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Scott, Paul --- "Price Fixing and the Doctrine of Ancillary Restraints" [1999] CanterLawRw 9; (1999) 7 Canterbury Law Review 403


PRICE FIXING AND THE DOCTRINE OF ANCILLARY RESTRAINTS

Paul G Scott[1]

I. Introduction

One of competition law's primary concerns is with agreements between competitors. The reasons for concern are that such agreements increase the risk of anticompetitive action, expand market power, create an anticompetitive restraint not otherwise possible and surrender important decision making autonomy on matters of competitive significance.

Section 27 of the Commerce Act deals with such agreements. It forbids them if they have the purpose or effect or likely effect of substantially lessening competition.[2] Robert Bork has identified the two ways in which an agreement can substantially lessen competition:

a) agreements by which consenting parties remove some or all competition existing or likely to exist between themselves;
b) practices by which two or more parties injure competitors and thereby injure the competitive process itself.[3]

Price fixing is a practice which falls into the first category. The general view of price fixing is that two or more parties agree to restrict competition between themselves by setting fixed or minimum prices below which they will not sell. Such an arrangement is termed a cartel.

World wide competition law treats price fixing harshly. In New Zealand section 30 of the Commerce Act deems agreements which have the purpose or effect or likely effect of fixing controlling or maintaining prices to substantially lessen competition.[4] Likewise, under section 1 of the Sherman Act 1890, United States courts have held price fixing to be a per se breach of the law.[5] However, a problem remains. Not every agreement which literally fixes prices has a deleterious effect on competition. On the contrary, a price restraint may have an extremely procompetitive effect. Such an effect usually arises in the context of a joint venture whereby competitors integrate their economic activities, usually by contract to achieve economies of scale.[6] This enables them to produce more output more cheaply. As such it increases both allocative and productive efficiency. Another example is price restraints contained in the rules establishing an organised market. An organised market can contribute to efficiency as it provides more information about the market to buyers and sellers than they could discover by themselves. Price restraints may be necessary to establish such a market.[7]

A mature competition law must be able to distinguish between a cartel which simply fixes prices and thus harms competition and a price restraint which is a necessary part of a valid joint venture or the formation of an organised market and thus benefits competition.

United States courts have called such a distinction characterisation.[8] If a price restraint is merely a cartel then courts characterise it as price fixing and declare it per se illegal. If on the other hand, it is a necessary part of a procompetitive joint venture or the like, United States courts will not characterise it as price fixing. Rather they will examine its purpose and pro and anticompetitive effects before deciding on its legality. United States courts call the second examination, assessment under the rule of reason.

This article argues that the best method of dealing with the characterisation problem is Judge William Howard Taft's doctrine of ancillary restraints which he enunciated in United States v Addyston Pipe & Steel Co? Under the doctrine a court examines the purpose behind an agreement which contains an allegedly anticompetitive restraint. If the only purpose of the agreement is to eliminate competition then it is a naked restraint and worthy of condemnation. If the agreement has a lawful business purpose then any restraint in it is ancillary to that lawful business purpose. A court then examines the restraint to see whether it is wider than necessary to achieve that lawful business purpose. If it is a court will condemn the agreement. If not a court will bless it. The doctrine applies to all types of allegedly anticompetitive agreements. However, this article only considers price fixing agreements.

Part I of this article examines why the New Zealand Parliament has used purpose, effect and likely effect to assess the legality of an agreement between competitors. Part II discusses why section 30 of the Commerce Act deems price fixing to substantially lessen competition and United States courts have treated price fixing as per se illegal. One can find the answers in United States case law. Accordingly Part III examines the United States case law and sets out the history of both the per se rule and rule of reason. It argues that United States law began with the doctrine of ancillary restraints, took a detour and has now rediscovered the doctrine. Part IV argues that the doctrine is applicable under the Commerce Act. It does so on the basis of a purposive and structural interpretation of the Act. Part V

responds to some criticisms of the ancillary restraints doctrine. Part VI examines the Australian price fixing case of Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd[10] using the doctrine. It responds to critics of Lockhart J's decision at first instance and argues his Honour's comments are explicable and uncontroversial using the doctrine. Part VII offers some conclusions.

II. Purpose and Effect

New Zealand courts examine the purpose and effect of an agreement when assessing its legality under section 27. One must ask why? Section 27 is based upon section 45 of the Australian Trade Practices Act which also uses purpose and effect to determine legality.[11] As will be shown one can trace the use of purpose and effect back to the famous United States case of Standard Oil Co of New Jersey v United States.[12] The New Zealand (and Australian) Legislature adopted this test. This by itself does not justify using purpose and effect. Mere fidelity to a distinguished lineage does not justify the adoption of a legal rule. However, good reasons exist for using purpose and effect.

Turning to purpose, when an agreement has a substantial purpose of substantially lessening competition courts will condemn it under section 27. courts condemn on purpose alone as the participants to the agreement best know what they can achieve. They are intimate with the market concerned. They know the market conditions. Presumably they would not have engaged in an anticompetitive scheme had they not believed they had a high probability of succeeding.[13] If they believe that they can substantially lessen competition by an agreement courts should accept that assessment. As Professor Lawrence Sullivan notes purpose serves as a surrogate for effect.[14] If parties have an anticompetitive purpose they must believe their agreement will have an anticompetitive effect. In some cases despite an anticompetitive purpose an agreement will have no anticompetitive effect. However, liability should still arise. Such a party who argues for no liability is in effect saying we tried to behave anticompetitively but due to circumstances beyond our control we failed.[15] Just because they were wrong is no reason to condone their behaviour. Such a party is equally as blameworthy as a party who had the same purpose and who produced an anticompetitive effect.

If no anticompetitive purpose is evident courts turn to examine the likely effect or effect of an agreement under section 27. If the likely effect or effect of an agreement is to substantially lessen competition courts will condemn it under section 27 irrespective of the purpose. This is unexceptionable. As Sullivan notes:

It is, in the end, effects - impacts upon the competitive process - which are of social consequence.[16]

If an agreement has the effect of substantially lessening competition then society should not put up with it. There is no benefit in letting it endure, nor is there any harm in forbidding it.[17] The reason for using likely effect in determining liability is the same as using purpose. If an agreement had or has the likely effect of substantially lessening competition there is no benefit in letting it endure. The fact that it did not mature into an actual effect is irrelevant. By the time of trial market circumstances may have changed. The conduct may have been caught and examined before it had the chance to ripen into full blown anticompetitive effect.

The New Zealand High Court, following United States authority, has analysed agreements under section 27 by considering whether there is a less restrictive alternative.[18] If an agreement is designed to achieve a procompetitive outcome a court will consider whether it was possible to achieve that outcome by a less restrictive agreement. If it was, then a court will condemn the original agreement. Although controversial[19] this method of analysis is merely an element of considering an agreement's purpose and effect.[20] As for purpose, if one can achieve a procompetitive outcome by a less restrictive agreement, that casts doubts on the claimed procompetitive purpose. If one can do this, why didn't the parties structure their agreement in such a way in the first place? As for effect, if one can produce the same outcome in a less restrictive way (without anticompetitive effect) nothing is lost and something is gained by forbidding the original agreement.

As part of assessing an agreement's effect a court weighs up the procompetitive and anticompetitive effects.[21] It decides on balance whether the ultimate effect is to substantially lessen competition. A crucial part of this process (and also in assessing purpose) is assessing the market power that results from the agreement. Market power is relevant to purpose in that usually parties will not attempt to substantially lessen competition unless they believe they have some degree of market power. In some cases they will not. But why did they attempt to substantially lessen competition if they believed they could not? As for effect or likely effect, there can be none unless the parties to the agreement have some degree of market power.

While this is true of most types of anticompetitive agreements, it is not true of price fixing. Section 30 deems any agreement which has the purpose or effect or likely effect of fixing controlling or maintaining prices to

substantially lessen competition. Similarly United States courts hold price fixing to be a per se breach of section 1 of the Sherman Act.[22] The proscribed purpose and effect is not to substantially lessen competition but rather to fix, control or maintain prices. Market power plays no part under section 30. Why has Parliament (and United States courts) decided this? The next part of this article discusses the reasons for such a harsh view of price fixing.

III. WHY COURTS CONDEMN PRICE FIXING

To understand why competition law treats price fixing harshly one must examine it using neoclassical price theory. When competitors join together to agree on price they form a cartel. Professors Phillip Areeda and Donald Turner have defined a cartel as "an arrangement in which competing firms have substituted an agreement on price, output or related matters for independent decision making."[23]

Price

Transfer of consumer surplus from consumers to the monopolist

A1 - dead weight loss

Monopoly Competitive Quantity Quantity

Average Cost = Marginal Cost

Demand

Quantity

900901.jpg

By forming a cartel its members, by acting together, reduce output and raise prices just like a single firm monopolist. The model of monopoly market structure shows the harm of cartels.

Marginal Revenue

The result of monopoly is higher price and decreased output leading to a misallocation of resources (allocative inefficiency) and a loss of consumer surplus as consumers transfer resources to the monopolist. The same thing results with a cartel. Its members act like a single firm monopolist resulting in reduced output and increased price to the detriment of consumers. A cartel is worse than a monopoly. Due to economies of scale a monopolist may be able to lower its cost curve and produce goods at a lower cost.[24] This means a monopolist can produce a quantity of output at a lower cost than would be the case in a competitive market. However, as Professor Michael Trebilcock notes this is not the case with cartels as:

Unlike some monopolies [cartels] will almost never exhibit offsetting productive efficiency gains that may be realisable from greater economies of scale, because the scale of the participating production units has not changed.[25]

A cartel is even worse, from a consumer welfare perspective, in that invariably individual members of the cartel will have different cost curves. Some will be more efficient than others. Accordingly, a cartel will agree on a price which enables its least efficient member to make a profit.[26] Cartels are unambiguously inefficient - both allocatively and productively. Thus, since cartels seldom, if ever, produce any beneficial productive efficiencies and invariably restrict output and increase price, competition law treats them harshly and deems them to substantially lessen competition or declares them per se illegal.

Commentators have heralded this harsh treatment of cartels as one of competition law's finest hours. Bork has stated:

The subject of cartels lies at the centre of antitrust policy. The law's oldest and properly qualified most valuable rule states that it is illegal per se for competitors to agree to limit rivalry among themselves ... without doubt thousands of cartels have been made less effective and other thousands have never been broached because of the overhanging threat of this rule. Its contributions to consumer welfare over the decades have been enormous.[27] .

Similarly Judge Richard Posner has noted:

the elimination of the formal cartel ... is an impressive and remains the major achievement of American antitrust law.[28]

Despite this encomium some commentators have objected to competition law's harsh treatment of price fixing.[29] Generally these criticisms are based on the effect (or rather the lack of effect) of a price fixing cartel and the reasons parties form cartels. This article considers these objections.

One argument turns on cartels having very little, if any, anticompetitive effect. This is in the sense of there being little or no dead weight loss. Despite a cartel's obvious purpose of reduced output and increased price, it may actually have only minor (or no) effect on price and output. This is due to the instability of cartels. This results from the members of a cartel having different cost curves. Some members will be more efficient than others. A cartel must agree on a single price. Yet the profit maximising price of each member will be different. The cartel price must be such as to cover the least efficient member's costs. The more efficient members may well feel chagrined at such a price. Thus, actually agreeing on a price will be difficult. They will also have the incentive to cheat on the cartel by lowering price and increasing sales.[30] These sales will be profitable. This is especially so in a cartel with significant product differentiation,[31] where each member's production is too small to affect market price or in industries with relatively high fixed costs.[32] As Professor Herbert Hovenkamp notes in such industries short run marginal costs are minute in comparison to total cost. As a result, the cartel price which covers total costs plus monopoly profits will be much higher than the lowest price that is profitable to each cartel member. Each member can give a substantial secret price reduction and still make large profits from the transaction.[33]

Once other cartel members have detected cheating it may spread, leading to the cartel's collapse. The United States Supreme Court recognised these difficulties with cartels in Business Electronics Inc v Sharp Electronics Co when it noted:

Cartels are neither easy to form nor easy to maintain. Uncertainty over the terms of the cartel particularly the prices to be charged in the future obstructs both formation and adherence by making cheating easier.[34]

In the late nineteenth century so many cartels in the United States broke up that John D Rockefeller characterised cartels as "ropes of sand."[35] Similarly Trebilcock notes:

T]hese arguments have some force. Indeed a number of the cartel arrangements in issue in the common law cases appear to have evolved out of earlier cartel attempts that disintegrated in the face of internal and external competition.[36]

Cheating is not the only threat to a cartel's stability. Members may engage in heavy forms of non-price competition.[37] The very success of a cartel may cause its destruction. If cartel members manage to earn monopoly profits they will attract new entrants (assuming no substantial entry barriers exist). These new entrants, assuming they do not join the cartel, will drive prices down.[38]

To be truly effective a cartel must be able to detect cheating quickly. As Professor Ian Ayres notes that is not enough - it must be able to punish cheaters.[39] This can be extremely difficult. Accordingly cartels are only likely to endure in certain circumstances. Professors Dennis Carlton and Jeffrey Perloff identify the following market characteristics for long lived cartels viz: (i) high levels of seller concentration; (ii) substantial product homogeneity; (iii) high transaction frequency and (iv) high entry barriers.[40]

