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Last July the Federal Trade Commission agreed with an administrative law judge who said that PolyGram Records and Warner Bros. Records, Inc., entered into a “naked agreement to fix prices and restrict output” of some recordings. The disks in question were recorded by the opera stars known as the “Three Tenors”: Jos� Carreras, Placido Domingo, and Luciano Pavarotti. To the casual observer, the FTC’s use of the word “naked” to describe an agreement might seem like an odd rhetorical, even operatic, flourish. How can you tell if a contract is naked or clothed? The traditional meaning of the word “naked” is “undisguised” or “unembellished,” much like the pejorative use of “bare,” as in “a bare allegation.” But that makes little sense in the FTC case; surely the commission was not suggesting that an agreement to fix prices would be better if it were disguised. No, the use of the word “naked” in antitrust law is slightly more complicated. In the Three Tenors case, PolyGram and Warner formed a joint venture to distribute a 1998 recording by the three masters of bel canto. The joint venture itself wasn’t controversial, but the FTC objected to an alleged side agreement in which PolyGram and Warner agreed to refrain from promoting earlier recordings by the Three Tenors. By referring to the side agreement as “naked,” the FTC was using a shorthand reference to a long line of authority that distinguishes between “naked” restraints of trade, which are bad, and “ancillary” restraints, which are good or at least tolerable. If business rivals agree to set prices, allocate customers, or divide sales territories between themselves, then that’s a naked restraint. But if the rivals agree on restrictions that are ancillary to a legitimate transaction, then it’s probably okay. An example of an ancillary restraint might be a noncompetition agreement that is part of the sale of a business. Where does this use of the word “naked” come from? It has been used metaphorically in legal writing for over a century: Naked gets its own entry, for example, in Bouvier’s 1856 Legal Dictionary, where it is defined as “a thing that is not complete.” The distinction between naked and ancillary restraints is usually attributed to the landmark 1898 opinion of Judge William Howard Taft in U.S. v. Addyston Pipe & Steel Co. The only problem with this attribution is that Judge Taft himself, while using the term “ancillary,” never actually uses the word “naked.” Nor does “naked” appear in the Supreme Court opinion affirming the decision of the future president. A search of Supreme Court antitrust cases turns up no “naked” references until the 1963 decision in White Motor Co. v. U.S., in which Justice William O. Douglas states: “Horizontal territorial limitations . . . are naked restraints of trade with no purpose except stifling competition.” And there the trail goes cold because Justice Douglas gives no citation for his use of “naked.” Historically, the most likely origin of “naked agreement” is the Latin nudum pactum, literally, a “nude contract.” A nude contract is one that is not supported by (or “clothed with”) consideration. This derivation makes sense, because an ancillary agreement would be “clothed” with whatever consideration supports the main transaction. A naked agreement, however, would stand on its own with no consideration, save the desire of the parties to stifle competition. The concept of a nude contract in English law goes back at least to the eighteenth century, when Sir William Blackstone wrote: “[A] consideration of some sort or other is so absolutely necessary to the forming of contract that a nudum pactum . . . is totally void in law.” Beyond all the high-sounding phrases, the motivation for both naked and ancillary restraints is usually a little more down-to-earth. “It’s always the money,” as William Gaddis wrote in his legal satire, A Frolic of His Own; “the rest of it’s nothing but opera.”
Adam Freedman, an attorney at Schulte Roth & Zabel, writes the “Dear Diary” column for Corporate Counsel sibling publication The New York Law Journal.

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