The U.S. Department of Justice Antitrust Division’s case against Kemp Associates, an heir location service firm, has focused attention on the growing role of the rule of reason in the defense of criminal antitrust prosecutions. United States v. Kemp & Assocs., No. 17-1418 (10th Cir. Oct. 31, 2018) (Kemp II).
Under stated policy, the Antitrust Division does not criminally prosecute cases under the more permissive rule of reason standard, but reserves its discretion only to charge conduct considered to be per se illegal—that is, restraints of trade classified as unlawful without assessing potential precompetitive benefits and overall market impact. So a judicial finding that charged conduct comprises an offense that should be evaluated under the rule of reason effectively amounts to a dismissal. The trial court’s ruling in Kemp precluding antitrust prosecutors from proceeding on a per se theory, and the Tenth Circuit’s criticism of that ruling, provide unique insight into the modern use of the Sherman Act as a criminal statute.
The Sherman Act, and in particular a per se violation of the Sherman Act, often functions as a blunt prosecutorial instrument. The Sherman Act tends to limit the per se rule of illegality to those restraints among horizontal competitors, with which courts have had considerable experience and where the restraints are deemed facially anticompetitive and lack any plausible business justification. But such condemnation is not static. The principles animating antitrust law have evolved with the century-old Sherman Act, dynamically moving from the formalistic approach towards horizontal price-fixing agreements applied in United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 224 n.59 (1940), to the recognition that not all price-fixing arrangements unreasonably eliminate competition in Broadcast Music v. Columbia Broadcasting System, 441 U.S. 1, 23 (1979), to more complex notions that emphasize economic realities of business relationships as set forth in Business Electronics v. Sharp Electronics, 485 U.S. 717, 726 (1988).
As with antitrust doctrines themselves, the judgment that guides prosecutorial discretion should take into consideration the complexities and nuances of markets. This article reviews a series of criminal antitrust cases in which indicted defendants have challenged the application of the per se rule of illegality, with only a small degree of success. Still, to the extent the Sherman Act continues to be a weapon of choice for U.S. prosecutors, practitioners should consider whether the rule of reason can function as a useful tool in pre-charging discussions and, if need be, seeking dismissal of an indictment.
Policy and Provenance
The DOJ’s policy on prosecuting antitrust crimes focuses, as a matter of institutional discretion, on per se unlawful conduct. The current version of the U.S. Attorneys’ Antitrust Manual provides that “current Division policy is to proceed by criminal investigation and prosecution in cases involving horizontal, per se unlawful agreements such as price fixing, bid rigging, and customer and territorial allocations.” U.S. Dep’t of Justice, Antitrust Division, Manual at III-12 (5th ed. 2018). The Antitrust Manual, however, states that “[t]here are a number of situations where, although the conduct may appear to be a per se violation of law, criminal investigation or prosecution may not be appropriate.” According to the Manual, those “situations may include cases in which (1) the case law is unsettled or uncertain; (2) there are truly novel issues of law or fact presented; (3) confusion reasonably may have been caused by past prosecutorial decisions; or (4) there is clear evidence that the subjects of the investigation were not aware of, or did not appreciate, the consequences of their action.”
The DOJ’s policy descends from the Supreme Court’s century-long experience with the Sherman Act, and its classification of federal antitrust violations. Under the Sherman Act, two distinct standards govern the legality of agreements that restrain trade: the rule of reason and per se unlawfulness.
Antitrust law’s rule of reason was born of technical necessity. By its terms, §1 of the Sherman Act prohibits “[e] very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade.” 15 U.S.C. §1. Despite the expansive language of the statutory prohibition, the Supreme Court has held that §1 prohibits only agreements that unreasonably restrain trade. Board of Trade of Chicago v. United States, 246 U.S. 231, 238 (1918); Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 58-60 (1911). With the rule of reason, antitrust courts assumed a prudential role in administering the scope of antitrust violations, applying a factual inquiry weighing legitimate justifications for a restraint against any anticompetitive effects. Under the rule of reason, “the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.” Continental T.V. v. GTE Sylvania, 433 U.S. 36, 49 (1977).
