The current antitrust jurisprudence concerning exclusive dealing is a mess. The Supreme Court has been silent for over 50 years as appellate courts have struggled looking for a standard that is straightforward, administrable and benefits the ultimate goals of the Sherman Act – protecting competition, not competitors. There are few bright line rules and there are significant concerns of both over-enforcement and under-enforcement. No case better demonstrates this tension than the FTC’s case against McWane, a pipe fitting company, for exclusivity arrangements.
The case sounds simple enough. McWane the largest firm in the ductile pipe fitting market allegedly used an exclusivity arrangement to tie up customers and prevent smaller rivals from effectively competing. After 17 months of litigation before an FTC ALJ, in 2013 the Commission found that McWane unlawfully maintained its monopoly in the domestic fittings market by engaging in a “Full Support Program” that supposedly required customers to buy all domestically produced iron pipe fittings from McWane, with exceptions, or the customer could lose rebates or be cut off from future purchases of domestic iron pipe fittings.
The case reminds you of the difficulty of what John Adams called “hard facts” and there are several hard facts that may raise concerns on appeal. The program at issue existed only for roughly 5 months. McWane’s key competitor Star “clearly” and successfully entered the market with 130 customers, including dozens of its own exclusive customers, and millions of dollars in sales in its first full year in business. There were significant sales under the program’s exceptions. Finally, there was no direct evidence that McWane’s alleged “exclusive dealing” led to higher prices or reduced output relative to a market without the challenged agreements. Not surprisingly, then, the FTC staff presented no economic test demonstrating that Star was “excluded” and no test showing any harm to consumers. It was facts like these that caused Commissioner Rosch, typically an enforcement hawk, to dissent at the complaint stage and at summary judgment cautioning that the claim was inconsistent with the law.
Back to the problems with the law. The Sherman Act, as written, declares illegal any restraint of trade (making almost any contract illegal). However, the Supreme Court solved this problem by limiting the law to only punishing activity that runs afoul of the goal of Congress of preserving competition: “[t]he 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.”
Unfortunately, the announcement of this limiting principle of antitrust law did not solve all problems in enforcement or jurisprudence. Exclusive dealing is a perfect example of an area of law where a test has threatened to swallow the underlying purpose of the law. In exclusive dealing the courts traditionally have tried to determine the percentage of market foreclosed to competitors as the determinant of antitrust liability. Foreclosure might be a clue in establishing harm to competition, but it doesn’t tell the whole competitive story. As antitrust lawyer and scholar Jonathon Jacobson has stated – “be really wary of antitrust lawyers arguing that the pertinent question is the degree of ‘foreclosure’ when the case involves allegations of exclusionary practices.” This is because foreclosure analysis “originated as a device for lessening the plaintiff’s burden of proof and making challenges to exclusive dealing easier to maintain.”
In other words calculating foreclosure is at best an initial screening mechanism, not the ultimate factor whether there is competitive harm.
Advances in economic and legal thinking have helped modernize the evaluation of distribution restraints overall in the past few decades. Restraints such as vertical price maintenance are now evaluated on a balanced rule of reason approach with the full evaluation of efficiencies.
However, the FTC decision in McWane stands as notable step backward in modern vertical restraint jurisprudence. McWane’s Full Support Program was a response to market conditions (primarily, a flood of cheap imports from China and a host of other countries outside the U.S.) that had driven every other domestic iron pipe-fitting supplier with a full-line foundry out of business and threatened to close McWane’s domestic iron pipe fittings foundry. In finding a violation, the Commission relied entirely on anecdotal evidence of McWane’s supposed intent, and a very small smattering of customer views, to find McWane liable for unlawful exclusive dealing in the absence of any direct evidence of actual anticompetitive effects in the market. There was no direct evidence showing McWane’s conduct had a deleterious effect on price or output and the record showed that a competitor successfully entered the market for domestically produced iron pipe fittings while the Full Support Program was in place.
Commissioner Wright, in a stiff 52-page dissent, outlines the problem in his dissent and offers a reasonable path forward with greater fidelity to the purposes of the law based on modern antitrust theory. Commissioner Wright would require an analytical link between the foreclosure and harm to competition, such as the raising of rivals costs sufficiently to impact the competitive process. Direct evidence can also be used to show that the exclusive dealing arrangement caused prices to rise and output to fall relative to what they would be without the arrangements. A defendant should not be liable under the antitrust laws without such an analytical link or direct evidence. To find otherwise ignores the fundamental limiting principle of antitrust law – that competition must be harmed.
The McWane decision is on appeal. The appellate court will need to pay attention to Wright’s dissent in order to ground exclusive dealing law in a sound theory of competitive harm. Wright’s dissent is not a Commissioner’s wish for the law, but a well-supported roadmap of modern exclusive dealing jurisprudence from which the FTC has strayed. The Commission’s test is not simply a case of missing the forest for the trees; it’s like calling a tree a forest.