Despite many cartels' lack of anticompetitive effect due to their instability the law's harsh treatment of them is justified. Many cartels have endured for long periods and caused considerable harm. Professor Douglas Greer argues some cartels have resulted in price increases of 20 - 60 percent.[41] Professor William Shepherd argues the average price-fixing agreement increases price by 10 - 30 percent.[42] In any case even a short cartel causes efficiency losses during its life. A cartel which makes an argument of lack of effect should not receive any sympathy. It is in effect saying we tried to distort the market but failed due to cheating or market circumstances beyond our control.[43] The law rightly condemns cartels under the purpose test. Furthermore, the costs of policing a cartel to prevent cheating are part of the losses cartels cause.[44]

Professor Thomas Kauper is surely correct when he notes:

... when the harm caused by successful cartels is clear and their capacity to endure is unknown, a prohibition of cartels is appropriate.[45]

The same comments apply to those commentators who argue it is a waste of time to condemn a price fixing agreement where the participants lack market power.[46] If participants lack it, industry output will not fall nor will prices rise. The reason is that the participants were either too small a part of the market or competitors reduced price in response to the cartel's price rise. Liability still arises. Under section 30 market power is irrelevant. Two corner dairy owners who fix prices are just as liable under section 30 as the owners of price fixing multinationals, despite the disparity in market power. However, again the cartel members had an obvious competitive purpose. It does no harm to condemn such an agreement as it produces no benefit. Condemning also has the beneficial effect of deterring other would be price fixers. Perhaps the last word on the lack of market power and price fixing should be with Professor Thomas Krattenmaker who notes:

Indeed the very suggestion, in such cases, that the competing firms lacked market power is incredible. Why did they agree to fix prices if they could not do so?[47]

Lack of or little effect should be (and is) irrelevant when considering liability for cartels. However, it will be relevant when assessing a plaintiff's damages in a price fixing case.[48]

A closely related argument to the lack of effect one, is the excuse that a price fix deserves no condemnation as the price fixed was reasonable or the same as would have occurred in a competitive market. Courts have wisely given such arguments a short shrift. The defendants to a price fixing claim raised such an argument before the United States Supreme Court in United States v Trenton Potteries Co.[49] Justice Harlan Stone rejected it. His comments are still apposite. He argued that even price fixes which set a reasonable price are too difficult to monitor. "... The reasonable price fixed today may through economic and business changes become the unreasonable price of tomorrow." Furthermore assessing a reasonable price was not the job for judges. Judges could only find such a price "after a complete survey of our economic organisation and rival philosophies."[50]

A moment's reflection reveals that, in the context of price fixing, a reasonable price is impossible, not only for the judiciary to determine, but

for everyone also as well. No one price, by itself, is reasonable unless compared with the price set by supply and demand in a free market. Price fixing by its very nature distorts supply and demand. Courts thus, have no reference to assess a price's reasonableness.[51] In any case courts would have to know the demand curve over all possibly relevant ranges of output and the marginal cost curve over the same region. As Bork notes (albeit in a different context): "[N]obody knows these curves."[52] Furthermore, as Justice Stone noted in Trenton a reasonable price is an ever changing beast. Assessing whether a price is reasonable is a hopeless task and courts have wisely rejected such defences in price fixing cases.

The next group of objections to the law's harsh treatment of price fixing focuses not on effect but rather on the motives for entering into a price fixing agreement. The most common justification for a cartel is that it is necessary to prevent ruinous or cut throat competition.[53] Indeed, Judge Frank Easterbrook characterises it as "the siren song of the cartel."[54] Despite the nineteenth century common law having recognised such a defence[55] and the pervasiveness of the excuse, courts operating under competition law statutes have consistently (albeit with one famous exception) rejected such a justification. The reason is that such a notion strikes at the very heart of competition policy. People using such an excuse are really saying "we abhor competition". "Let us have an easy life and earn monopoly profits." However competition is ruthless. It eliminates inefficient firms. Professor Joseph Schumpeter described competition as a "gale of creative destruction."[56] While competition may harm individual firms, it serves a far more beneficial social cause. As Areeda and Kaplow note:

[T]he central point is that losses imposed by competition serve the important social function of inducing shifts in resource allocation and inducing producers to perform more efficiently.[57]

The "ruinous competition" argument only applies to industries characterised by high fixed costs relative to variable costs.[58] In such situations usually excess capacity exists. Where firms compete vigorously or demand falls in such industries firms will reduce price to where they barely cover variable costs. This will not be sustainable as all firms will be incurring substantial losses. In these circumstances competition will be ruinous as it will lead to firms' bankruptcies and loss of jobs. A cartel prevents this. As Sullivan notes a more subtle variation of this excuse is that the cartel enables "an orderly withdrawal of the excess capacity in the industry which is the root cause of the ruinous price competition."[59]

While such an action (forming a cartel) benefits the cartel members it provides no benefits to society. Why should society suffer high prices and reduced output until the cartel members have eliminated excess capacity?

A cartel unlike competition does not speed up this process - rather it retards it.[60] Society does not value excess capacity. It prefers capital to be placed in alternative investments - not in propping up excess capacity. Society does not benefit from propping up industries that face ruinous competition. Forming a cartel prevents resources being allocated to where society values them and lets inefficient producers survive. Competition on the other hand leads to resources going where society wants them. It provides an incentive for firms to allocate resources to preferred products. In an industry with excess capacity firms that are members of a cartel have no incentive to reduce price. As Areeda and Kaplow note:

Competitors have an incentive to keep lowering their prices only if they have capacity to serve their additional customers.[61]

Cartels prevent this or slow down the process. Competition as mentioned is harsh, and it teaches firms who have invested in excess capacity a lesson. Do not over-expand or you will suffer losses. Cartels prevent such a lesson, slow down the process of the return to efficient resource allocation and force consumers to face higher prices. Competition law rightly takes no notice of the excuse of the prevention of ruinous competition.

Another excuse for cartels is that the resulting monopoly profits can finance socially desirable activities such as research and development or innovation.[62] Competition results in pricing at marginal cost, leaving no room for innovation. Posner and Easterbrook note some people have argued that cartels allow the maintenance of large inventories to avoid shortages.[63] However, there is little reason to believe this is true. Why will cartel members use monopoly profits to support innovation? They have equal incentive just to pocket the profits. Similarly, it is doubtful that competition will not lead to desirable innovation. Furthermore, why should society want or need research that a competitive market cannot provide?

Another argument for cartels is that they create higher quality products and prevent dangerous products reaching the public.[64] Such an argument reached the United States Supreme Court in National Society of Professional Engineers v United States.[65] The society banned competitive bidding (ie fixed prices) in its canon of ethics on the basis that competition would drive engineers to cut costs and produce unsafe bridges and skyscrapers. The Supreme Court did not have a bar of such an argument. It held it was completely counter to the concept of competition. It called the argument "a frontal assault on the basic policy of the Sherman Act."[66] The Court noted the underlying assumption of competition law is that "competition will produce not only lower prices, but also better goods and services."[67] Price fixing even with such a motive interferes with free and open markets. Consumers should be able to decide whether they want higher quality or lower priced buildings.

The heart of our national economic policy long has been faith in the value of competition. ... The assumption that competition is the best method of allocation of resources in a free market recognises that all elements of a bargain - quality, service, safety and durability - and not just the immediate cost, are favourably affected by the free opportunity to select among alternative offers.[68]

With respect, this is correct. If consumers want high quality goods they will pay more for them. Competition will provide goods of varying quality at different prices. A consumer then chooses what he or she wants. If a consumer does not receive the quality goods he or she desires that is not a problem of competition but rather lack of consumer information. With a cartel there is one price and usually one quality. It deprives the consumer who wants a low price and quality product eg a no-frills airline ticket. In any case if consumers do not want quality goods why should cartel members impose quality and safety standards? That is a job for government regulation rather than private self-interested cartel members.

One should treat the last two justifications for cartels sceptically. As Kauper notes:

all of these alleged benefits begin with the misallocation of resources price fixing causes and try to make a benefit of it.[69]

Indeed, there is no reason why firms would only form cartels in situations where they will allegedly benefit consumers. They occur far more widely than that.

None of the justifications for cartel price fixing pass muster. Competition law rightly treats it harshly. The reason is that it has no benefit to society. It invariably results in lower output and higher prices. It can cause a great deal of harm to society. Even if courts were to analyse price fixing under section 27 they would come to the same result. The purpose of cartel price fixing must be to substantially lessen competition. By deeming price fixing to be a breach of section 27, section 30 results in considerable savings in time and money. A plaintiff does not need to prove market power or define a market.[70]

As price fixing is tempting to firms the simplicity of the rule against price fixing acts an effective deterrent.[71] Firms know they breach the law if they fix prices. While this is true of cartel price fixing the situation is not so simple with price restraints in joint ventures and rules establishing organised markets. These situations result in increased output and lower prices. They are not harmful to society. They benefit it. A literal interpretation of section 30 would capture such situations. This is not right. The United States law has had to deal with such problems. An examination of United States law reveals a way around the problem and explains the origins of section 27 and 30.

IV. UNITED STATES PRICE FIXING LAW[72]

Early Cases

Section 1 of the Sherman Act 1890 governs agreements between competitors. It provides:

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal...[73]

The first case under section 1 was United States v Trans - Missouri Freight Association.[74] It involved a price fixing cartel. Eighteen railroads which controlled most of the traffic west of the Mississippi river formed an association. A committee of the association set rates for rail transportation. All the association members charged this rate. The United States government brought action alleging a breach of section 1. The defendants disagreed. They argued their prices were reasonable and that the rate agreement was necessary to avoid ruinous competition. A complicating factor was that the Interstate Commerce Act required all railroad rates be "reasonable and just."[75] The government did not suggest the defendants had breached this Act.

A bare majority of the Supreme Court rejected the defendants' argument. Justice Rufus Peckham for the majority held that the reasonableness of the defendants' rates was irrelevant. He held that the literal wording of section 1 prohibited "all restraints of trade."[76] This was one and was therefore illegal.

Justice Edward white for the minority disagreed. He argued that the Sherman Act imported the common law view that only unreasonable agreements were illegal. He wrote:

[A]lthough a contract may in some measure restrain trade, it is not for that reason void or even voidable unless the restraint which produces it be unreasonable.[77]

Accordingly he would have upheld the rate agreement, inter alia, as (i) the defendants' purpose of avoiding ruinous competition and thus bankruptcy was reasonable and (ii) their rates were "fair and reasonable."[78]

Some commentators have derided Justice Peckham's opinion for two reasons. First for being far too literal and second for contradicting himself. Peckham noted that a restrictive covenant ancillary to the sale of a business might not be included in the statutory ban on "every" restraint of trade.[79]

However, as Bork notes such a view is unfair.[80] Peckham's opinion was largely to defeat white's view of the law. He demonstrated the

impossibility of a reasonable price defence. Only a competitive market can determine a reasonable price. Peckham wrote:

[T]he subject of what is a reasonable rate is attended with great uncertainty ...[I]t is exceedingly difficult to formulate even the terms of the rule itself which should govern in the matter of determining what would be a reasonable rate ... even after the standard should be determined there is such an infinite variety of facts entering into the question of what is a reasonable rate.[81]

He thus concluded that such a rule would be impossible to administer and would make the Act impossible to enforce.

As Bork notes Peckham's distinction between a restrictive covenant subordinate to a sale and an agreement to set railroad rates contains the genesis of the per se rule against price fixing.[82] Peckham said of the defendants' agreement:

There can be no doubt that its direct, immediate and necessary effect is to put a restraint upon trade or commerce as described in the Act.[83]

It was, thus illegal "no matter what the intent was on the part of those who signed it."[84]

The next significant case is United States v Joint-Traffic Association?[85] This also involved a railroad cartel indistinguishable from the one in Trans - Missouri. Here the defendants argued that Trans-Missouri's literal interpretation was unworkable. Again a majority of the Court rejected the defendants' arguments. Again Justice Peckham wrote for the majority. This time, following two Supreme Court cases decided the same year Hopkins v United States[8] and Anderson v United States,[87] his Honour held that section 1 only forbade agreements which "directly" restrained trade.[88] Price fixing was a direct restraint of trade. Indirect restraints on the other hand were legal. He gave the example of a covenant not to compete with the purchaser of a business. This was "a contract not within the meaning of the act."[89] He gave further examples of indirect restraints such as mergers and the designation by rivals of a joint selling agency.[90]

While indicating restraints such as price fixing were to be condemned quickly under the Act, Joint-Traffic provides little guidance on how to deal with other restraints. As Professor Stephen Ross notes the distinction between direct and indirect restraints is opaque.[91] It provides no operational guidance or doctrinal basis for making such a distinction. As Sullivan notes:

Justice Peckham's opinions did leave unanswered questions. They outlined no systematic ways in which concerted arrangements which violate the Act were to be distinguished from those which do not.[92]

The Doctrine of Ancilliary Restraints

In United States v Addyston Pipe & Steel Co[93] Judge William Howard Taft (as he then was)[94] provided a methodology for doing just that. Addyston involved a cartel. The defendants were six producers of cast iron pipe. They divided the country into territories for themselves, jointly fixed prices for each territory and divided business among themselves. Their purpose was to fix prices low enough to discourage new entry. The prices however, were higher than what would have resulted in a competitive market. Again the defendants sang the siren song of the cartel arguing the agreements were necessary to avoid ruinous competition and that the prices were reasonable. The Sixth Circuit Court of Appeals disagreed. Judge Taft set out a methodology for determining what agreements were legal and illegal under the Act. Claiming to use the common law restraint of trade[95] Taft said that the Act forbade agreements whose "sole object" was to restrain trade.