From judicial experience with certain business arrangements and trade restraints emerged the rule of “per se” illegality. Under the per se approach, the Supreme Court divined that there are “certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” Northern Pacific R. Co. v. United States, 356 U.S. 1, 5 (1958). The per se rule thereby is confined to those categories of restraints that “facially appear[] to be one that would always or almost always tend to restrict competition and decrease output.” NCAA v. Board of Regents, 468 U.S. 85, 100 (1984). “Per se liability is reserved for only those agreements that are ‘so plainly anticompetitive that no elaborate study of the industry is needed to establish illegality.’” Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006) (quoting National Soc. of Prof. Eng’rs v. United States, 435 U.S. 679, 692 (1978)). Such per se prohibited practices include horizontal price fixing and output limitations, horizontal market allocation, and group boycotts. Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982); United States v. Topco Assocs., 405 U.S. 596 (1972); Klor’s, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207 (1959).
Notably, however, judicial understanding of the redeeming virtues of certain business arrangements has evolved over time. For example, in Northwest Wholesale Stationers, Inc. v. Pacific Stationary & Printing Co., 472 U.S. 284 (1985), a wholesale purchasing cooperative’s expulsion of a retailer did not constitute a per se illegal group boycott because the cooperative did not possess market power or enjoy exclusive access to an element essential to effective competition. Contrary to other group boycott cases subject to per se condemnation, the cooperative arrangements at issue in Northwest Wholesalers were “justified by plausible arguments that they were intended to enhance overall efficiency and make markets more competitive.” Id. at 294. The Supreme Court arrived at this result despite some questions as to whether nonmembers were disadvantaged in price competition. Id. at 286, 295 n.6.
In another example, since the Supreme Court’s 1986 decision in Albrecht v. Herald Co., 390 U.S. 145 (1968), long-standing precedent held that vertical maximum price fixing was a per se violation of the Sherman Act. Nearly 30 years later, however, in State Oil Co. v. Khan, the Supreme Court reconsidered and then overruled Albrecht, explaining that “[l]ow prices … benefit consumers regardless of how those prices are set, and so long as they are above predatory levels, they do not threaten competition.” 522 U.S. 3, 15 (1997). Even more dramatically, for nearly 100 years, U.S. courts regarded the decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 383 (1911), as establishing a per se rule against a vertical agreement between a manufacturer and its distributor to set minimum resale prices. In 2007, the Supreme Court overruled Dr. Miles, citing among other things the “economics literature” which is “replete with precompetitive justifications for a manufacturer’s use of resale price maintenance” and therefore casting doubt on the conclusion that the practice meets the criteria for the per se rule. Leegin Creative Leather Prods. v. PSKS, 551 U.S. 877, 889 (2007). Against this backdrop, a series of recent cases reveal the interplay between criminal antitrust and the rule of reason.
‘U.S. v. Kemp & Associates’: Heir Location Services
In August 2016, a federal grand jury in Utah returned a single count indictment against Kemp & Associates, a provider of heir location services, and its vice president, for agreeing with a competitor to allocate customers between them. As alleged, Kemp and a competing firm arranged how to allocate customers when both companies researched a potential heir. According to the indictment, the arrangement provided that when both companies contacted the same unsigned heir to the estate, the company that first contacted that heir would be allocated certain remaining heirs to that estate who has yet to sign a contract with a service provider. The first-contacting company in turn would pay its competitor a portion of the contingency fees ultimately collected from the allocated heirs. The Antitrust Division charged this conduct criminally as a straightforward customer allocation case, treated as per se illegal under the Sherman Act.
