AAI Urges FTC to develop guidelines for structured rule of reason, in light of California Dental--an AAI column

Jun 08 1999
Commentaries

The aai column

Prosthetics after California Dental Association

by Albert A. Foer President American Antitrust Institute

The Supreme Court on May 24 issued its opinion in the case of California Dental Association v. FTC (No. 97-1625). The first part of the opinion unanimously upheld the FTC's jurisdiction over non-profit associations, provided that there is a non-trivial economic benefit for the association members. i.e., a non-profit that provided no bottom-line benefit to its members would not be subject to the FTC. This holding was virtually compelled by the statutory language and is important only as a dog that did not bark: it would have been dreadful had the Court taken away the extremely useful jurisdiction over professionals and trade associations which the FTC has taken for granted for years.

The second part of the case is more complex. The FTC had utilized a "quick look" or "structured rule of reason" approach to the facts of the case. This is an evidentiary methodology somewhere between a per se rule, which ignores any pro-competitive arguments once it is apparent that the violation is of a sort that is unlikely to be defensible, and a rule of reason approach, which invites an endless array of evidence in order to balance efficiency benefits against competitive losses. By a 5-4 margin, with the Court's moderates (Breyer, Ginsburg, Stevens, Kennedy) in the minority, it was held that a "quick look" methodology was not sufficient in this case. Breyer's dissent showed that had a rule of reason approach been applied, the defense would have lost. (So much for Justice Breyer as the Court's undisputed leader on antitrust matters.)

The Court did not say that "quick look" can never be used and -- as far as I can tell -- it made no effort to define what a quick look looks like or when it can be used. The practical effect may be to wipe out anything between per se and rule of reason trials because it would be too risky to try a case on an in-between basis.

Practical people know that where rule of reason applies, the defendant has an enormous advantage. Rule of reason entails massive discovery, lengthy trial, and ample expert testimony that what the defendant did had or did not have legitimate business purposes that do or do not outweigh the anticompetitive effects. Rule of reason means the government must spend more resources per case, hence can bring fewer cases. The private bar has to apply a case-deterring risk/benefit analysis whenever rule of reason may be involved. Finally, in our system, it is appropriate to generalize that defendants in antitrust cases will most often be large companies and that plaintiffs (in interest, if not always in formality) will be consumers and smaller businesses. Therefore, this decision (at a time when the realm of per se violations is shrinking) is going to shift antitrust enforcement in the favor of big corporations and against consumers and smaller businesses.

One could second-guess the FTC for trying to push the envelope in this case. It could have presented more evidence, but apparently made the decision to see how far it could simplify things. The gamble failed and it is possible that a useful methodology has been killed off. Perhaps the agencies will have to do more work per case than might have been necessary, not necessarily in their behind-the-scenes preparation where they generally try to work through a rule of reason analysis to inform their prosecutorial discretion - but in litigation. The lack of clarity as to when a "quick look" would be allowed and what it would entail was itself an obstacle to an efficiently operating system.

What to do? Since the Court did not say that "quick look" can never be applied, it is possible that expertly-crafted agency guidelines on particular types of violations could gain judicial sanction, much as the merger guidelines have. Constraining administrative and judicial discretion through structured rule of reason guidelines would make it feasible to try relatively familiar non-per-se violations in a way that is more efficient without being unfair. A good place to start would be the FTC's joint venture guidelines now being drafted.