Atlantic Richfield Company v. USA Petroleum Company/Dissent Stevens

Justice STEVENS, with whom Justice WHITE joins, dissenting.

The Court today purportedly defines only the contours of antitrust injury that can result from a vertical, nonpredatory, maximum-price-fixing scheme. But much, if not all, of its reasoning about what constitutes injury actionable by a competitor would apply even if the alleged conspiracy had been joined by other major oil companies doing business in California, as well as their retail outlets. The Court undermines the enforceability of a substantive price-fixing violation with a flawed construction of § 4, erroneously assuming that the level of a price fixed by a § 1 conspiracy is relevant to legality and that all vertical arrangements conform to a single model.

* Because so much of the Court's analysis turns on its characterization of USA's cause of action, it is appropriate to begin with a more complete description of USA's theory. As the case comes to us on review of summary judgment, we assume the truth of USA's allegation that ARCO conspired with its retail dealers to fix the price of gas at specific ARCO stations that compete directly with USA stations. It is conceded that this price-fixing conspiracy is a per se violation of § 1 of the Sherman Act.

USA's theory can be expressed in the following hypothetical example: In a free market ARCO's advertised gas might command a price of $1 per gallon while USA's unadvertised gas might sell for a penny less, with retailers of both brands making an adequate profit. If, however, the ARCO stations reduce their price by a penny or two, they might divert enough business from USA stations to force them gradually to withdraw from the market. The fixed price would be lower than the price that would obtain in a free market, but not so low as to be "predatory" in the sense that a single actor could not lawfully charge it under 15 U.S.C. § 2 or § 13a.

This theory rests on the premise that the resources of the conspirators, combined and coordinated, are sufficient to sustain below-normal profits in selected localities long enough to force USA to shift its capital to markets where it can receive a normal return on its investment. Thus, during the initial period of competitive struggle between the conspirators and the independents, consumers will presumably benefit from artificially low prices. If the alleged campaign is successful, however-and as the case comes to us we must assume it will be-in the long run there will be less competition, or potential competition, from independents such as USA, and the character of the market will be different than if the conspiracy had never taken place. USA alleges that, in fact, the independent market already has suffered significant losses.

ARCO's alleged conspiracy is a naked price restraint in violation of § 1 of the Sherman Act, 15 U.S.C. § 1. It is undisputed that ARCO's price-fixing arrangement, as alleged, is illegal per se under the rule against maximum price fixing, which is " 'grounded on faith in price competition as a market force [and not] on a policy of low selling prices at the price of eliminating competition.' Rahl, Price Competition and the Price Fixing Rule-Preface and Perspective, 57 Nw.U.L.Rev. 137, 142 (1962)." Arizona v. Maricopa County Medical Society, 457 U.S. 332, 348, 102 S.Ct. 2466, 2475, 73 L.Ed.2d 48 (1982). At issue is only whether a maximum price, administered on a host of retail stations that are ostensibly competing with one another as well as with other retailers, may be challenged by the competitor targeted by the pricing scheme.

Section 4 of the Clayton Act allows private enforcement of the antitrust laws by "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws." 15 U.S.C. § 15. See Simpson v. Union Oil Co. of California, 377 U.S. 13, 16, 84 S.Ct. 1051, 1054, 12 L.Ed.2d 98 (1964) (quoting Radovich v. National Football League, 352 U.S. 445, 454, 77 S.Ct. 390, 395, 1 L.Ed.2d 456 (1957)) (laws allowing private enforcement of the antitrust laws by an aggrieved party " 'protect the victims of the forbidden practices as well as the public' "). In order to invoke § 4, a plaintiff must prove that it suffered an injury that (1) is "of the type the antitrust laws were intended to prevent" and (2) "flows from that which makes defendants' acts unlawful." Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 697, 50 L.Ed.2d 701 (1977). In Brunswick, the plaintiff businesses claimed that they were deprived of the benefits of the increased concentration that would have resulted had failing businesses not been acquired by petitioner, allegedly in violation of § 7. In concluding that the plaintiffs had failed to prove "antitrust injury," we found that neither condition of § 4 standing was satisfied: First, the plaintiffs sought to recover damages because the mergers had preserved businesses and competition, which is not the type of injury that the antitrust laws are designed to prevent;  and second, the plaintiffs had not been harmed by any potential change in the market structure effected by the entry of the " 'deep pocket' parent." Id., at 487-488, 97 S.Ct., at 696-697.