Before the trial court in the District of Utah, the Kemp defendants moved for an order that the antitrust case would proceed under the rule of reason, as opposed to the per se rule, and to dismiss the indictment. The Kemp defendants acknowledged that customer allocation agreements generally warrant per se treatment under the antitrust laws, but nonetheless argued that “in the typical context of heir location business the [agreement] is far from an ordinary customer allocation, and instead bears more in common with joint ventures analyzed under the rule of reason.” Kemp II, No. 17-1418, slip op. at 5. At oral argument, the district court ruled that the rule of reason governed the conduct charged in the indictment and, upon a motion for consideration, adopted the Kemp defendants’ proposed order regarding the applicability of the rule of reason and, in addition, dismissed the indictment as barred by the five-year statute of limitations. United States v. Kemp & Assocs., Case No. 2:16 CR 403 (DS), 2017 WL 3720695 (D. Utah Aug. 28, 2017) (Kemp I).
On the substantive antitrust matters, the district court appeared reluctant to apply the strict per se rule because the alleged arrangement was “structured in an unusual way,” “affected a small number of estates,” and “occurred in a relatively obscure industry (heir location services) with an unusual manner of operation.” Kemp II, slip op. at 13-14. Ultimately, the court concluded that because the agreement applied “only where two firms had already invested significant resources investigating the same estate,” and “provided for firms to integrate their efforts going forward, specifically in administering the probate process of the estate, which needed to be done only once,” the agreement “on [its] face would not necessarily restrict competition or decrease output, but instead contained efficiency-enhancing potential.” Id. at 14.
On appeal, in an unusual decision, the Tenth Circuit felt bound by “jurisdictional restraint” and ruled that it was “powerless” to address the substantive antitrust law question before it. The Tenth Circuit nonetheless reversed the district court’s dismissal of the indictment on statute of limitations grounds, dismissed the Antitrust Division’s appeal for lack of appellate jurisdiction and remanded for further proceedings consistent with a series of suggested considerations for the district court on the applicability of the per se rule. Id. at 2, 11, 23-24. In particular, the Tenth Circuit expressed that it was “sympathetic to the Government’s position” but refused to address the merits because there were no grounds to entertain an interlocutory appeal—as the only effect of the underlying order was “to foreclose the Government’s preferred avenue of trying the case” under a per se theory—or grounds to grant a writ of mandamus. Id. at 16, 20. Still, recognizing the district court’s order “may have the practical effect of dismissing this case unless the government chooses to depart from its position of declining to prosecute this [case] under a rule of reasons approach,” the Tenth Circuit offered an “analytical framework” to guide the district court “should it decide to reassess its rule of reason on remand.” Id. at 18, 20, 24. Noting that “were the merits of the rule of reason order before us we might very well reach a different conclusion than did the district court,” the Tenth Circuit worked its way through each of the distinguishing elements cited by the district court— that it “only applied to new customers,” “affected a small number of estates,” or was a “relatively obscure industry”— and found them either “unpersuasive” or “irrelevant” as a matter of law. Id. at 21-24.
‘United States v. Joyce’: Foreclosed Real Property
In December 2014, a federal grand jury returned an indictment charging Thomas Joyce and four co-conspirators with one count of conspiring to rig bids at public real-estate foreclosure auctions in Contra Costa County, California, in violation of §1 of the Sherman Act. Rather than submitting competing bids for the same property, as alleged, Joyce and his alleged co-conspirators would designate one winner among them to purchase selected properties at public auctions at artificially suppressed prices. The indictment further alleged that, after the conclusion of the public auction for a particular property, the conspirators would hold a separate, private auction called a “round,” wherein they would bid for the property by the amount they were willing to pay over the public auction winning price. The indictment in turn alleged that the winner of the round would pay the amount of his private bid to the round participants and take title to the property. Prior to trial, Joyce filed a motion asking the district court to find the per se rule inapplicable to the bid-rigging charges. The motion was denied, Joyce was convicted and he then was sentenced to imprisonment for twelve months and one day.
