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Ten-Point Check List for Sherman Act Section 1 Antitrust Complaints

M. Brian McMahon

Section I of the federal Sherman Act, 15 U.S.C. §1, declares illegal any contract, combination or conspiracy in restraint of trade or commerce. Section 15 of the Clayton Act, 15 U.S.C. §15, provides that successful Section 1 plaintiffs are entitled to three times the amount of damages suffered, plus the costs of prosecuting the lawsuit and reasonable attorneys' fees. Because of the size of the potential recovery, the costs expended by plaintiffs and defendants in litigating Section 1 cases are enormous. Inevitably, discovery is a long, expensive process, experts need to be hired and paid, and motion practice is complex and arduous.

Courts have established a number of requirements that plaintiffs must satisfy in asserting and proving violations of Section 1. Before filing a Section 1 lawsuit, a plaintiff should take great care to make sure that their antitrust theories are both legally correct and factually supported. If a plaintiff fails to take great care, the court will likely dismiss the lawsuit, and the plaintiff will have wasted a great deal of time and money.

Defendants also should review Section 1 complaints very carefully to determine if they fail to satisfy legal and factual requirements. By attacking, at an early stage, antitrust complaints that are legally and factually deficient, a defendant may be able to avoid not only a judgment against it, but also a long, expensive lawsuit.

The following are the ten most important requirements for a Section 1 case that should be carefully considered by plaintiffs in drafting and filing Section 1 cases and by defendants in defending against them.

1. The lawsuit must be filed within the statute of limitations period.

  1. 15 U.S. C. § 15(b) (An antitrust suit must commence within four years after the cause of action has accrued)
  2. Zenith Radio Corp. v. Hazeltine Research Inc., 401 U.S. 321 (1971) (An antitrust action accrues and the limitations period begins to run when a defendant commits an act that injures the plaintiff. The period maybe tolled until the plaintiff discovers or should have discovered the injury.) 

Section 1 actions have a four year limitation period. The period is tolled until the plaintiff discovers or should have discovered the injury. If the conspirators successfully hid their conspiracy, however, the limitations period may be extended until the plaintiff discovers the conspiracy.

2. The Complaint must plead facts with sufficient specificity.

  1. Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (A complaint alleging an antitrust conspiracy is subject to dismissal if it consists only of allegations of parallel conduct and a bare assertion of conspiracy)
  2. Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009) (Conclusions of law are not to be considered in determining whether the complaint states a plausible antitrust claim. The factual allegations must be examined to determine whether they state a cause of action.)

In order to establish a Sherman Act Section 1 violation, a plaintiff must plead and prove concerted action by two or more actors. Allegations in a complaint that the defendants engaged in similar behavior does not establish concerted action, if their behavior is equally indicative of a series of unilateral but similar independent actions. For example, the fact that companies in a concentrated market set the same prices for similar products does not by itself indicate an agreement to fix prices. A number of lawsuits have been dismissed because the complaints did not contain enough factual detail about the alleged conspiracy or because the complaints alleged no more than that the defendants set the same prices. The lower courts are inconsistent as to how much factual detail the complaint requires.

3. The alleged conspiracy must be economically plausible.

Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) (Summary judgment was upheld because the inference of conspiracy was not reasonable. Although over twenty years old, the alleged conspiracy had failed to reach its objective. It was implausible, because it would have generated uncompensated losses for the defendants.)

Summary judgment will be granted against plaintiffs when, lacking any direct evidence of a conspiracy, they allege a conspiracy that does not make any economic sense. In the Matsushita case, Japanese television manufacturers were accused of taking part in an antitrust conspiracy for over twenty years to underprice television sets in order to drive American television manufacturers out of business. Summary judgment was upheld because the conspiracy that the plaintiffs tried to infer made no economic sense. The court reasoned that the conspirators could never recoup the losses caused by their alleged underpricing scheme and so the alleged conspiracy was against their economic interest.

4. The injury alleged in the complaint must be of the type that the antitrust laws were intended to prevent.

  1. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977) (Operators of bowling centers may not bring an antitrust action to recover lost profits from increased competition caused by the acquisition of a failing bowling center by a manufacturer of bowling equipment.)
  2. Atlantic Richfield v. USA Petroleum Co., 495 U.S. 328 (1990) (A retailer of gasoline cannot recover damages for sales lost to a competitor, when competitor conspired with its authorized dealers to fix the maximum prices at which its dealers resold gasoline. The price ceiling that ARCO imposed on its dealers benefited consumers. The plaintiff did not suffer antitrust injury, because its actual complaint was only that the defendant's competition made the plaintiff unable to raise the price of its gasoline.)

The antitrust laws were intended to prevent injury caused by actions that reduce competition. Accordingly, actions by defendants that increase competition are not illegal under the antitrust laws, even if, by increasing competition, they adversely impact the plaintiff. In the Brunswick and Atlantic Richfield cases, the plaintiffs were injured by actions that actually increased competition. If a plaintiff suffers lost profits because of competition from defendants, a plaintiff suffers no injury cognizable under the antitrust laws.

5. The plaintiff must have "antitrust standing" to bring the antitrust claim; that is, the alleged injury suffered by the plaintiff must not be too remote from the alleged illegal conduct.

Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983) (A labor union did not have standing to bring a lawsuit that alleged that an association of employers conspired with third parties and members of the association to refuse to engage in collective bargaining with the union.)