Where the sole object of both parties in making the contract ... is merely to restrain competition and enhance or maintain prices, it would seem that there was nothing to justify the restraint.[96]

Taft called such restraints naked restraints. A cartel is such a restraint. Courts can condemn such restraints quickly and without considering the defendants' purpose or the reasonableness of their prices. Taft set out why a reasonable price defence was an impossibility - thereby criticising Justice White's views.

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 of 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.[97]

Taft argued a reasonableness test was unworkable. "The manifest danger in the administration ofjustice according to shifting, vague, and indeterminate a standard would seem to have a strong reason against adopting it."[98] He said of agreements whose sole aim was to restrain competition "there is no measure of what is necessary to the protection of either party, except the vague and varying opinion of judges as to how much, on the principles of political economy, men ought to be allowed to restrain competition."[99]

Unlike Justice Peckham in Trans-Missouri Taft did not think that all types of restraint were illegal under section 1. Restraints which were ancillary to a lawful purpose and reasonably necessary to accomplish that purpose were lawful. To be lawful a restraint must be ancillary (ie subordinate and collateral) to another legitimate agreement and necessary to make that agreement effective. He wrote:

[I]t would certainly seem to follow from the tests laid down for determining the validity of such an agreement that no conventional restraint of trade can be enforced unless the covenant embodying it is merely ancillary to the main purpose of a lawful contract, and necessary to protect the covenantee in the enjoyment of the legitimate fruits of the contract, or to protect him from the dangers of an unjust use of those fruits by the other party.[100]

Rather than focus on the restraint itself, courts should look at the main purpose of the agreement that the restraint is designed to enhance. This was because:

[t]he main purpose of the contract suggests that the measure of protection needed, or furnishes a sufficiently uniform standard by which the validity of such restraints may be judicially determined.[101]

Taft called such restraints ancillary restraints. He gave five examples of ancillary restraints lawful at common law and presumably under the Act.

[A]greements
1) by the seller of property or business not to compete with the buyer in such a way as to derogate from the value of the property or business sold;
2) by a retiring partner not to compete with the firm;
3) by a partner pending the partnership not to do anything to interfere, by competition or otherwise, with the business of the firm;
(A) by the buyer of property not to use the same in competition with the business retained by the seller; and
4) (5) by an assistant, servant or agent not to compete with his master or employer after the expiration of his time of service.[102]
This was not an exhaustive list of lawful ancillary restraints.[103]

Once a court has decided that an agreement's main purpose is legitimate it then determines whether the restraint is essential to the implementation of the underlying transaction. If so, the restraint is lawful unless it gives the defendants' monopoly power. However, if the restraint is wider than necessary to meet the parties' needs it will be unlawful. This is akin to the less restrictive alternative analysis.[104]

Taft's methodology has become known as the doctrine of ancillary restraints. Professors Thomas Sullivan and Jeffrey Harrison have graphically represented it as follows:[105]

900902.jpg

One can view Taft's ancillary restraints doctrine as a purpose based analysis.[106] Naked restraints such as cartel price fixing have the sole purpose

of restraining competition. Once a court identifies a restraint as naked it condemns it without further ado. This is akin to the deeming rule under section 30. The effect of naked restraints is also invariably to decrease competition. With an ancillary restraint its purpose is legitimate and procompetitive. This can include lowering the costs of production and distribution or creating a new market or product. This purpose is lawful. Nor will any anticompetitive effect arise. Unlike a naked cartel no allocative or productive inefficiencies will result. If the restraint is wider than necessary one must doubt whether the parties' true purpose was the claimed legitimate one. Similarly if the restraint is wider than necessary an anticompetitive effect will invariably arise. The doctrine enables courts to distinguish between harmful price fixing and literal price fixing ancillary to a legitimate and procompetitive joint venture.

Commentators from across the antitrust spectrum have praised Taft's methodology. Sullivan calls it a "tour de force"[107] claiming Taft "spelled out a rational and useful way of distinguishing between lawful and unlawful restraints."[108] Bork characterises Taft's opinion "as one of the greatest, if not the greatest, antitrust, opinions in the history of the law."[109] Ross calls it "masterful"[110] and notes:

Taft's approach transcends antitrust ideology and represents the soundest means of distinguishing between desirable and offensive horizontal agreements, regardless of one's views on the goals of antitrust.[111]

Unfortunately the Supreme Court merely affirmed Taft's opinion and promptly seemed to forget about his methodology. However various Circuit Courts of Appeal still used it.[112] During the 1980's the Supreme Court resurrected it and applied it without overtly saying so.[113] Several Circuit Courts interpreted the Supreme Court's precedents as re-establishing the doctrine. They now apply it.[114]

The Rule of Reason

In the meantime in 1911 the Supreme Court used a different methodology which it enunciated in Standard Oil Co v United States ( Standard Oil)[115] and its companion case United States v American Tobacco.[116] These cases did not involve an agreement as such. They were merger and monopolisation cases. However Chief Justice White (as he had become) set out a standard for assessing the legality of agreements under section 1 of the Sherman Act.

From a phrase in his opinion this became known as the "rule of reason". The rule of reason was essentially a purpose and effect test.[117] According to White the Act prohibited "all contracts or acts which were unreasonably restrictive of competitive conditions, either from the nature or character of the contract or act or where the surrounding circumstances were such as to justify the conclusion" that they had not the "legitimate purpose of reasonably forwarding personal interest and developing trade" but rather had been intended "to bring about the evils, such as enhancement of prices, which were considered to be against public policy."[118]

White noted that the Act was wide enough to reach every agreement concerning trade and commerce. However, the Act did not forbid every agreement. Courts had to judge agreements on a "standard of reason" to determine whether they breached the Act. He later used the famous term "rule of reason" to describe this process.[119] The way to do this was to assess an agreement's purpose and effect. White viewed his rule of reason as covering agreements which "operated to the prejudice of public interests by unduly restricting competition ... either because of their inherent nature or effect or because of the evident purpose of the acts ..."[120]

White, thus sets out a three part rule of reason. First the Act "conclusively presumed" certain agreements to be illegal because their inherent nature was to injure the public. Second agreements that were not inherently anticompetitive were still unreasonable if their "evident purpose" was to restrict competition. Third, other agreements breached the Act if their inherent effect was to restrain trade.[121]

This purpose and effect test is the origin of the section 27 test. Also as Sullivan and others have noted the first part of the rule contains an embryonic version of the per se rule against naked or cartel price fixing.[122] However, it was possible to read the cases so that the rule of reason applied to both naked and ancillary restraints. This is exactly what the Supreme Court did in its next great section 1 case, viz: Chicago Board of Trade v United States. [123]

Chicago Board of Trade dealt with the Board's "Call Rule". The Board was an association of grain brokers, warehouses and others in the grain trade who operated the United States's largest organised market for grain trades. Under the "Call Rule" competing grain dealers agreed that they would only purchase grain, that was in transit to Chicago after the exchange had closed, at the closing price of the day. This price was termed the call price after the afternoon session which was termed the Call Session. The United States government alleged this was an illegal price fix under section 1 as it fixed prices during part of the day. In effect, the rule confined price competition to the time the exchange was open. The rule did not fix the level of the closing price. Bidders during the Call Session determined this. The Supreme Court led by Justice Brandeis held the rule did not breach section 1. In so doing Brandeis set forth the now classic formulation of the rule of reason. He wrote:

[T]he legality of an agreement or regulation cannot be determined by so simple a test, as whether it restrains competition. Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences.[124]

Using this test the court upheld the Call Rule. It did not examine the actual price or its reasonableness. Rather it examined the Rule's purpose and effect. The most important of these were to regulate the hours of business, to break up the monopoly held by the few warehouses willing to purchase during the night and to perfect the exchange's operation by increasing the number of trades made in it.[125] Of special appeal to Brandeis was that the rule "shorten[ed] the working day or at least limited the period of most exacting activity."[126]

The Court's decision has been controversial.[127] So, however, has been the Court's formulation of the rule of reason.[128] The formulation provides little operational guidelines or doctrine to distinguish between legal and illegal agreements. Brandeis's distinction between a restraint which "merely regulates and perhaps thereby promotes competition or whether it such as may suppress or even destroy competition"[129] offers no guide on how to determine what category an agreement falls into. Brandeis's answer is to "consider the facts peculiar to the business". As Professor Thomas Arthur notes this means all the facts. One needs to examine the agreements' history, context, competitive impact and so on. Complex market power and definition questions become relevant. This leads to large long and expensive trials.[130] While Brandeis gave a list of relevant factors he provided no guide on how to rank them or link them to purpose and effect. This also leads to huge trials and reduced predictability. Max Blecher described Brandeis's rule of reason as "a euphemism for an endless economic inquiry resulting in a defence verdict."[131] Furthermore, non-economic factors such as decreased working days become relevant. Everything does. This makes the law formless.[132]

The case left unanswered questions. Could ruinous competition be a defence to price fixing? It certainly appeared so. Chicago Board of Trade let courts set sail on Taft's sea of doubt. However, the case's formulation of the rule of reason receives numerous references, as one can cite it in support of almost any position. Lawyers even quote it in New Zealand today.

In the next case, United States v Trenton Potteries[133] the Supreme Court faced the issue of whether a reasonable price saved a price-fixing cartel from liability using the Chicago Board of Trade rule of reason. The defendants controlled 82 percent of the United States market for vitreous pottery used in bathrooms and lavatories. They had agreed on prices and only to sell to certain wholesalers. The government alleged this breached section l. At trial, the judge instructed the jury not to consider whether the prices fixed were reasonable. Liability depended simply on the parties entering into the price fixing agreement. The Court of Appeals reversed on the basis of a faulty jury instruction. This was in line with the rule of reason inquiry of Chicago Board of Trade. The Supreme Court reversed and upheld the defendants' conviction. In so doing it rejected the defence that fixed prices may be reasonable. Justice Harlan Stone held:

The aim and result of every price-fixing agreement, if effective, is the elimination of one form of competition. The power to fix prices, whether reasonably exercised or not, involves power to control the market and to fix arbitrary and unreasonable prices. The reasonable price fixed today may through economic and business changes become the unreasonable price of tomorrow ... Agreements which create such potential power may well be held to be in themselves unreasonable or unlawful restraints, without the necessity of minute inquiry whether a particular price is reasonable or unreasonable as fixed and without placing on the government in enforcing the Sherman Law the burden of ascertaining from day to day whether it has become unreasonable through the mere variation of economic conditions.[134]

Stone also distinguished Chicago Board of Trade (Justice Brandeis did not participate in the case). He held:

[Chicago Board of Trade], dealing as it did with a regulation of a board of trade, does not sanction a price agreement among competitors in an open market, such as is presented here.[135]

As commentators have noted this case also establishes a per se rule against price fixing.[136] The case arguably holds that with price fixing a court only asks whether an agreement to fix prices exists. If so the agreement is illegal and other factors (such as the prices' reasonableness) are irrelevant. Courts can infer illegal purpose from the agreement.

However, the Court did use the term "if effective" in its reasoning. This left open the question of whether market power was necessary to a finding of per se illegality.[137] However, by the time of Trenton the Supreme Court was well on the way to holding price fixing per se illegal - if it hadn't already. Unfortunately during the depression the Supreme Court took a detour in Appalachian Coals Inc v United States.[138]

This case involved price fixing by 137 coal producing companies. They accounted for 12 percent of the bituminous production east of the Mississippi River and 74 percent in Appalachia. To combat falling prices the companies formed a new company to act as the producers' exclusive selling agent. They instructed it to get " the best prices obtainable" and if it could not sell all its coal, it had to allocate orders among the companies. Thus, the companies formed a sales cartel. The companies relied on the ruinous competition defence.

Following Trenton the lower court found the agreement illegal. The Supreme Court reversed. Chief Justice Charles Evans Hughes held a court had to assess an agreement's essential reasonableness. As in Chicago Board of Trade a court had to engage in "a close and objective scrutiny of particular conditions and purpose"[139] in examining an agreement. His Honour noted "the deplorable economic conditions" in the industry. He concluded the sales agent had no power to fix or affect prices. He noted the industry had high numbers of distress sales. He described these as "injurious and destructive practices"[140] that demanded correction. He said that "the coal competes with itself, thereby resulting in abnormal and destructive competition which depresses the price for all coals in the market."[141] He held the agreement's purpose was to stop such ruinous practices and was thus legal. Another reason was that the defendants' claimed purpose of fostering "a better and more orderly market" was valid.[142] Finally the likely effect of an agreement determined liability. As the defendants had not implemented it, purpose alone could not condemn it.[143]

Appalachian Coals stands alone. For the first and last time the Supreme Court had taken notice of a cartel's siren song. Despite valiant subsequent attempts to distinguish it, Appalachian Coals is the only case where the Court upheld a naked price fixing cartel.[144] As commentators have noted the reason is the time the Court decided the case. It was the height of the depression. Society had had its faith in competition shaken. No Judge, no matter how great, can be immune to such parlous and desperate times as a great depression.[145]

However, Appalachian Coals did not last long as a precedent. In 1940 the Supreme Court launched its most swinging attack against price fixing and held it to be per se illegal. The case? United States v Socony-Vacuum Oil Co.[146]

The Per Se Rule

Socony involved similar facts to Appalachian Coals, except it involved the oil industry. Oil refining was depressed. Independent refiners had insufficient storage capacity. They were dumping gasoline at give-away prices. This depressed prices. Such gasoline was termed distress gasoline. The major oil companies informally agreed to buy all of it from the independent refiners. They did not agree on a set price - rather they bought at the "fair going market price." As they had storage capacity and developed distribution systems they succeeding in removing much of the distress gasoline from the market. Although such gasoline eventually reached the market it had less effect on price than it would have had under normal competition. Relying on Appalachian Coals the defendants argued their purpose was to eliminate "competitive evils." In short they invoked the ruinous competition defence. Justice William Douglas emphatically rejected such a defence. He held:

If the so-called competitive abuses were to be appraised here, the reasonableness of prices would necessarily become an issue in every price-fixing case. In that event the Sherman Act would soon be emasculated ...[147]

In footnote 59 Douglas set out why price fixing is illegal.