In this case, however, both conditions of standing are met. First, § 1 is intended to forbid price-fixing conspiracies that are designed to drive competitors out of the market. See Klor's Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 213, 79 S.Ct. 705, 710, 3 L.Ed.2d 741 (1959) (illegal coordination "is not to be tolerated merely because the victim is just one merchant whose business is so small that his destruction makes little difference to the economy"). USA alleges that ARCO's pricing scheme aims at forcing independent refiners and marketers out of business and has created "an immediate and growing probability that the independent segment of the industry will be destroyed altogether."

In Brunswick, we recognized that requiring a competitor to show that its loss is "of the type" antitrust laws were intended to prevent

"does not necessarily mean . . . that § 4 plaintiffs must     prove an actual lessening of competition in order to recover.      The short-term effect of certain anticompetitive behavior      predatory below-cost pricing, for example-may be to stimulate      price competition.  But competitors may be able to prove      antitrust injury before they actually are driven from the market and competition is thereby      lessened." 429 U.S., at 489, n. 14, 97 S.Ct., at 697, n. 14.

The pricing behavior in the Court's hypothetical example may cause actionable injury because it is "predatory." This is so because the Court assumes that a predatory price is illegal. The direct relationship between the illegality and the harm is what makes the competitor's short-term loss "antitrust injury." The fact that the illegality in the case before us today stems from the illegal conspiracy, rather than the predatory character of the price, does not change the analysis of "that which makes defendants' acts unlawful." Thus, notwithstanding any temporary benefit to consumers, the unlawful pricing practice that is harmful in the long run to competition causes "antitrust injury" for which a competitor may seek damages.

Second, USA is directly and immediately harmed by this price-fixing scheme, that is to say, by "that which makes defendants' acts unlawful." Id., at 489, 97 S.Ct., at 697. In Brunswick, the allegedly illegal conduct at issue-the merger itself did not harm the plaintiffs; similarly, in Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 107 S.Ct. 484, 93 L.Ed.2d 427 (1986), the alleged injury arose not from the illegality of the proposed merger, but merely from possible postmerger behavior. Although the link between the illegal mergers and the alleged harms was insufficient to prove antitrust injury in either Brunswick or Cargill, both of those cases recognize that illegal pricing practices may cause competitors "antitrust injury."

The Court accepts that, as alleged, the vertical price-fixing scheme by ARCO is per se illegal under § 1. Nevertheless, it denies USA standing to challenge the arrangement because it is neither a consumer nor a dealer in the vertical arrangement, but only a competitor of ARCO: The "antitrust laws were enacted for 'the protection of competition, not competitors.' "  Ante, at 338 (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 320, 82 S.Ct. 1502, 1521, 8 L.Ed.2d 510 (1962)). This proposition-which is often used as a test of whether a violation of law occurred cannot be read to deny all remedial actions by competitors. When competitors are injured by illicit agreements among their rivals rather than by the free play of market forces, the antitrust laws protect competitors precisely for the purpose of protecting competition. The Court nevertheless interprets the proposition as categorically excluding actions by a competitor who suffers when others charge "nonpredatory prices pursuant to a vertical, maximum-price-fixing scheme." Ante, at 331. In the context of a § 1 violation, however, the distinctions both of the price level and of the vertical nature of the conspiracy are unfounded. Each of these two analytical errors merits discussion.

The Court limits its holding to cases in which the noncompetitive price is not "predatory," ante, at 331, 333, n. 3, 335, 339, 340, essentially assuming that any nonpredatory price set by an illegal conspiracy is lawful, see n. 1, supra. This is quite wrong. Unlike the prohibitions against monopolizing or underselling in violation of § 2 or § 13a, the gravamen of the price-fixing conspiracy condemned by § 1 is unrelated to the level of the administered price at any particular point in time. A price fixed by a single seller acting independently may be unlawful because it is predatory, but the reasonableness of the price set by an illegal conspiracy is wholly irrelevant to whether the conspirators' work product is illegal.