Plaintiffs asserting a Section 1 claim must show that the defendants' antitrust violation was not only a "but for´" cause of their injury but a proximate cause as well. In Associated General Contractors, the Supreme Court outlined a series of factors to be evaluated on a case-by-case basis to determine whether a plaintiff has standing to bring an antitrust action. These factors are: (1) antitrust injury (discussed above); (2) the directness of the injury; (3) the speculative measure of the harm; (4) the risk of duplicative injury; and (5) the complexity of apportioning damages. An antitrust plaintiff must suffer anitrust injury. But a court need not find in favor of the plaintiff on all factors and no single factor, including the presence of antitrust injury, is decisive. Courts are required to balance the factors to determine whether a plaintiff has antitrust standing. This requirement is difficult to assess in the abstract, because it is not susceptible to a clear cut standard.

6. The plaintiff must be a direct purchaser of the products or services sold by the conspirators.

Illinois Brick v. Illinois, 431 U.S. U.S. 720 (1977) (Customers that do not compete or deal directly with the defendants may not bring a Section 1 lawsuit.)

Assume an industry in which manufacturers sell similar products exclusively to distributors, distributors in turn sell the products exclusively to retail outlets and retail outlets sell the products to their retail customers. In this hypothetical, there are four vertical levels. Assume also that the manufacturers agree to fix their prices artificially high and these overcharges are passed down the distribution chain. In such a situation, neither the retail customers nor retail outlets may sue the manufacturers under Section 1 for price fixing, because they do not purchase directly from the manufacturers. Only the distributors may sue the manufacturers for their price fixing conspiracy, because only they purchase directly from the manufacturers.

7. The antitrust claims must not be preempted by other federal law.

Credit Suisse Securities (USA) LLC, 551 U.S. 264 (2007) (Federal securities law implicitly precluded application of the antitrust laws to activities of underwriting firms that marketed and distributed shares in initial public offerings.)

Congress has carved out express statutory exemptions from the antitrust laws for some, but not all, types of activities with respect to the business of insurance, agricultural cooperatives, activities of unions, and export trade associations. There are also implied immunities from the antitrust laws. In finding that the securities related activities are immune from the antitrust laws, the Court in Credit Suisse articulated four factors to determine whether the securities laws implicitly precluded application of the antitrust laws: (1) whether the area of conduct is squarely within the heartland of securities regulations; (2) whether the Securities and Exchange Commission has clear and adequate authority to regulate; (3) whether there is active and ongoing agency regulation; and (4) whether a serious conflict arises between antitrust law and securities regulation. In determining whether other federally regulated industries are similarly impliedly immune from the antitrust laws, these four factors should be applied.

8. The complaint must not attack rates that were approved by a federal agency.

Keogh v. Chicago & N.W. Ry. Co., 260 U.S. 156 (1922) (A plaintiff may not bring an antitrust action against defendants for allegedly conspiring to successfully convince a federal rate-setting agency to adopt rates favorable to them. If adopted by a federal agency with tariff approval authority, the rates or other tariff terms cannot be challenged by an antitrust plaintiff.)

Private antitrust actions are barred where a plaintiff asserts that prices regulated by a federal agency are artificially high. The filed rate doctrine prohibits a private plaintiff from seeking a price that is different from the price filed with and approved by a federal agency. The doctrine has been extended beyond simply rates. The doctrine bars damage claims based not only on the rate or price of service, but also on other components of the overall service that are related to, or affect, the price paid by the consumer.

9. The alleged illegal action of the defendants must not constitute anticompetitive actions engaged in by states.

Parker v. Brown, 317 U.S. 341 (1943) (A plaintiff may not bring an antitrust suit to challenge a state-created regulatory scheme that is a clearly articulated system of regulation and is affirmatively designed to supplant the antitrust laws.)

The state action doctrine of Parker v. Brown has been extended to cover actions by private individuals who are subject to state oversight and control. In order for the state action immunity to apply to actions by private individuals, the courts apply a two-pronged test: (1) the challenged restraint must be one that is clearly articulated and affirmatively expressed as state policy; and (2) the policy must be actively supervised by the state. As for the second prong of the test, a state need not give express authorization of particular anticompetitive acts for the state action doctrine to apply. The second prong is fulfilled when the actions by individuals are a foreseeable result of a broader statutory authorization. For example, where a city acted within its state-given authority to pass a zoning ordinance that prevented the plaintiff billboard company from entering the market, the plaintiff was barred from bringing an antitrust action, because the suppression of competition was a foreseeable result of passing such an ordinance. City of Columbia v. Omni Outdoor Adver., Inc., 499 U.S. 365 (1991) On the other hand, where a state statute required wine producers to file price schedules with the state, but the wine dealers set the prices without any state oversight or control, the wine producers were not immune under the state action doctrine for price fixing. California Retail Liquor Dealers Assoc. v. Midcal Aluminum, Inc., 445 U.S. 97 (1980)

10. The complaint must not attack agreements among competitors to petition the government.

Eastern Railroad Presidents Conference v. Noerr Motor Freight, 365 U.S. 127 (1961); United Mine Workers of America v. Pennington, 381 U.S. (657) (Conspiracies to petition the government are protected from antitrust liability even if they are undertaken for antitrust purposes.)

The Noerr-Pennington immunity has been extended to court proceedings and, under certain circumstances, to administrative agency proceedings. The Noerr-Pennington immunity is based on the principle that individuals and companies have a right under the First Amendment of the United States Constitution to petition their government, even if they do so for anticompetitive purposes. The First Amendment ´┐Żtrumps´┐Ż the Sherman Act.

This Bulletin is intended to convey general information and does not constitute legal advice. The attorney listed above would be pleased to discuss in detail the information in this Bulletin and its application to your situation. We welcome your comments and suggestions.

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