SCOTUS is about to hear the easiest antitrust case ever

SCOTUS is about to hear the easiest antitrust case ever
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Antitrust law is notorious for its hard questions. Enacted in 1890, the Sherman Act prohibits “restraints of trade” and the meaning of that cryptic phrase still remains unresolved. Yet, there has never been any serious debate as to the illegality of one type of restraint: horizontal price-fixing. 

The “per se” rule against this practice reflects the virtual absence of uncertainty concerning its harmfulness. That rule enables plaintiffs to prove a violation by demonstrating the existence of a cartel, without showing harm and without having to rebut countervailing justifications. 

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This is a powerful driver behind the antitrust laws’ ability to deter activity that so obviously distorts the market-pricing mechanism.

 

Given all that, a puzzle is posed by the U.S. Court of Appeals Second Circuit’s ruling in the under-discussed antitrust case of Animal Science Products, Inc. et al. v. Hebei Welcome Pharmaceutical Co. Ltd. et al. The case, which the Supreme Court will hear on April 24, concerns a cartel among vitamin C producers representing a majority of the world market. 

The defendants — who do not contest the existence of the cartel — are located in China but export to the U.S. market. The sole defense relies on an amicus brief submitted by China’s Ministry of Commerce. 

According to that brief, the defendants were compelled to participate in the cartel under Chinese law (which, if accepted, may trigger an exemption to antitrust liability due to “state compulsion”). The district court was unconvinced due to other evidence that the cartel was voluntary and declined to dismiss the suit. 

The jury ultimately award damages of $147 million. Upon appeal, the Second Circuit held that the district court judge was “bound to defer” to the foreign government’s interpretation of its laws under international comity principles, which means the defendants walk away without a penalty.  

The case presents a vital opportunity to preserve antitrust deterrence in a globalized economy. While courts should take into account principles of international comity, this is not a factor that should override judicial scrutiny. 

The appeals court’s near-blanket limitations on a judge’s freedom to probe less than entirely persuasive claims of state compulsion is liable to create a substantial loophole in U.S. antitrust law.

By way of background, prosecutors targeted and broke up another vitamin C cartel, among European and Japanese firms, in the 1990s. (Ironically, the cartel was undermined in part by competition from Chinese firms.) 

As a matter of antitrust policy, it is arbitrary that a second cartel in the same product should receive a free pass without the type of nuanced inquiry undertaken by the district court, simply because the cartel purports to act under state sanction. 

Given the globalization of commerce and substantial state involvement in commercial activities in some countries, a one-sided emphasis on comity principles endangers a key foundation behind the antitrust shield against cartels. 

The time is ripe for the Supreme Court to provide guidance concerning the extraterritorial reach of the Sherman Act when so much commerce is no longer territorial.

In recent years, the Supreme Court has declined to hear several cases involving application of the antitrust laws to alleged price-fixing activities that happen to take place outside the borders of the U.S. but impact U.S. consumers. 

In 2012, the Supreme Court declined to review an antitrust case involving an alleged export cartel among foreign magnesite producers and, in 2015, the Court declined to review two antitrust cases relating to an alleged cartel involving foreign producers of LCD panels. 

Additionally, in 2011, the Supreme Court declined to hear two antitrust cases involving OPEC, which is so confident of its U.S. antitrust immunity that it holds press conferences to announce its output targets.

In all but one of those cases, antitrust doctrines posed roadblocks to applying the Sherman Act to alleged foreign anticompetitive activity that can impact U.S. consumers. 

To be clear, courts should give due weight to a foreign government’s interpretations of its laws. But an overly deferential standard unreasonably limits a court’s discretion to look more closely when appropriate.

That opens up a detour by which firms could evade the Sherman Act’s near-watertight prohibition on cartels by seeking refuge under a nebulous shadow of state involvement.

Appropriately, the Supreme Court most authoritatively stated the per se rule in U.S. v. Socony-Vacuum Oil Co., a price-fixing case brought against U.S. oil companies who, akin to the vitamin C producers in this case, argued in defense that they had operated under the not-quite-explicit blessing of a government entity. 

The Supreme Court rejected that type of argument in 1940 and now has the opportunity to consider it in the international context. This is not one of antitrust’s hard questions.

Jonathan M. Barnett is a professor of law at the University of Southern California, Gould School of Law, where he specializes in intellectual property, contracts, antitrust and corporate law.