Whatever economic justification particular price fixing agreements may be thought to have, the law does not permit an inquiry into their reasonableness. They are all banned because of their actual or potential threat to the central nervous system of the economy.[148]

Douglas also declared price fixing to be per se illegal. This was the first use of this now classic phrase:

Congress ... has not permitted the age-old cry of ruinous competition and competitive evils to be a defence to price fixing conspiracies. It has no more allowed genuine or fancied competitive abuses as a legal justification for such schemes that it has the good intentions of the members of the combination .... Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging or stabilising the price of a commodity in interstate commerce is illegal per se.[149]

According to the Court anything that tampered with price structures was unlawful price fixing. To determine whether an agreement fixed prices one had to examine its purpose and effect. However, market power was irrelevant to this exercise. In footnote 59 Douglas held:

[We do] not mean that both a purpose and a power to fix prices are necessary for establishment of a conspiracy under section 1 of the Sherman Act. That would be true if power or ability to commit an offence was necessary in order to convict a person of conspiring to commit it. But ... conspiracies under the Sherman Act are not dependent on any overt act other than the act of conspiring .... In view of these considerations a conspiracy to fix prices violates section 1 of the Act though ... it is not established that the conspirators had the means available for accomplishment of their objective ...[150]

In this case the Court had no difficulty in discerning a purpose to raise and to stabilise price. Although not substantively necessary in light of the stark evidence of purpose, the Court also found the agreement had an increasing and stabilising effect on price. Thus, before a court will call an agreement price fixing it analyses its purpose and effect. As Professor John Allison notes:

in Socony-Vacuum the Court, before it was willing to call the arrangement price-fixing,
did employ a purpose and effect analysis every bit as elaborate as would have been necessary under the rule of reason.[151]

Thus, after Socony two types of agreement fell for analysis under section 1. First the per se category. At this stage only price fixing belonged to this category. Once a court held an agreement was price fixing it condemned it summarily. Second the rule of reason category from Standard Oil. Here a court had to do an extensive analysis as mandated by Chicago Board of Trade before pronouncing on its legality. To determine whether an agreement fell within the per se category a court examined its purpose and effect. Once it had, it called the agreement price fixing and declared it illegal per se. The process of determining whether an agreement was price fixing became known as characterisation. Once a court characterised an agreement as price fixing, that was it.

Socony-Vacuum's definition of price fixing as "tampering with the price structure" is extremely wide. It is capable of capturing every agreement which affects price whether directly or indirectly. This not only includes naked cartels but also legitimate ancillary restraints such as joint ventures. Under Socony-Vacuum courts could characterise such procompetitive agreements as price fixing and declare them per se illegal. Such a result would be ridiculous and contrary to competition law's basic policy. This did not happen.

Modern Developments

The Supreme Court did not encounter an ancillary price restraint agreement until the late 1970's and 1980's when a series of such cases arrived for the Court to consider. In the decisions the Court effectively rediscovered the doctrine of ancillary restraints. As Kauper notes:

... we began with United States v Addyston Pipe and Steel Co in 1898, we are back to Addyston Pipe in 1987 and all the false starts in between have been for nought.[152]

The Court never expressly stated it was relying on the doctrine. However, one can only really explain its decisions using it. As Ross has sardonically noted:

Indeed if the Supreme Court were in the business of providing legal doctrine, its opinions in this area could justify a finding of liability under section 5 of the Federal Trade Commission Act for unfair and deceptive acts or practices. In cases involving horizontal restraints, the Court frequently makes contradictory statements, overrules precedent without acknowledging that it is doing so, and describes its mode of analysis in a way that appears to be at variance with what it is really doing.[153]

The first of these cases was Broadcast Music Inc v Columbia Broadcasting System ("BMI").[154] This involved copyrights. The relevant Copyright Act prohibited musical performers from performing copyrighted songs without a licence from the copyright holder. It was impracticable and too expensive for individual copyright holders to police their work and collect royalties. Accordingly associations of copyright holders formed. They did the policing and licensing for their members. The two largest were the American Society of Composers, Authors and Publishers ("ASCAP") and BMI.

These organisations had huge libraries of copyrighted works. Each member granted BMI or ASCAP a non-exclusive licence permitting them to licence his or her works to performers. BMI and ASCAP also policed their members' works by listening for the broadcasting of works in their libraries by anyone who had not purchased a licence. They sold "blanket licences" which permitted the licensee to perform all of the works in BMI and ASCAP's libraries. Individual composers could still issue individual licences. Licensees paid a charge that varied with their revenues. The licences had huge benefits. They saved millions of dollars in transaction

costs. Rather than having thousands of separate negotiations and separate licences for each work, licensees obtained the right to thousands of works in one hit. Despite this, the blanket licensing agreement appeared to fall within Socony-Vacuum's definition of price fixing. It tampered with the market's price structure. Furthermore, the agreement eliminated price competition between copyright holders. Once a licensee purchased the blanket license it could perform any work in BMI and ASCAP's libraries at no extra cost. One of ASCAP and BMI's licensees was the CBS television network. CBS had purchased blanket licences for many years. It wanted a new type of license based on a per use basis. ASCAP and BMI refused. CBS sued alleging the blanket licence was illegal price fixing. CBS was in an awkward position. Although it claimed the blanket licence was a price fix - it wanted another type of licence. It did not want individual bilateral licenses but rather bulk licences in a cheaper and different form. If blanket licensing was a per se price fix than so also was CBS's preferred bulk licence which also involved copyright owners acting in concert to license works.

The Second Circuit Court of Appeals applied the per se rule relying on Socony-Vacuum. However, a unanimous Supreme Court refused to apply the per se rule. A majority of eight remanded the case for consideration under the rule of reason. Justice John Paul Stevens held that although the per se rule did not apply, the blanket licence breached the rule of reason.

For the majority Justice Byron White accepted that the blanket licence "involves 'price fixing' in the literal sense: the composers and publishing houses have joined together into an organisation that sets its price for the blanket licence that it sells."[155] However White said this did not necessarily imply that the blanket licence was per se illegal, since not all literal price fixing is price fixing for antitrust purposes. He wrote:

As generally used in the antitrust field, 'price fixing' is a shorthand way of describing certain categories of business behaviour to which the per se rule has been held applicable. The Court of Appeal's literal approach does not alone establish that this particular practice is one of those types or that it is 'plainly anticompetitive' and very likely without 'redeeming virtue.' Literalness is overly simplistic and often over broad. When two partners set the price of their goods or services they are literally 'price fixing', but they are not per se in violation of the Sherman Act. See United State v Addyston Pipe & Steel Co ... Thus, it is necessary to characterise the challenged conduct as falling within or without that category of behaviour to which we apply the label 'per se price fixing.' That will often, but not always, be a simple matter.[156]

Before deciding on the issue of characterisation a court had to examine an agreement's purpose and effect. White wrote:

... in characterising this conduct under the per se rule our inquiry must focus on whether the effect and, because it tends to show effect ... the purpose of the practice is to threaten the proper operation of our predominately free market economy - that is whether the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output, and in what portion of the market, or instead one designed to 'increase economic efficiency and render markets more rather than less competitive'.[157]

The Court held the blanket licence was not a per se price fix. It was not akin to a naked cartel which deserves per se condemnation.

The blanket licence, as we see it, is not a 'naked restraint of trade with no purpose except stifling of competition' ... but rather accompanies the integration of sales, monitoring, and enforcement against unauthorised copyright use.[158]

Two other factors influenced the Court not to apply the per se rule. First the blanket licence was "reasonably necessary" if copyright holders were to obtain the full benefits of the rights the Copyright Act granted.[159] The difficulties of individual negotiation virtually necessitated such a blanket licence agreement. It resulted in "a substantial lowering of costs, which is of course potentially beneficial to both sellers and buyers ..."[160]

Second the blanket licence created a new product:

Here the whole is truly greater than the sum of its parts; it is, to some extent, a different product ... Thus, to the extent the blanket licence is a different product, ASCAP is not really a joint sales agency offering the individual goods of many sellers, but is a separate seller offering its blanket licence, of which the individual compositions are raw material. ASCAP in short, made a market in which individual composers are inherently unable to compete fully effectively.[161]

The Court appeared to imply that the blanket licence was akin to a joint venture. Thus, it fell for analysis under the rule of reason.

Not all arrangements among actual or potential competitors that have an impact on price are per se violations of the Sherman Act or even unreasonable restraints. ... Joint Ventures and other co-operative arrangements are not usually unlawful, at least as price-fixing schemes, where the agreement on price is necessary to market the product at all.[162]

Accordingly, the majority remanded the case to the Court of Appeals to assess under the rule of reason. In his dissenting opinion, Justice Stevens held the per se rule did not apply. However, he held the record showed the blanket licence breached the rule of reason. The Court of Appeals upheld the blanket licence.[163] Its main reason was that the blanket licence had no anticompetitive purpose. Buyers dissatisfied with blanket licences could obtain individual licences directly.

What is important about BMI is that it shows the Court was prepared to allow rivals to literally fix prices if the price restraint was a necessary part of an efficiency - enhancing endeavour and enabled the participants to market a product that otherwise would not be available. In such circumstances literal price fixing would not be "price fixing" under the per se rule. Or as David Marks and Jonathan Jacobsen, quipped:

Once an arrangement has been labelled 'price-fixing', it is indeed illegal per se. But not all price-fixing arrangements are considered 'price fixing'.[164]

Unfortunately the BMI Court did not give a doctrinal basis for its ruling. Some commentators suggested the case endorsed a "quick look"[165] or

"facial examination"[166] technique for price restraints. According to these techniques before a court decides whether to characterise an agreement as price fixing its conducts a preliminary inquiry (or quick look) to see whether the per se rule should apply. This involves assessing its purpose and effect. If the agreement's probable tendency to restrict output outweighs its procompetitive effects a court will characterise it as per se illegal. A defendant must identify "significant procompetitive effects achieved through the integration of productive capacity that are unattainable in the absence of agreement" to avoid the per se label. Other commentators have suggested that this method only applies to price fixing only where a new product results from the price restraints.[167]

However the doctrine of ancillary restraints best explains the Court's reasoning. A practice which "facially appears to be one that would always or almost always tend to restrict competition and decrease output" and therefore deserves per se treatment is a naked restraint under Taft's analysis. Indeed, the Court expressly held the blanket licence was not a "naked restraint of trade with no purpose except stifling of competition." A naked restraint can have no other purpose of decreasing output and increasing price.

The category of agreement which falls for consideration under the rule of reason fits within the definition of an ancillary restraint. The price restraint is part of an integration of the parties' economic activity, ie a joint venture and appears capable of enhancing the group's efficiency. It is certainly procompetitive. Furthermore the Court quoted Addyston Pipe. The example it gave of two partners setting the price of their goods and services does not involve creating a new product. Yet the court said it would not be a per se violation of section 1. Indeed Addyston Pipe states why a partnership is not:

... when two men become partners in a business, although their union might reduce competition, this effect was only an incident to the main purpose of a union of their capital, enterprise and energy to carry on a successful business, and one useful to the community. Restrictions in the articles of partnership upon the business activity of the members, with a view of securing their entire effort in the common enterprise, were of course, only ancillary to the main end of the union and were to be encouraged.[168]

Thus, the ancillary restraints doctrine best explains BMI or is, at the very least, consistent with it. Ross has gone further and said:

The majority [in BMI] simply restored the law of horizontal restraints to the position enunciated by then Judge William Howard Taft in ...United.States v Addyston Pipe & Steel Co: even agreements that 'literally' fix prices are permissible if reasonably necessary to achieve the legitimate benefits of some other lawful integration between the parties.[169]

In any case BMI heralded a major shift in the Supreme Court's treatment of price fixing. Nothing in Socony-Vacuum suggested that not all literal price fixing was per se illegal. The same year, the District of Columbia Court of Appeals rejected a price fixing challenge to an electric power pooling agreement in Central Iowa Power Co-operative v Federal Energy Regulatory Commission[170] The Court accepted certain pricing provisions literally fixed prices. However, they were reasonably necessary to the functioning of the co-operative market. Relying on BMI the Court upheld them.

Some commentators wondered whether the Supreme Court had eliminated the per se rule for price fixing. Catalano Inc v Target Sales[171] showed this was not so. Here competing liquor wholesalers agreed to eliminate short term trade credit for customers. The defendants argued the agreement should not be characterised as price fixing as it was not necessarily anticompetitive. They claimed it removed barriers to entry and enhanced price visibility. The Ninth Circuit Court of Appeals accepted these arguments. It held the agreement was not on its face illegal.[172] The agreement was thus subject to the rule of reason. The Supreme Court unanimously reserved. Citing Socony-Vacuum the Court found the agreement tampered with prices and was thus per se illegal. The Court held the elimination of short term credit to be "tantamount to an agreement to eliminate discounts and thus [fell] squarely within the traditional per se rule."[173] As the wholesalers competed in providing credit, the Court thought it was "realistic to view an agreement to eliminate credit sales as extinguishing one form of competition among the sellers."[174] Since there was "an obvious risk of anticompetitive impact with no apparent potentially redeeming value"[175] the Court applied the per se rule.

