule of reason analysis and the inherently suspect categorization is unnecessary and may condemn valid acts through false positives. 128 But the clear advantage of the quick-look analysis is that it saves time and money while reaching the same conclusion. Even if the inherently suspect framework had not been applied, the moratoriums would still have been condemned because the Commission could have introduced direct evidence of anticompetitive effects: as a result of the moratoriums, prices were higher than they otherwise would have been. 129 A finding of anticompetitive effects is a substitute for proof of market power and a market analysis, even in a full rule of reason analysis William Kolasky & Richard Elliott, The Federal Trade Commission s Three Tenors Decision: Qual Due Fiori A Un Solo Stello, 18 ANTITRUST 50 (2004) McChesney, supra note 113, at 647 (stating that [t]he Massachusetts Board approach attempts to simplify the analysis by identifying cases where there are relatively few costs to avoiding the often complex rule of reason questions of market definition, market power, and how to weigh anticompetitive concerns against efficiencies (quoting Langenfeld & Morris, Analyzing Agreements among Competitors: What Does the Future Hold?, 36 ANTITRUST BULL. 651, 670 (1991))) See Ronald W. Davis, Limitations on Competition and the Joint Venture Parents that Impose Them: A Fair and Balanced Look at Polygram, 18 ANTITRUST 56, 60 (2004) (noting both that the categorization must be broader than per se illegal acts and that the inherent problem is distinguishing acts that are not per se illegal, but are likely to raise prices and reduce output) McChesney, supra note 113, at See United States v. Visa U.S.A., Inc., 344 F.3d 229, 238 (2d Cir. 2003) (providing an example of structured rule of reason analysis); Kolasky & Elliott, supra note 124, at 50, 54 (arguing that the inherently suspect analysis should not have been applied because it creates risk of false positives) McChesney, supra note 113, at Because the moratorium agreement stopped the discounting and advertising that occurred when the prior Three Tenors recordings were marketed, the FTC could easily have met the test of showing direct evidence of anticompetitive effects. The Commission noted that prior to the release of 3T3 material, discounting and aggressive advertising of 3T1 and 3T2 products were common.... In other words, resort to Massachusetts Board, while sufficient, was not necessary to avoid defining a relevant product market and showing market power therein. Existing case law predating Massachusetts Board already provided a way around the traditional rule of reason requirements of showing a relevant market and market power. Id See Fed. Trade Comm n v. Ind. Fed n of Dentists, 476 U.S. 447, 461 (1986) (stating that actual anticompetitive effects are legally sufficient, without an elaborate market analysis, to condemn a restraint as unlawful).