If any proposition is firmly settled in the law of antitrust, it is the rule that the reasonableness of the particular price agreed upon by defendants does not constitute a defense to a price-fixing charge. In United States v. Trenton Potteries Co., 273 U.S. 392, 47 S.Ct. 377, 71 L.Ed. 700 (1927), the Court explained that "[t]he reasonable price fixed today may through economic and business changes become the unreasonable price of tomorrow," id., at 397, 47 S.Ct., at 379, and cautioned that

"in the absence of express legislation requiring it, we     should hesitate to adopt a construction making the difference      between legal and illegal conduct in the field of business      relations depend upon so uncertain a test as whether prices      are reasonable-a determination which can be satisfactorily      made only after a complete survey of our economic      organization and a choice between rival philosophies." Id.,     at 398, 47 S.Ct., at 379.

See also United States v. Masonite Corp., 316 U.S. 265, 281-282, 62 S.Ct. 1070, 1079, 86 L.Ed. 1461 (1942). This reasoning applies with equal force to a rule that provides conspirators with a defense if their agreed upon prices are nonpredatory, but no defense if their prices fall below the elusive line that defines predatory pricing. By assuming that the level of a price is relevant to the inquiry in a § 1 conspiracy case, the Court sets sail on the "sea of doubt" that Judge Taft condemned in his classic opinion in the Addyston Pipe and Steel case:

"It is true that there are some cases in which the     courts, mistaking, as we conceive, the proper limits of the      relaxation of the rules for determining the unreasonableness      of restraints of trade, have set sail on a sea of doubt, and have assumed the power to say, in respect to      contracts which have no other purpose and no other      consideration on either side than the mutual restraint of the      parties, how much restraint of competition is in the public      interest, and how much is not." United States v. Addyston     Pipe & Steel Co., 85 F. 271, 283-284 (CA6 1898).

The Court is also careful to limit its holding to cases involving "vertical" price-fixing agreements. In a thinly veiled circumscription of the substantive reach of § 1, the Court simply interprets "antitrust injury" under § 4 so that it excludes challenges by any competitor alleging a vertical conspiracy: "[A] vertical price-fixing scheme may facilitate predatory pricing. . . [b]ut because a firm always is able to challenge directly a rival's pricing as predatory, there is no reason to dispense with the antitrust injury requirement in an action by a competitor against a vertical agreement." Ante, at 339, n. 9. This focus on the vertical character of the agreement is misleading because it incorrectly assumes that there is a sharp distinction between vertical and horizontal arrangements, and because it assumes that all vertical arrangements affect competition in the same way.

The characterization of ARCO's price-fixing arrangement as "vertical" does not limit its potential consequences to a neat category of injuries. A horizontal conspiracy among ARCO retailers administered by, for example, trade association executives instead of executives of their common supplier would generate exactly the same anti-competitive consequences. ARCO and its retail dealers all share an interest in excluding independents like USA from the market. The fact that each member of a group of price fixers may have made a separate, individual agreement with their common agent does not destroy the horizontal character of the agreement. We so held in the Masonite case:

"[T]here can be no doubt that this is a price-fixing     combination which is illegal per se under the Sherman Act.      United States v. Trenton Potteries Co., 273 U.S. 392 [47      S.Ct. 377, 71 L.Ed. 700] [(1927) ];  Ethyl Gasoline Corp. v.      United States, 309 U.S. 436 [60 S.Ct. 618, 84 L.Ed. 852]      [(1940) ];  United States v. Socony-Vacuum Oil Co., 310 U.S.      150 [60 S.Ct. 811, 84 L.Ed. 1129] [(1940) ].  That is true      though the District Court found that, in negotiating and      entering into the first agreements, each appellee, other than      Masonite, acted independently of the others, negotiated only      with Masonite, desired the agreement regardless of the action      that might be taken by any of the others, did not require as      a condition of its acceptance that Masonite make such an      agreement with any of the others, and had no discussions with      any of the others. . . . Prices are fixed when they are      agreed upon. United States v. Socony-Vacuum Oil Co., supra,     p. 222 [60 S.Ct., at 843]. The fixing of prices by one     member of a group, pursuant to express delegation,      acquiescence, or understanding, is just as illegal as the      fixing of prices by direct, joint action. Id."