The decision is unexceptionable. Trade credit is part of the price of goods. An agreement to eliminate it reduces output and increases price. It falls within Taft's definition of a naked restraint. The per se rule is appropriate.

The Supreme Court's next price-fixing decision Arizona v Maricopa County Medical Society,[176] is more controversial.[177] The case involved a challenge by the State of Arizona against two incorporated associations of doctors called Foundations for Medical Care. The associations consisted of 70 percent of doctors in Maricopa County, Arizona. The doctors agreed on the maximum prices they would charge for their services to patients with health insurance. Several insurance companies agreed to pay the full costs of these services. They provided a list of participating doctors to consumers.

The State of Arizona applied for summary judgment claiming the maximum price fixing was per se illegal under section 1. A majority of the Ninth Circuit Court of Appeals refused to apply a per se rule.[178] It argued

it knew too little about either the effect of the agreement or the health care industry to apply the per se rule.

The defendants argued the agreement reduced prices to consumers by lowering search costs. They also argued that the insurance companies were acting in consumers' best interests and that the medical profession should not be subject to the per se rule. Furthermore participating doctors were free to deal with patients outside the agreement on any basis they wished. In short the defendants argued that BMI controlled and the per se rule did not apply.

A majority (4 to 3) of the Supreme Court disagreed. It reserved and applied the per se rule to condemn the agreement. Writing for the majority Justice Stevens held:

The respondents' principal argument is that the per se rule is inapplicable because their agreements are alleged to have procompetitive justifications. The argument indicates a misunderstanding of the per se concept. The anticompetitive potential inherent in all price fixing agreements justifies their facial invalidation even if procompetitive justifications are offered for some.[179]

He then offered reasons why maximum price fixing is per se illegal. It substitutes the defendants' "perhaps erroneous judgment" for the market place. It "cripples the freedom of traders." Price ceilings like price floors may have a restraining effect on competition. Finally maximum price fixing may be minimum price fixing in disguise.[180] (Most participating doctors charged the maximum price). He held "[O]ur decisions foreclose the argument that the agreements at issue escape per se condemnation because they are horizontal and fix maximum prices."[181] He summarily rejected the argument that the medical profession was not subject to the per se rule because of its unique characteristics. He held this in essence led to a standard based on reasonableness of the price fixed. This was something the Court had consistently rejected. He then distinguished BMI as the price restraints here were not "reasonably necessary to the operation of the scheme."

Nothing in the record even arguably supports the conclusion that this type of insurance program could not function if the fee schedules were set in a different way.[182]

For good measure, unlike BMI, he refused to characterise the arrangement as a joint venture because:

[t]he foundations are not analogous to partnerships or other joint arrangements in which persons who would otherwise be competitors pool their capital and share the risks of loss as well as the opportunities for profit. In such joint ventures, the partnership is regarded as a single firm competing with other sellers in the market. The agreement under attack is an agreement among hundreds of competing doctors concerning the price at which each will offer his own services to a substantial number of consumers.
If a clinic offered complete medical coverage for a flat fee, the co-operating doctors would have the type of partnership arrangements in which a price fixing agreement among the doctors would be perfectly proper. But the fee agreements disclosed by the record in this case are among independent competing entrepreneurs. They fit squarely into the horizontal price-fixing mold.[183]

For the minority Justice Lewis Powell, relying on BMI, argued the per se rule did not apply:

The Court acknowledges that the per se ban against price fixing is not be invoked every time potential competitors literally fix prices ... One also would have expected it to acknowledge that per se characterisation is inappropriate if the challenged agreement or plan achieves for the public procompetitive benefits that otherwise are not attainable. The Court does not do this. And neither does it provide alternative criteria by which the per se characterisation is to be determined. It is content simply to brand this type of plan as 'price fixing' and describe the agreement in Broadcast Music - which also literally involved the fixing of prices - as 'fundamentally different'.[184]

Justice Powell would only apply the per se restraint to naked restraints because "departure from the rule of reason standard must be based upon demonstrable economic effect rather than ...upon formalistic line drawing."[185] To do this a court had to determine whether the efficiencies an agreement creates "are substantial and reliable in the absence of such agreement."[186] He argued the State of Arizona had the burden of showing that the maximum price fixing agreement was "plainly anticompetitive" and "without a substantial and procompetitive efficiency justification."[187] It had not and therefore per se condemnation was inappropriate.

With respect, on its face, the majority opinion is somewhat confusing.[188] The first part, with its emphasis on the usefulness and certainty of the per se rule against price fixing, seems to support a return to the broad language of Socony-Vacuum. While acknowledging the usefulness of per se rules the opinion does not offer a doctrinal basis on which to distinguish between price fixing which merits per se treatment and that which does not. The second part of the opinion distinguishes BMI. Yet the language of the first part suggests that BMI was worthy of over-ruling. The reasons the first part offers for per se price fixing are applicable to BMI. However, the majority opinion shows no hint of overruling BMI.

As commentators have noted the ancillary restraints doctrine is the best method of explaining the case.[189] Under the doctrine a restraint that is wider than anything the procompetitive integration would justify is to that extent naked. Thus, an agreement that has restraints wider than necessary will be a naked restraint and thus subject to per se condemnation. The majority held the defendants had failed to show the agreements' alleged efficiencies resulted from the maximum price fees. It held it was unnecessary for the doctors to set the fees. Insurance companies or other independent bodies could do so. The same insurance plan could have resulted without competing doctors agreeing on fees. Thus, a maximum fee schedule set by doctors was not truly ancillary to the insurance plan. It was wider than necessary. Accordingly it was a naked restraint. The per se rule applied.

The Supreme Court revisited alleged ancillary price fixing in National Collegiate Athletic Association v Board of Regents of the University of Oklahoma (NCAA).[190] The NCAA is an organisation which regulates amateur college sports including football in the United States. It regulates everything from the rules of the game, recruiting student athletes, academic eligibility and the number of games played and the televising of these games. One of the rules on televising games restricted the number of games on television, how many times a school could appear and how much compensation a school would receive for a televised game. In short the rules forbade schools from conducting individual negotiations with television networks and artificially limited the number of games shown. Two schools which at the time were football power-houses, the Universities of Oklahoma and Georgia, sued. They alleged the television plan amounted to price fixing. The NCAA argued the per se rule did not apply and attempted to justify the plan. It said the television restrictions minimised loss of game attendances. They also minimised loss of athletic plan revenues and promoted a more balanced competition by spreading television income among many schools. The Supreme Court held that there were three issues before it. First whether the per se rule or rule of reason applied. Second whether the television plan contained any anticompetitive potential and third whether the NCAA's justifications prevented a finding of illegality. For the majority Justice Stevens held the plan was a horizontal restraint of trade. He defined this as "an agreement among competitors on the way in which they will compete with each other."[191] The Court held the plan artificially limited output and precluded any price negotiation between broadcasters and schools. It also held the anticompetitive consequences of the television restrictions were "apparent" as "individual competitors lost their freedom to compete."[192] "[P]rice [was] higher and output lower than they would otherwise be, and [b]oth [were] unresponsive to consumer preference."[193] In short the television plan was a "naked restriction on price or output."[194]

However, the Court refused to apply the per se rule. It reasoned as follows:

[W]e have decided that it would be inappropriate to apply a per se rule to this case. This decision is not based on a lack of judicial experience with this type of arrangement, or the fact that the NCAA is organised as a non-profit entity, or on our respect for the NCAA's historic role in the preservation and encouragement of intercollegiate amateur athletics. Rather, what is critical is that this case involves an industry in which horizontal restraints on competition are essential if the product is to be available at all.[195]

The Court continued:

Our decision not to apply a per se rule to this case rests in large part on our recognition that a certain degree of co-operation is necessary if the type of competition that petitioner and its member institutions seek to market is to be preserved.[196]

The Court rejected the NCAA's justifications. It held the plan did not minimise game attendance issues as games were shown live. This drew spectators from their game seats into their living rooms. The plan also distinguished BMI as the plan did not create a new product. "[T]he same rights [were] still sold on an individual basis, only in a non-competitive market."[197]

The Court also rejected the NCAA's argument that the plaintiff had not shown that the NCAA had any market power. It held "absence of proof of market power does not justify a naked restriction on price or output."[198] Rather a defendant had to show "some competitive justification even in the absence of a detailed market analysis."[199] As the NCAA had not, the Court struck down the rules.

Justice Byron White dissented.[200] He stressed the non-commercial nature of the NCAA. He thought the price restraints were necessary to correct the free market's inability to provide high quality amateur athletics in colleges. He argued that all the NCAA's rules, including its television plan, worked together to accomplish this goal. For primarily this reason but plus others, he would have upheld the plan.[201]

Again with respect, Justice Stevens's opinion is somewhat confusing. First his use of the word naked to describe the television plan is unclear.[202] Prior to NCAA a naked restraint was automatically subject to the per se rule. Yet the Court applied the rule of reason to a so-called naked restraint. The opinion has nothing in it which suggests the Court was abandoning the per se / rule of reason dichotomy. Its choice of word is unfortunate.

Furthermore, the Court's analysis under the rule of reason is difficult.[203] When it rejected the NCAA's argument that the television plan was a co- operative joint venture that increased the efficiency of its college football plan the Court held:

The District Court did not find that the NCCA's television plan produced any procompetitive efficiencies which enhanced the competitiveness of college football television rights; to the contrary it concluded that NCAA football could be marketed just as effectively without the television plan. There is therefore no predicate in the findings for petitioner's efficiency justification. Indeed, petitioner's argument is refuted by the District Court's finding concerning price and output. If the NCAA's television plan produced procompetitive efficiencies, the plan would increase output and reduce the price of televised games. The District Court's contrary findings accordingly undermine petitioner's position. In light of these findings, it cannot be said the 'the agreement on price is necessary to market the product at all'.[204]

As Professor Wesley Liebeler notes if there was no predicate in the findings for petitioner's efficiency justifications then the per se rule should have applied. If a court finds no efficiency justifications for an agreement that has price restraints, then it should characterise it as price fixing.[205]

Again the ancillary restraint doctrine best explains the decision.[206] The above quotation simply holds that the television plan was not ancillary to the NCAA's football programmes legitimate aspects. While some restraints were necessary to produce an even football programme the restraints in the television plan were wider than necessary. Bork notes that had the restraint been between members of one of the NCAA's conferences then the restraint would have had a clear relationship to competitive balance. The restraint would have been ancillary to the joint venture of the conference. He writes:

The NCAA's limitations on telecasting, however, obviously did not protect competitive balance across all of college football. The rules did nothing to bring Yale and Notre Dame to a condition of competitive equality. Nor did it appear that restricting colleges' rights to have their games televised enhanced economic efficiency in any other way. Justice Stevens' opinion disposed of the competitive balance argument with the observation that 'the NCAA does not complain that its television plan has equalised or is intended to equalise competition with any one league. The plan is nation-wide in scope and there is no single league in which all college football teams compete'.[207]

As the restraint was not ancillary under Taft's doctrine it was naked and therefore deserving of per se condemnation.

As the above discussion shows the Supreme Court's price fixing decisions are explicable under the ancillary restraints doctrine. The Court has never explicitly adopted the doctrine. However, a number of Circuit Court of Appeals have interpreted the above cases (plus a Supreme Court boycott case, Northwest Wholesale Stationers Inc v Pacific Stationery & Printing Co)[208] as effectively resurrecting the doctrine.[209] A relevant price fixing case is the Eleventh Circuit Court of Appeals' decision in National Bancard Corp (NaBanco) v VISA USA Inc.[210]

This involved a challenge to an interchange fee which members of the visa credit card system operated. Visa ran a bank credit card system. Such card systems involve the following transactions.

1) card holders who use the cards to purchase goods and services;
2) merchants who accept the cards in exchange for goods and services;
3) banks that issue cards to cardholders (card issuing banks) and
4) banks that contract with merchants to accept the credit cards (merchant signing banks).

Visa, as the central credit card organisation, agreed with participating banks upon a uniform "interchange fee." A bank issuing a credit card to its customer would receive a uniform fee for transferring funds on behalf of that customer to a bank that paid the merchant who sold goods or services to that customer. Thus, there was a set fee for a transaction between the card issuing banks and the merchant-signing banks. NaBanco was a third party processor of credit card transactions. It acted as an agent for Visa members in processing merchant credit card transactions. It recruited new merchants on behalf of merchant-signing banks. In return it kept some or all of the merchant discount revenue it retained from the amounts remitted to merchants.

NaBanco sued Visa alleging the set interchange fee was an illegal per se price fixing agreement. The Court held it was not. It relied on the ancillary restraints doctrine. It called the agreement a joint venture. It concluded that "this joint enterprise is not subject to per se scrutiny because it is a necessary element in the creating of efficiency enhancing integration."[211] Visa showed "characteristics of a joint venture" because it had partially integrated some of its functions to produce a new product (the Visa Card) which none of its members could do individually. The interchange fee was a "necessary term without which the system would not function."[212]

The Court did not solely rely on the creation of a new product argument. The fee was also necessary in reducing transaction costs (ie it created productive efficiencies). If each bank could establish its own transfer fee some banks would find the transaction costs of negotiating such fees too high and would refuse to make or accept the transfers. That would make merchants unwilling to accept cards other than those issued by their own banks. The Court showed it fully accepted the ancillary restraints doctrine when it held, quoting Bork:

[T]he [interchange fee] accompanies the co-ordination of other productive or distributive efforts of the parties that is capable of increasing the integration's efficiency and no broader than required for that purpose ... [The interchange fee] is reasonably ancillary to [a] procompetitive efficiency - creating endeavour and therefore not a naked restraint of trade.[213]

It further said of BMI: "BMI's underlying teaching therefore appears to be that courts should look to whether the restraint at issue potentially could create an efficiency enhancing integration to which the restraint is ancillary."[214] The Court concluded that as the interchange fee was not a naked restraint of competition it was not per se illegal price fixing.