On appeal, Joyce argued that the district court erred by denying his motion and refusing to admit evidence that allegedly showed the precompetitive benefits of his conduct. In particular, Joyce argued that the per se rule should not apply to the charged conduct because it involved “a few participants in a narrow set of public foreclosure auctions” and as a result did not have any “demonstrable effect on the pricing or quantity of the real estate sold.” United States v. Joyce, 895 F.3d 673, 677 (9th Cir. 2018). The Ninth Circuit summarily rejected Joyce’s arguments, holding that bid-rigging is a classic antitrust offense and the “per se rule eliminates the need to inquire into the specific effects of certain restraints of trade.” Id.
‘United States v. Usher’: Foreign Exchange Markets
In January 2017, three traders at global banks were charged in the Southern District of New York in a onecount indictment with a conspiracy to fix prices and rig bids in the FX Euro- Dollar spot market in violation of §1 of the Sherman Act. The traders moved to dismiss the indictment on the grounds that the charged conduct was not per se unlawful under the antitrust laws, among other things. The traders argued that: (1) the indictment did not squarely allege that the traders were consistently horizontal competitors in the FX spot market; (2) the courts lacked sufficient experience with FX trading market necessary to support a determination that the alleged conduct is per se unlawful; and (3) the alleged trading conduct was not plainly anticompetitive, as it centered on exchanges of information not presumptively unlawful under the antitrust laws.
The district court summarily rejected each of those arguments. See United States v. Usher, No. 17 Cr. 19 (RMB), 2018 WL 2424555 (S.D.N.Y. May 4, 2018). Referencing the experience of Second Circuit courts with financial benchmarks and reference rates, the district court held that “[c]ourts have long held that horizontal price-fixing conspiracies are per se illegal under the Sherman Act when they include agreement among competitors ‘formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price.’” Id. at *3-4.
On Oct. 26, 2018, the three traders were acquitted following a jury trial.
Overreach or Gradual Change?
A common theme in these three criminal cases is the prosecution’s reliance on the Supreme Court’s 1940 decision in Socony-Vacuum to press the courts to adopt the rule of per se illegality. In Socony-Vacuum, numerous oil companies were convicted under the Sherman Act for conspiring to artificially maintain spot market prices of gasoline in the Midwest by arranging for purchases of distress gasoline. Even though the members of the alleged conspiracy “were in no position to control the market,” the Supreme Court upheld the convictions because “[u]nder the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commence is illegal per se.” Socony-Vacuum, 310 U.S. at 221, 223. Reasoning that price is the “central nervous system of the economy,” the Supreme Court concluded that “[w] hatever economic justification particular price-fixing agreements may be thought to have, the law does not permit an inquiry into their reasonableness.” Id. at 226 n.59.
Notably, however, in another Sherman Act ruling issued no more than two weeks after Socony-Vacuum, the Supreme Court seemed to retreat from this static position in Apex Hosiery Co. v. Leader, 310 U.S. 469 (1940). Drawing on the common law and cases decided since the Standard Oil case in 1911, the Supreme Court concluded that “the restraint, actual or intended, prohibited by the Sherman Act are only those which are so substantial as to affect market prices.” Id. at 500. Certainly, the unfettered vitality of Socony-Vacuum should not be accepted in light of the modern analytical framework set out in Broadcast Music, Inc. v. CBS, where the Supreme Court expressly determined that some horizontal arrangements that literally fix prices have substantial merit and must be subject to a more searching analysis of competitive impact. 441 U.S. at 8-9.
The Sherman Act is not a general conspiracy statute in the form, for instance, of §371 of Title 18. The per se prohibition depends on a taxonomy of a “restraint of trade” consistent with accepted economic principles and market realities, not simply any agreement resulting in harm to interstate commerce. Thus, while recent efforts by defendants charged with antitrust crimes to seek refuge in the rule of reason have been meet with only limited success, this is an area to watch as prosecutors continue to apply the Sherman Act in highly regulated and specialized markets.