Differences between vertical and horizontal agreements may support an argument that the former are more reasonable, and therefore more likely to be upheld as lawful, than the latter. But such differences provide no support for the Court's contradictory reasoning that the direct and intended consequences of one form of conspiracy do not constitute "antitrust injury," while precisely the same consequences of the other form do. Finally, the Court's treatment of vertical maximum-price-fixing arrangements necessarily assumes that all such conspiracies have the same competitive consequences. Ante, at 337, 339-340, 345. The Court is again quite wrong. For example, a price agreement that is ancillary to an exclusive distributorship might protect consumers from an attempt by the distributor to exploit its limited monopoly. However, a conclusion that such an agreement would not cause any antitrust injury lends no support to the Court's holding that an illegal price arrangement designed to drive a competitor out of business is immune from challenge by its intended victim. V

In a conspiracy case we should always ask ourselves why the defendants have elected to act in concert rather than independently. Although in certain situations collective action may actually foster competition, see, e.g., National Collegiate Athletic Assn. v. Board of Regents of University of Oklahoma, 468 U.S. 85, 104 S.Ct. 2948, 82 L.Ed.2d 70 (1984), we normally presume that the free market functions most effectively when individual entrepreneurs act independently. This is true with respect to both maximum and minimum pricing arrangements.

Professor Sullivan recognized that producers fixing maximum prices "are not acting from undiluted altruism," but from self-interested goals such as prevention of new entries into the market. L. Sullivan, Law of Antitrust 211 (1977). He described the broad policy reasons to prohibit collusive pricing:

"The policy which insists on individual decisions about     price thus has at its source more than a preference for the      independence of the small businessman (though that is surely      there) and more than a preference for the lower prices which      such a policy will usually yield to consumers (though that      too is strongly present).  Also at work is the theoretical      conviction that the most general function of the competitive      process, the allocation and reallocation of resources in a      rational yet automatic manner, can be carried out only if      independence by each trader is scrupulously required.      Created out of the confluence of these parallel strivings,      the policy has a breadth which makes it as forbidding to      maximum price arrangements as to the more common ones which      forestall price decreases." Id., at 212.

In carving out this exception to the enforcement of § 1, the Court has chosen to second-guess the wisdom of our per se rules and to embark on the questionable enterprise of parsing illegal conspiracies. This approach fails to heed the prudence urged in United States v. Topco Associates, Inc., 405 U.S. 596, 92 S.Ct. 1126, 31 L.Ed.2d 515 (1972):

"The fact is that courts are of limited utility in examining     difficult economic problems.  Our inability to weigh, in any      meaningful sense, destruction of competition in one sector of      the economy against promotion of competition in another      sector is one important reason we have formulated per se      rules.

"In applying these rigid rules, the Court has     consistently rejected the notion that naked restraints of      trade are to be tolerated because they are well intended or      because they are allegedly developed to increase competition.  E.g., United States v. General Motors Corp., 384      U.S. 127, 146-147 [86 S.Ct. 1321, 1331, 16 L.Ed.2d 415]      (1966);  United States v. Masonite Corp., 316 U.S. 265 [62      S.Ct. 1070, 86 L.Ed. 1461] (1942);  Fashion Originators'      Guild v. FTC, 312 U.S. 457 [61 S.Ct. 703, 85 L.Ed. 949]      (1941)." Id., [405 U.S.], at 609-610, [92 S.Ct., at 1134].

The Court, in its haste to excuse illegal behavior in the name of efficiency, has cast aside a century of understanding that our antitrust laws are designed to safeguard more than efficiency and consumer welfare, and that private actions not only compensate the injured, but also deter wrongdoers.

As we explained in United States v. American Tobacco Co., 221 U.S. 106, 183, 31 S.Ct. 632, 649, 55 L.Ed. 663 (1911): "[I]t was the danger which it was deemed would arise to individual liberty and the public well-being from acts like those which this record exhibits, which led the legislative mind to conceive and to enact the Anti-trust Act." The conspiracy alleged in this complaint poses the kind of threat to individual liberty and the free market that the Sherman Act was enacted to prevent. In holding such a conspiracy immune from challenge by its intended victim, the Court is unfaithful to its history of respect for this "charter of freedom."

I respectfully dissent.