The above discussion shows that section 30 drives from United States law. However, the issue remains whether section 30 accommodates the doctrine of ancillary restraints, viz: whether it captures literal price fixing which is truly ancillary to a procompetitive larger agreement. New Zealand courts have been unwilling to incorporate United States antitrust doctrines such as the essential facilities doctrine into the Commerce Act[215] . However, an examination of the purpose and structure of the Commerce Act shows how the ancillary restraints doctrine applies under it.

V. Does the Ancillary Restraints Doctrine Apply to Section 30?

New Zealand courts could apply the doctrine of ancillary restraints under section 30 by using a purposive approach to interpretation. The High Court has stated that a purposive approach is necessary in interpreting the Commerce Act. In Union Shipping Ltd v Port Nelson Ltd the High Court noted:

The [Commerce Act] is legislation of a type where the Court should not hesitate to adopt necessary purposive approaches in line with Northland Milk Vendors Association Inc v Northern Milk Ltd [1988] 1 NZLR 530 paying due respect to legislative policy.[216]

In Northland Milk Vendors the Court of Appeal noted:

The responsibility falling on the courts as a result is to work out a practical interpretation appearing to accord best with the general intention of Parliament as embodied in the Act - that is to say the spirit of the Act ... Obviously therefore a great deal turns on the need for the courts to appreciate and give weight to the underlying ideas and scheme of the Act.[217]

One of the ways of finding the purpose of an act is its long title. The Commerce Act's long title is "An Act to promote competition in markets within New Zealand ..." As the Court of Appeal noted in Tru Tone Ltd v Festival Records Retail Marketing Ltd the Commerce Act "is based on the premise that society's resources are best allocated in a competition market where rivalry between firms ensures maximum efficiency in the use of resources."[218]

The purpose of section 30 is to make price fixing per se illegal. The reason for this is that cartel or naked price fixing serves no useful procompetitive end. It distorts the market, reduces output and raises prices. It can be very harmful to society. It also deters would be price fixers. It also saves time and money. Virtually, (if not) all cartel or naked price fixing would be condemned under full blown analysis under section 27 using the purpose limb. However, a truly ancillary price restraint has none of these features. Rather than reducing output and increasing prices it increases output and decreases prices. In the words of Tru Tone a truly ancillary price restraint "ensures maximum efficiency in the use of resources." It frustrates the purpose of the Act to interpret it in such a way as to make truly ancillary price restraints per se illegal.

Another way of discerning the purpose of an act is examine its scheme or structure. Several provisions of the Commerce Act show a purpose that Parliament did not design the act so as to capture truly ancillary restraints. As mentioned previously, in Addyston Pipe Judge Taft gave five examples of ancillary restraints that were lawful at common law and presumably would be under the Sherman Act. These were:

[A]greements
1) by the seller of property or business not to compete with the buyer in such a way as to derogate from the value of the property or business sold;
2) by a retiring partner not to compete with the firm;
3) by a partner pending the partnership not to do anything to interfere, by competition or otherwise, with the business of the firm;
4) by the buyer of property not to use the same in competition with the business retained by the seller; and
5) by an assistant, servant or agent not to compete with his master or employer after the expiration of his time of service.[219]

Section 44 of the Commerce Act contains specific exemptions to Part II of the Act. It specifically exempts four of Taft's examples. The only one

it doesn't is number four. Interestingly Bork argues such a restraint should not be lawful under the Sherman Act.[220]

Furthermore, section 33 provides section 30 does not apply to joint buying groups who collectively acquire goods and jointly advertise the price for the supply of goods so acquired. The reason for this is explicable under the ancillary restraints doctrine. If a joint buying group is to work its members need to agree on the acquisition price and the advertised resupply price. The buying group serves a legitimate procompetitive purpose. The price restraint is ancillary to that purpose. It is no wider than necessary as members can only agree on the advertised resupply price. They cannot agree to resupply at a certain price.

Similarly sections 31 provides section 30 does not apply to certain marketing schemes of joint ventures. Again this is explicable under the ancillary restraints doctrine. Joint ventures are the archetypal situation where ancillary restraints exist. By placing limitations on the agreement of prices sections 31 ensures the price restraints are no wider than necessary. Thus the scheme and structure of the Commerce Act show a purpose not to condemn ancillary restraints per se. This should also be so under Section 30.

This is so, despite the use of the word "deemed." From Ross v P J Heeninga Ltd [221] "deemed" in section 30 does not create a statutory fiction. Rather it means "conclusively considered for the purposes of the Act."[222] However, even with such a meaning courts still take account of the legislative purpose of the Act. Haslam J did in Ross.[223] Bennion also notes: "In construing a deeming provision it is necessary to bear in mind the legislative purpose."[224] Thus, when the purpose of the Commerce Act is not to condemn ancillary price restraints as per se illegal, courts should not interpret section 30 to capture them. As Areeda notes:

A sensible jurisprudence cannot frame abstract rules in English and then instruct subordinates to apply them without regard to their purpose or rationale or impact upon the society.[225]

A court interpreting section 30 so as to capture ancillary price restraints would be ignoring the purpose of why section 30 makes price fixing per se illegal. It would have a deleterious impact on society as it would result in the quick condemnation of beneficial agreements with a resulting loss of allocative and productive efficiency. Thus, courts can use the ancillary restraints doctrine in applying section 30.

Some commentators have argued section 30 does not that degree of flexibility. Others have criticised the doctrine itself. The next part of this article addresses those criticisms.

VI. Criticisms of The Ancillary Restraints Doctrine

One argument as to why courts should not apply the doctrine to section 30 is the authorisation provisions of the Commerce Act.[226] Under section 58 the Commerce Commission may grant an authorisation on the application of any person who wishes to enter into or give effect to a contract, arrangement or understanding, or covenant, to which sections 27 and 28, would or might apply. Although section 58 does not refer to section 30 the Commission may authorise section 30 conduct. Reference to section 30 is unnecessary. Section 27 is the source of the prohibition against price fixing and section 30 is only a deeming provision. If a literal price fixing agreement is truly ancillary to a procompetitive outcome then the Commission can authorise it on a party's application. In such a case the benefits will outweigh any detriment. One can contrast this with the United States law. Neither of the antitrust enforcement agencies have any such power. It is up to the courts to deal with price fixing agreements. Given such procompetitive agreements such as in BMI and NaBanco it is no wonder the United States courts have used the ancillary restraints doctrine to bless them. To condemn them would be striking down extremely procompetitive agreements Congress did not intend the Sherman Act to do that. In New Zealand the parties to the BMI and NaBanco agreements could have applied to the Commission to authorise them. The Commission undoubtedly would have. Given this authorisation procedure New Zealand courts should strictly interpret section 30. Any ancillarity arguments should be for the Commission.

While the Commerce Act envisages an important role for the Commission, this argument only goes so far. First in New Zealand parties make very few authorisation applications under section 27 and even less under section 30. The market is not in favour of authorisation applications. Accordingly, New Zealand courts will have to face ancillary price fixing cases. In the case of true ancillary price restraints their procompetitive benefits will be plainly visible. This was so in BMI and will also be so in restraints involved in setting up a market. In such circumstances it will be extremely unlikely that an enforcement agency will bring action alleging a breach of section 30. Any plaintiff will likely to a competitor. That is so in the United States. According to a Georgetown Law School study, the most common relationship between plaintiffs and defendants in price fixing cases is that of competitor.[227] Courts should be suspicious of competitor price fixing cases. If horizontal price fixing is truly at issue no competitor should be bringing an action. If firms are reducing output and raising prices a competitor should be thrilled.[228] The competitor is able to raise its prices or sell an increased volume. Thus, a competitor case suggests what is really happening is that the price restraint is truly ancillary and is contributing to productive efficiency. This disadvantages an inefficient competitor.

In any case, it is doubtful that a New Zealand court will condemn a truly ancillary price restraint under section 30. Such restraints can result in the savings of millions of dollars as in BMI and NaBanco. They are extremely procompetitive. Is a court really going to want to do that? It is likely, it will try and bless such a restraint. The doctrine of ancillary restraints offers a way of doing so.

Any analysis under the doctrine is tightly focused. It is not a broad ranging inquiry as under section 27. A court does not need to assess market

power or market definition. With a truly naked restraint a court can condemn it in the twinkle of an eye. The only real inquiry is whether the price restraint is ancillary to a legitimate transaction or venture. If so, the question is whether it is wider than necessary. Generally this will not be too difficult or protracted an inquiry. However, in some circumstances the inquiry will not be easy.

This leads to the second criticism of the doctrine in that it is not a panacea to the issue of characterisation.[229] It does not lead to an automatic answer when dealing with a price fixing agreement. This is undoubtedly true. People can have legitimate differences over whether a restraint is ancillary or truly necessary. The Chicago Board of Trade case illustrates this. Professor Peter Carstensen has argued that the call rule was an ancillary restraint and thus legal.[230] On the other hand Bork, Lawrence Sullivan and Professors Ernest Gellhorn and William Kovacic argue it was a naked restraint deserving of per se condemnation.[231] A similar debate has arisen over NaBanco. Professors David Evans and Richard Schmalensee agree with the Tenth Circuit Court of Appeals that the interchange fee was truly ancillary and necessary to the credit card system.[232] On the other hand Professor Dennis Carlton and Dr Alan Frankel argue that it was not necessary and therefore a naked restraint.[233] These disputes do not mean the doctrine is of no use.

The doctrine is not meant to be a panacea. It is a method of analysing horizontal restraints. It provides principles for distinguishing between procompetitive legal restraints and anticompetitive illegal ones. Its definition of naked restraints is the best way of identifying per se illegal restraints. One can contrast it with Justice Brandeis's broad ranging inquiry in Chicago Board of Trade. That inquiry is formless. Everything becomes relevant. The doctrine of ancillary restraints provides a structure and rigour to the analysis. Legal reasoning should be structured and rigorous. Without it the law lacks certainty and falls into disrepute.

A related criticism from a Yale Law Journal Note is that the doctrine relies too much on purpose.[234] To know whether a restraint is ancillary one has to know its purpose. The Note argues this investigation of purpose is not part of the per se rule. Rather it is part of the rule of reason. To investigate purpose is inconsistent with the per se rule.[235] This criticism is puzzling. Courts have always used purpose and effect when deciding whether to characterise an agreement as price fixing and thus per se illegal. Certainly the Supreme Court did in Socony-Vacuum. To suggest that purpose is not part of per se analysis is contrary to what the courts have said and done. To criticise the ancillary restraints doctrine for an analysis of purpose is invalid.

Leonard Vary provides another criticism of the doctrine by accusing it of being the product of the Chicago School. He notes:

The emergence of the so-called Chicago School and the distinction that it drew between naked and ancillary restraints has, at least to a degree, moved the thinking of the courts in the United States away from the view that effects of price fixing between competitors are always pernicious.[236]

Some people view the Chicago School as an anathema.[237] It is true that Bork has championed the doctrine.[238] However, it derives from Addyston Pipe and Taft's reading of the then common law on restraint of trade. Given Taft decided Addyston Pipe in 1898, 30 years before Bork was born, it is stretching things to say that the Chicago School drew the distinction between naked and ancillary restraints. In any case the doctrine has no place in any ideological dispute over competition law. As mentioned above, "Taft's approach transcends antitrust ideology."[239] It offers a methodology for "distinguishing between desirable and offensive horizontal agreements, regardless of one's views on the goals of antitrust."[240] Commentators from all parts of the competition law spectrum have praised the doctrine.[241] They all say it is useful in distinguishing legal and illegal retrains. Vary's criticism is invalid.

Vary's comments are in an article criticising Justice Lockhart's decision in Radio 2 UE Sydney Pty Ltd v Stereo FM Pty Ltd.[242] This article turns to analyse that case using the doctrine.

VII. Analysis of Radio 2UE.

Radio 2UE involved section 45A of the Australian Trade Practices Act 1974 (equivalent to section 30). The case involved the radio industry - shortly after the introduction of FM stations. At that time FM stations faced fierce opposition from the established AM stations. Two Sydney FM stations produced a combined rate card for advertisers on their two stations. The advertising rates appearing on the combined card were the sum of each station's individual rate. Each station determined and charged its own rates independently. Each station could change its own rate at any time. Radio 2UE, a competing AM station sued alleging the combined card was a breach of section 45A.

At first instance Lockhart J held that the setting of the combined card did not involve the fixing, controlling or maintaining of prices. However in an obiter comment on characterisation, his Honour, relying on United States authorities, said:

The Court's task is to characterise the conduct before if in a given case. Care must be taken in performing that task because by its very nature, the violation of s 45A is deemed, for the purpose of s 45 to substantially lessen competition per se. Such a finding may have far reaching consequences to the competitors concerned.
It is important to distinguish between arrangements (I use this expression for convenience to encompass also contracts and undertakings) which restrain price competition and
arrangements which merely incidentally affect it or have some connection with it. Not every arrangement between competitors which has some possible impact on price is per se unlawful under the section.
Nor in my view was s 45A introduced by Parliament to make arrangements unlawful which affect price by improving competition. It is fundamental to both s 45A and 45 that the relevant conduct, in purpose or effect, substantially lessens competition or would likely to do so. If competition is improved by an arrangement I cannot perceive how it could be characterised as a price fixing arrangement within the ambit of those sections.[243]

The Full Federal Court upheld the decision but did not comment on Lockhart J's obiter statement.[244]

Some commentators reacted in horror to this interpretation of s 45A.[245] They regarded it almost as eviscerating s 45A. They argued that it was contrary to the Act's purpose of deeming price fixing to be a substantial lessening of competition. They argued that Lockhart J had introduced a rule of reason analysis to price fixing. However, Professor Robert Baxt praised Lockhart J's analysis, saying it introduced "the correct antitrust principles from the United States."[246] According to Baxt the decision stopped the fears of Australian commentators who thought "that where per se offences were introduced in the legislation the courts would be likely to read these provisions too rigidly, and not adopt what has been described in the American jurisprudence as a rule of reason approach."[247]

Viewed from the United States perspective one can criticise Lockhart J's comments as they do not have a doctrinal basis from which a court can determine whether a price fixing arrangement improves competition or not. However, one can find such a doctrinal basis if one looks at his Honour's comments through the lens of Professor Lawrence Sullivan's treatise.[248] It appears the treatise has influenced his Honour's views. One can compare the two.

His Honour said:

Nor in my view was section 45A introduced by Parliament to make arrangements unlawful which affect price by improving competition.[249]

Sullivan when discussing price fixing says:

The [Sherman] Act is not intended to make unlawful arrangements which affect price by improving competition.[250]

Lockhart J also said:

If competition is improved by an arrangement I cannot perceive how it could be characterised as a price fixing arrangement within the ambit of those sections.[251]

The Sullivan treatise says:

If competition is improved by an arrangement, we do not characterise it as a price fixing arrangement merely because it affects price.[252]

Lockhart J gives an example of an arrangement which may literally fix prices but does not deserve per se condemnation.

If competitors make an arrangement to establish a better market by, for example, forming an organisation through which they operate by exchanging information in ways that make prices more competitive. I do not see how such an arrangement is, per se, prohibited by s 45A.[253]

The Sullivan treatise's example of an arrangement which may literally fix prices but does not deserve per se condemnation is as follows:

Suppose for example that the purpose and affect of a particular arrangement is to make a better market through the establishment of an organised exchange where all buyers and sellers operate, by standardising the products to facilitate price comparisons, or by exchanging information in ways facilitating competition. These kinds of practices would affect price, but on our assumptions they would do so by making it more competitive; therefore, they ought not to be treated as per se invalid.[254]

If the Sullivan treatise influenced Lockhart J, then one can turn to it to find out the full meaning of his comments. The Sullivan treatise does not advocate rule of reason treatment of all price fixing agreements. It argues that "naked price restraints" deserve per se condemnation.[255] Those arrangements which affect price but do not deserve per se condemnation are as follows:

(1) Arrangements which make or improve a market.

Sullivan says "arrangements which may have the purpose or effect or making or improving a market are not per se unlawful even though they may affect price."[256]

(2) Restrictions resulting from partial integration. Sullivan notes:

An arrangement involving a partial integration of functions, which may achieve significant economies of scale among competitors, also may escape per se treatment, even though it eliminates price competition between the firms that participate in it. To qualify for the application of the rule of reason, the arrangement must have the following two characteristics: first, the elimination of price competition between the participating firms must result directly from the partial integration of their functions; second this elimination of price competition must not appear to significantly reduce market-wide competition. When these two conditions are met, the arrangement is not characterised as a price restraint...[257]

The resemblance between Sullivan's analysis and the doctrine of ancillary restraints is striking. This is not surprising as Sullivan calls Taft's Addyston Pipe opinion a "tour de force."[258] Essentially Sullivan argues that truly ancillary restraints do not deserve per se condemnation. Naked restraints do. Cast in that light Lockhart J's comments are explicable under the ancillary restraints doctrine. One can reach the same result using the doctrine. The two FM stations had in effect formed a joint venture. This was a legitimate activity. The combined rate card furthered that legitimate activity and was necessary to it. As the stations were free to change their individual rates whenever they wanted the restraint was no wider than necessary. Accordingly, an ancillary restraints doctrine analysis would not condemn the combined rate card.

VIII. Conclusion

The per se rule against naked cartel price fixing is of great utility. However, it should not apply to literal price restraints which are truly ancillary to a procompetitive venture. Application of the ancillary restraints doctrine ensures this will not happen. The doctrine provides a structured methodology for analysing price restraints. Such an approach is permissible under section 30. The doctrine may not turn the sea of doubt into a mill pond. However, it makes it navigable. New Zealand courts should set such a course when interpreting section 30.


* LLM (Cantuar) Solicitor, Commerce Commission.

This is a revised version of a paper presented at the Eighth Annual Workshop of the Competition Law and Policy Institute of New Zealand on 1 August 1997 at Christchurch. I thank Professor Peter Carstensen for his comments on previous drafts of this article. The views expressed are the author's alone. They should not be taken or represented to be the views of the Commerce Commission.

[1] P Areeda, 6 Antitrust Law (1986), para 1402(a).

[2] Section 27 provides: - (1) No person shall enter into a contract or arrangement, or arrive at an understanding, containing a provision that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market. (2) No person shall give effect to a provision of a contract, arrangement or understanding that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.

[3] Bork, "The Rule of Reason and the Per Se Concept: Price Fixing and Market Division. Part I" (1965) 71 Yale LI 775 at 775.

[4] Section 30 provides: - (1) Without limiting the generality of section 27 of this Act, a provision of a contract, arrangement or understanding shall be deemed for the purposes of that section to have the purpose, or to have or to be likely to have the effect, of substantially lessening competition in a market if the provision has the purpose, or has or is likely to have the effect of fixing, controlling, or maintaining or providing for the fixing, controlling, or maintaining, of the price of goods or services, or any discount, allowance, rebate or credit in relation to goods or services...

[5] See infra, n 73.

[6] R H Bork, The Antitrust Paradox A Policy At War With Itself" (2nd ed. 1993), p 264; Piraino, "Beyond Per Se, Rule of Reason or Merger Analysis: A New Antitrust Standard for Joint Ventures" (1991) 76 Minn L Rev 1; M J Trebilcock, The Common Law of Restraint of Trade (1986), pp 112-113; L A Sullivan, Antitrust (1977), pp 206-210.

[7] Sullivan, op cit n 6, at 205-206; R A Posner and F H Easterbrook, Antitrust (2nd ed 1981).

[8] Baxter, "Substitutes and Complements, and the Contours of the Firm" in F Matthewson, M Trebilcock and M Walker (eds), The Law and Economics of Competition Policy (1990), p 27.

[9] 85 F 271 (6th Cir 1898), aff'd, 175 United States 211 (1899).

[10] (1982) 62 FLR 437.

[11] See: R Miller, Annotated Trade Practices Act (17th ed, 1996), p 142.

[12] 221 United States 1 (1911).

[13] See Allison, "Ambiguous Price Fixing and the Sherman Act: Simplistic Labels or Unavoidable Analysis" (1979) 16 Houston L Rev, 761 at 767.

[14] Sullivan, op cit n 6, at 195; see also United States v United States Gypsum Co 438 United States 422 (1978); Broadcast Music Inc. v Columbia Broadcasting Systems, 441 United States 1 (1979).

[15] Areeda, "The Changing Contours of the Rule of Reason" (1988) 54 Antitrust LJ 1, at 28.

[16] Sullivan, op cit n 6, at 194.

[17] Kauper, "The Treatment of Cartels Under the Antitrust Laws of the United States" in C- K. Wang, C-J. Cheng & L. Lui (eds) International Harmonisation of Competition Laws (1995), p75 at 78.

[18] Fisher & Paykel Ltd v Commerce Commission [1990] NZHC 307; [1990] 2 NZLR 731 at 741. The High Court quoted White Motor Company v US [1963] USSC 36; 372 US 253 (1953) and P Areeda, Antitrust Analysis (2nd ed. 1974), p 637. However, one can trace the doctrine back to Addyston Pipe op cit n 9. Professor Donald Turner first gave it academic prominence. See Turner, "The Validity of Tying Arrangements Under the Antitrust Laws" (1958) 72 Harv L Rev 50, at 59, 64. Turner, "The Definition of Agreement Under the Sherman Act: Conscious Parallelism and Refusals to Deal" (1962) 75 Harv L Rev 655, at 699; see also, Note, "Restricted Channels of Distributions Under the Sherman Act" (1962) 75 Harv L Rev 795, at 823 - 832.

[19] Arthur, "Farewell to the Sea of Doubt: Jettisoning the Constitutional Sherman Act" (1986) 74 Cal L Rev 263, at 343; Roberts, "The Evolving Confusion of Professional Sports Antitrust, The Rule of Reason and the Doctrine of Ancillary Restraints" (1988) 61

Sou Cal L Rev 942, at 966.

[20] Allison, op cit n 13, at 769 - 770.

[21] Fisher & Paykel, op cit n 18, at 740.

[22] US v Socony - Vacuum Oil Co [1940] USSC 110; 310 US 150 (1940).

[23] P Areeda & D F Turner, 2 Antitrust Law (1978), p 280.

[24] Williamson, "Economies as an Antitrust Defense: The Welfare Trade-off (1968) 58 Am Econ Rev 18; Williamson, "Allocative Efficiency and the Limits of Antitrust" (1969) 59 Am Econ Rev 105.

[25] Trebilcock, op cit n 6, at 295.

[26] S Ross, Principles of Antitrust Law (1993), p 117; F M Scherer & D Ross, Industrial Market Structure and Economic Performance (3rd ed, 1990), pp 239-244.

[27] Bork, op cit n 6, at 263.

[28] R A Posner, Antitrust Law: An Economic Perspective (1976), 39.

[29] See Bittlingmayer, "Decreasing Average Cost and Competition: A New Look at the Addyston Pipe Case" (1982) 25 JL & Econ 201; Telser, "Cooperation, Competition, and Efficiency" (1985) 28 JL & Econ 271; Leslie, "Achieving Efficiency Through Collusion: A Market Failure Defense to Horizontal Price-Fixing" (1993) 81 Cal L Rev 243; Note, "Fixing the Price Fixing Confusion: A Rule of Reason Approach" (1983) 92 Yale LJ 706; D Armentano "Antitrust Policy: The Case For Repeal" (1986).

[30] Sullivan, op cit n 6, 163; P Areeda & L Kaplow, Antitrust Analysis (4th ed 1988), p 189; G Stigler, "A Theory of Oligopoly" (1964) 72 J Pol Econ 44; H Hovenkamp, Economics and Frederal Antitrust Law (1985), pp 83-91. 31 E Gelhorn & W E Kovacic, Antitrust Law and Economics in a Nutshell (4th ed 1994), p 161. 32 Areeda and Kaplow, op cit n 30, at 86; Posner & Easterbrook, op cit n 28, at 101; Sullivan op cit n 6, at 203-204; Leslie, op cit n 29.

[33] Hovenkamp, op cit n 30, at 86. 34 [1988] USSC 75; 485 US 717, 723 (1988).

[35] A Chandler, The Visible Hand: The Managerial Revolution in American Business (1977), p 321.

[36] Trebilcock, op cit n 6, at 299.

[37] Areeda & Kaplow, op cit n 30, at 189.

[38] Kauper, op cit n 17, at 78.

[39] Ayres, "How Cartels Punish: A Structural Theory of Self - Enforcing Collusion" (1987) 87

Colum L Rev 295.

[40] D W Carlton & J M Perloff, Modern Industrial Organisation (1990), pp 216-223 .

[41] Greer, "Price and Production Behaviour: Cartel Practice and Policy" in D F Greer (ed) Industrial Organisation and Public Policy (3rd ed, 1980), p 389.

[42] W F Shepherd, The Economics of Industrial Organisation (2nd ed, 1985), p 245.

[43] See op cit n 15.

[44] Hovenkamp, op cit n 30, at 91; Waldman, "The Inefficiencies of "Unsuccessful" Price Fixing Agreements" (1988) 33 Antitrust Bull 67.

[45] Kauper, op cit n 17, at 78.

[46] Leslie, op cit n 29.

[47] Krattenmaker, "Per Se Violations in Antitrust Law: Confusing Offenses with Defenses" (1988) 77 Geo LJ 165, at 173.

[48] Note, "Antitrust Standing Antitrust Injury, and the Per Se Standard" (1984) 93 Yale LJ 1309; Comment, "Segregation of Antitrust Damages: An Excessive Burden on Private Plaintiffs" (1983), 72 Cal L Rev 403; ABA Monograph, Proving Antitrust Damages

(1996).

[49] [1927] USSC 62; 273 US 392.

[50] Ibid at 397 - 398.

[51] Ibid at 179.

[52] Bork, op cit n 6, at 126.

[53] Areeda & Kaplow op cit n 30, at 190 - 192; Sullivan, op cit n 6, at 203; Posner & Easterbrook, op cit n 28, at 101-102.

[54] Fishman v Wirtz 807 F 2d 520 (7th Cir 1986).

[55] See Trebilcock, op cit n 6, at 275 - 305

[56] J Schumpeter, Capitalism, Socialism and Democracy (1942), p 82.

[57] Areeda & Kaplow, op cit n 30, at 190.

[58] See authorities cited at n 32.

[59] Sullivan, op cit n 6, at 203.

[60] Trebilcock, supra n 6, 301.

[61] Areeda & Kaplow, op cit n 30, at 191.

[62] Kauper, op cit n 17, at 17; Areeda & Kaplow, op cit n 30, at 194.

[63] Posner & Easterbrook, op cit n 28, at 115

[64] Ibid at 115 - 116.

[65] [1978] USSC 67; 435 US 679 (1978).

[66] Ibid at 695.

[67] Ibid.

[68] Ibid.

[69] Kauper, "Price Fixing : New Approaches to the Old Problem" (1977) 46 Antitrust LJ 435, at 437.

[70] Note, op cit n 29, at 709 - 710; Bork, op cit n 6, at 269.

[71] Kauper, op cit n 17, at 78.

[72] See Allison, op cit n 13, Note, op cit n 29; Wirtz, "Rethinking Price Fixing" (1987) 20 Ind L Rev 591; Marks & Jacobson, "Price Fixing: an Overview" (1985) 30 Antitrust Bull 199; Comment, "The Per Se Illegality of Price Fixing - Sans Power, Purpose or Effect" (1952) 19 U Chi L Rev 837.

[73] 15 U.S.C.S. (1982).

[74] [1897] USSC 80; 166 US 290 (1897).

[75] 24 Stat. 379 (1887).

[76] Op cit n 74, at 328.

[77] Ibid at 352.

[78] Ibid.

[79] Ross, op cit n 26, at 119; Sullivan op cit n 6, at 168.

[80] Bork, op cit n 3, at 786 - 790.

[81] Op cit n 14, at 331-332.

[82] Bork, op cit n 3, at 190.

[83] Op cit n l4, at 342.

[84] Ibid.

[85] [1884] USSC 189; 111 US 505 (1898).

[86] 111 US 518 (1898).

[81] [1884] USSC 190; 111 U.S 604 (1898).

[88] Op cit n 85, at 561 - 568.

[89] Ibid at 568.

[90] Ibid.

[91] Ross, op cit n 26, at 121.

[92] Sullivan, op cit n 6, at 110.

[93] 85 F. 271 (6th Cir. 1898) aff'd [1899] USSC 169; 175 U.S. 211 (1899).

[94] Taft was later a Yale Law School Professor, U.S. Solicitor General, President and Chief Justice of the Supreme Court.

[95] It is doubtful Taft's view of the then common law on restraint of trade was accurate. See Bork, op cit n 3, at 797. For a contrary view see Arthur, op cit n 19, at 280 - 284.

[96] Op cit n 93, 282-283.

[97] Ibid at 283 - 284.

[98] Ibid at 284.

[99] Ibid at 283.

[100] Ibid at 282.

[101] Ibid.

[102] Ibid at 281.

[103] Ibid at 282.

[104] Kauper, "The Sullivan Approach to Horizontal Restraints" (1981) 15 Cal L Rev 893.

[105] E T Sullivan & J Harris, Understanding Antitrust and its Economic Implications (2nd ed, 1994).

[106] Piraino, op cit n 6, at 5-6, 54-56.

[107] Sullivan, op cit n 6, at 171.

[108] Ibid.

[109] Bork, op cit n 6, at 26.

[110] Ross, op cit n 26, at 121.

[111] Ibid at 211.

[112] See infra, n 153 - 158.

[113] See infra, n 116 - 214.

[114] See infra, n 216 - 217.

[115] [2004] USSC 1; 221 US 1 (1911).

[116] 221 US 106 (1911).

[117] See Allison, op cit n 13, at 767-777.

[118] Op cit n 115, at 58.

[119] Ibid at 60.

[120] Op cit n 116, at 106.

[121] Bork, op cit n 3, at 805; Ross, op cit n 26, at 126.

[122] Sullivan, op cit n 6, at 174; Allison, op cit n 13, at 767; Kauper, op cit n 17, at 76.

[123] [1918] USSC 41; 246 US 231 (1918).

[124] Ibid at 238.

[125] Ibid at 240-241.

[126] Ibid at 140.

[127] Bork, op cit n 6, at 158-159; Sullivan, op cit n 6, at 175-179; Gellhorn & Kovacic, op cit n 31, at 176. These commentators argue the Rule breached section 1. For a contrary view see Carstensen, "The Content of the Hollow Core of Antitrust: The Chicago Board of Trade Case and the Meaning of the "Rule of Reason" in Restraint of Trade Analysis" (1992) 15 Res in L& Econ 1.

[128] See Bork, op cit n 3, at 815-820; Ross, op cit n 26,at 124; Arthur, op cit n 19, at 302-306;

Posner & Easterbrook, op cit n 28, at 597; Gellhorn & Kovacic, op cit n 31, at 176 - 178.

[129] Op cit n 123, at 238.

[130] Arthur, op cit n 19, at 302 - 306.

[131] Blecher, "Schwinn - An Example of a Genuine Commitment to Antitrust Law" (1975) 44 Antitrust LJ 550, at 553.

[132] Arthur, op cit n 19, at 302 - 306.

[133] [1927] USSC 62; 273 US 392 (1927).

[134] Ibid at 397 - 398.

[135] Ibid at 401.

[136] See for example, Ross, op cit n 26, at 127 - 128.

[137] Sullivan & Harris, op cit n 105, at 87.

[138] [1933] USSC 44; 288 US 344 (1933).

[139] Ibid at 360.

[140] Ibid.

[141] Ibid at 363.

[142] Ibid.

[143] Ibid at 375.

[144] See U.S. v Socony-Vacuum Oil Co. [1940] USSC 110; 310 US 150 (1940).

[145] Ross, op cit n 26, at 133; P Areeda Antitrust Analysis (2nd ed, 1974), para 356.

[146] [1940] USSC 110; 310 US 150 (1940).

[147] Ibid at 221.

[148] Ibid at 226, n 59.

[149] Ibid at 221 - 223.

[150] Ibid at 224, n 59.

[151] Allison, op cit n 13, at 783.

[152] Kauper, op cit n 104, at 893.

[153] Ross, op cit n 26, at 118.

[154] [1979] USSC 64; 441 US 1 (1979).

[155] Ibid at 8.

[156] Ibid at 9 (citations omitted).

[157] Ibid at 19 - 20.

[158] Ibid at 20.

[159] Ibid at 19.

[160] Ibid.

[161] Ibid at 21 -23.

[162] Ibid at 23.

[163] Columbia Broadcasting System Inc v American Society of Composers, Authors and Publishers, [1980] USCA2 290; 620 F 2d 930 (2nd Cir. 1980), cert denied, 450 U.S. 970 (1981); see also Buffalo Broadcasting Co v American Society of Composers, Authors and Publishers, [1984] USCA2 841; 744 F 2d 917 (2nd Cir.1984) cert denied 469 US 1211 (1985).

[164] Marks & Jacobson, "Price Fixing: An Overview" (1985) 30 Antitrust Bull 199, at 199.

[165] Vogel v American Society of Appraisers, [1984] USCA7 852; 744 F2d 598, 603 (7th Cir. 1984); Halverson, "The Future of Horizontal Restraints Analysis" (1988) 57 Antitrust LJ 33.

[166] Brunet, "Streamlining Antitrust Litigation by "Facial Examination" of Restraints: The Burger Court and the Per Se - Rule of Reason Distinction" (1984) 60 Wash L Rev 1.

[167] Ibid.

[168] Op cit n 93, at 280.

[169] Ross, op cit n 152, at 182.

[170] [1979] USCADC 277; 606 F 2d 1156, 1163. (D.C. Cir. 1979).

[171] [1980] USSC 158; 446 US 643 (1980).

[172] [1979] USCA9 1130; 605 F 2d 1097 (9th Cir. 1979).

[173] Op cit n 178, at 648.

[174] Ibid at 649.

[175] Ibid.

[176] [1982] USSC 122; 457 US 332 (1982).

[177] See for example, Liebeler, "1984 Economic Review of Antitrust Developments: Horizontal Restrictions, Efficiency, and the Per Se Rule" (1986) 33 UCLA Rev 1019; Gerhart, "The Supreme Court and Antitrust Analysis: The (Near) Triumph of the Chicago School" (1982) Sup Ct Rev 319; Harrison, "Price Fixing, the Professions and Ancillary Restraints Coping with Maricopa Country" (1982) 4 Univ Ill L Rev 925; Note, "Arizona v Maricopa County Medical Society: Supreme Court Refuses to Immunize Doctors Against Sting of Sherman Act Section 1 (1983) Wisc L Rev 1203.

[178] [1980] USCA9 685; 643 F 2d 553 (9th Cir. 1980).

[179] Op cit n 184, at 351.

[180] Ibid at 347 - 349.

[181] Ibid at 348.

[182] Ibid at 353.

[183] Ibid at 356 - 357.

[184] Ibid at 364.

[185] Ibid at 362.

[186] Ibid.

[187] Ibid at 366.

[188] Ross, op cit n 26, at 139; Note, op cit n 177.

[189] Ross, op cit n 26, at 140; Liebeler, op cit n 177, at 1048 - 1049; Note, op cit n 185, at

[1226] - 1228.

[190] [1984] USSC 155; 468 US 85 (1984).

[191] Ibid at 105.

[192] Ibid at 106 - 107.

[193] Ibid at 107.

[194] Ibid at 109.

[195] Ibid at 100 - 101 (footnotes omitted).

[196] Ibid at 117.

[197] Ibid at 113 - 114.

[198] Ibid at 109.

[199] Ibid at 110

[200] Justice William Rehnquist joined the dissent.

[201] Op cit n 198, at 120 - 126.

[202] Wood Hutchinson, "Antitrust 1984 : Five Decisions in Search of a Theory" (1984) Sup

Ct Rev 69, at 108.

[203] Liebeler, op cit n 177, at 1050 - 1061.

[204] Op cit n 198, at 114.

[205] Leibeler, op cit n 177, at 1058.

[206] Ross, op cit n 26, at 141.

[207] Bork, op cit n 6, at 435.

[208] [1985] USSC 154; 472 US 284 (1985).

[209] Polk Brothers Inc v Forest City Enterprises Inc [1985] USCA7 1078; 776 F 2d 185 (7th Cir, 1985); Rothery Storage & Van Co v Atlas Van Lines Inc [1986] USCADC 214; 792 F 2d 210 (D.C. Cir, 1986) cert denied, 479 US 1033 (1987); General Leaseways Inc v National Truck Leasing Ass'n [1984] USCA7 965; 744 F 2d 588 (7th Cir, 1984); Blackburn v Sweeney 53 F 2d 825 (7th Cir, 1995).

[210] [1986] USCA11 75; 779 F 2d 592 (11th Cir, 1986) cert denied 479 US 923 (1986).

[211] Ibid at 601.

[212] Ibid at 601 - 602.

[213] Ibid at 602.

[214] Ibid at 599.

[215] Union Shipping NZ Ltd v Port Nelson Ltd [1990] 2 NZLR 602.

[216] [1990] NZHC 61; [1990] 2 NZLR 662, at 700.

[217] [1988] 1 NZLR 530, at 537.

[218] [1988] NZCA 179; [1988] 2 NZLR 352,at 358.

[219] Op cit n 102.

[220] Bork, op cit n 3, at 798.

[221] [1970] NZLR 170.

[222] Ibid at 173.

[223] Ibid.

[224] FAR Bennion, Statutory Interpretation (2nd ed, 1992), p 663.

[225] Areeda, op cit n 15, at 29.

[226] Vary, "Price Fixing : Flawed Past, Uncertain Future" (1995) 3 TPLJ 126; Blakeney & Freilich, "The Per Se Prohibition of Price Fixing in Australia" (1986) 60 ALJ 668.

[227] Symposium, "Private Antitrust Litigation" (1986) 78 Geo LJ 1163

[228] Wood, "Costs and Benefits of Per Se Rules in Antitrust Enforcement" (1993) 38 Antitrust Bull 887, at 895.

[229] Ahdar, "The Competitive Effects and Legality of Maximum Price Fixing" (1989) 13 NZULR 271,at 291); Wirtz, op cit n 72, at 628.

[230] Carstensen, op cit n 127.

[231] See authorities cited at n 127.

[232] Evans & Schmalensee, "Economic Aspects of Payment Card Systems and Antitrust Policy Toward Joint Ventures" (1995) 63 Antitrust LJ 861.

[233] Carlton & Frankel, The Antitrust Economic of Credit Card Networks" (1995) 63 Antitrust LJ 643 (1995); Carlton & Frankel, "The Antitrust Economics of Credit Card Networks: Reply to Evans and Schmalensee Comment" (1995) 63 Antitrust LJ 903.

[234] Note op cit n 29, at 728.

[235] Ibid.

[236] Vary, op cit n 233, at 126.

[237] See for example, Sullivan, "The Viability of the Current Law on Horizontal Restraints" (1987) 75 Cal L Rev 835.

[238] Bork, op cit n 3 and n 6.

[239] Op cit n 111.

[240] Ibid.

[241] Op cit n 107 - 110.

[242] [1982] ATPR, para 40 - 318.

[243] Ibid at 43, 920.

[244] [1983] ATPR, para 40,367

[245] Vary, op cit n 233 ; Blakeney & Freilich, op cit n 233; Warner & Trebilcock, "Rethinking Price Fixing Law" (1993) 38 McGill L J 679, at 713.

[246] Baxt, Trade Practices - "Price "Fixing" and "Maintaining" and a Rule of Reason in

Australian Courts" (1983) 57 ALJ 423, at 424.

[247] Ibid.

[248] Sullivan, op cit n 6.

[249] Op cit n 249, at 43, 920.

[250] Sullivan, op cit n 6, at 200.

[251] Op cit n 249, at 43, 920.

[252] Sullivan, op cit n 6, at 200.

[253] Op cit n 249, at 43, 920.

[254] Sullivan, op cit n 6, at 200.

[255] Ibid at 197 - 198.

[256] Ibid at 205.

[257] Ibid at 206 - 207.

[258] Ibid at 171.


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