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On Dec. 7, the U.S. Supreme Court agreed to decide two antitrust cases. One case, Credit Suisse First Boston v. Billing, No. 05-1157, questions how much implied antitrust immunity the federal securities laws and regulation by the Securities and Exchange Commission confer on investment banking firms collaborating in the underwriting of securities offerings. In the other case, Leegin Creative Leather Products v. PSKS, No. 06-480, the court will have the opportunity finally to reverse the long-outmoded rule-stemming from the court’s decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) -that resale price maintenance is illegal per se. Few people are likely to recognize any connection between the two cases. But former students in my antitrust classes should see some. 1953 case addressed price-fixing by underwriters In teaching law students about horizontal restraints of trade, I used to find it instructive to have them consider the facts and holding in U.S. v. Morgan, 118 F. Supp. 621 (S.D.N.Y. 1953). In this relatively minor case, the government challenged many aspects of the underwriting of corporate securities, and the district court, in a very lengthy opinion, approved the underwriters’ general practice of agreeing in advance on the price at which they would sell their respective allotments of the offering. It was also typical for underwriters to authorize the lead underwriters to repurchase securities, at the syndicate’s collective expense, if that was necessary to keep the market price from falling below the offering price. When the underwriters finished selling their allotments and ceased any market-stabilizing activities, the customers who had bought at the fixed price faced the possibility of significant losses. The court in Morgan saw no problem here, either. How such competition-limiting arrangements might be justified under the antitrust laws proved a worthy subject for classroom discussion. There were always several students in the class who knew something about securities offerings and were willing to defend the underwriters’ price-fixing on the merits. They found it surprisingly hard to do so, however. First, they had to escape the per se rule against naked horizontal price-fixing, about which they had just learned. I made it difficult for them to invoke the rule of reason by reminding them that the rule directs attention not to a restraint’s reasonableness as a matter of public policy, but only to its net effect on competition, which black-letter principles treat as a function of power, purpose and effect. Analyzed in these terms, this price-fixing agreement was not easy to defend. The underwriters certainly seemed to enjoy market power since they were, initially at least, the sole sellers of the security in question, clearly a unique product. Also, the clear effect of their practices was to deny consumer-investors the benefits of competition, exposing them to significantly increased risks. The students also found it hard to argue that underwriters are engaged in a pro-competitive joint venture and that their agreements restricting competition among themselves are defensible as “ancillary restraints,” essential to achieving an overriding and legitimate business purpose. The first hurdle to this defense was the collaborators’ market power. Cooperating competitors seldom succeed with efficiency defenses if, collectively, they would monopolize the market in question. Their position would be even weaker if their alleged pro-competitive business purpose could have been accomplished in some “less restrictive alternative” way. Moreover, the only claim the underwriters could make was that their price-fixing agreement reduced the financial risks they would face if they had to compete in unloading their allotments. That only made their price-fixing seem more like a naked, rather than an ancillary, restraint. Naturally, we found some other things to say about the possible merits of the arrangement, and I mentioned that the regulatory scheme provided at least some protection for investors and possibly for the whole arrangement (even though implied exemption was not the subject at hand). In the end, however, I left the class thinking that even though the arrangements appeared to work reasonably well in practice, the horizontal price-fixing agreement could not stand up under rigorous rule-of-reason analysis. But I also told them they would see Morgan again. When we finally reached the topic of resale price maintenance later in the course, I introduced the many reasons for believing that the old Dr. Miles rule, though still nominally intact as precedent, was seriously out of keeping with modern antitrust thinking. In the watershed case, Continental TV v. GTE Sylvania, 433 U.S. 36 (1977), for example, the Supreme Court had sharply shifted antitrust law’s focus away from intrabrand competition and stressed the overriding importance of interbrand competition. I tried to show why a firm manufacturing a distinctive (usually branded) product in a generally competitive market would want to have some say about how and where and at what price its dealers were selling it. I even went so far as to suggest that the students might view as the true relevant market the market for the services of dealers, in which manufacturers seek to hire distributors who will do the marketing job in the way the manufacturer wants it done. If the situation is viewed this way, the true restraints of trade suddenly appear to be the law’s own prohibitions against vertical restrictions on dealer practices. Of course, young people are strongly inclined to view these situations as the consumers they are and to want things arranged so that they can buy products at discount prices. I could therefore always count on the class to resist the argument, which was increasingly appearing in the cases they read, that manufacturers should be free to adopt a marketing strategy under which discounting would be discouraged, if not precluded. It was never easy to convince them that interbrand competition provided all the protection to which they, as consumers, were entitled. A good way to get around the students’ self-interest as consumers was to focus on a case involving something other than a consumer good. Morgan was just such a case, and its relevance could be quickly established by making the key point that our earlier analysis had ignored-namely, that the restraints imposed on members of a syndicate of underwriters are in fact vertical, not horizontal. Thus, the product the underwriters are selling (the security being issued) originates from a single source, the issuer, and is unique in much the same way that a branded consumer good is unique. At least in theory, an underwriting involves an issuer’s sale of its securities to underwriters whom it selects for resale by them at a price that the issuer itself, in the last analysis, determines. Thus, the old Morgan case gave me a good vehicle for conveying important insights about the law of both horizontal and vertical restraints to law students. It was helpful first in developing their skills in applying the rule of reason to horizontal restraints. Then, later, it proved useful in demonstrating the logic of allowing a seller of a unique product facing effective interbrand competition to organize a joint venture with distributors to market the product in the most effective way, with the seller, not the resellers, setting the price. Once they recognized the benefits of resale price maintenance in the securities context, it was much easier to persuade them that the per se rule of Dr. Miles made no economic sense. They could also see how resale price maintenance could be reconciled with the competition policy of the Sherman Act. Connecting the cases on the high court’s docket Although there is no reason to think that the Supreme Court granted writs of certiorari in CSFB and Leegin with any thought that the two cases had anything in common, the foregoing description of my pedagogical use of Morgan suggests that the cases can be usefully thought about together. The investment banking industry has long relied on the implied antitrust exemption being tested in CSFB in part because the Dr. Miles per se rule against resale price maintenance precluded any argument that price-fixing provisions in agreements among underwriters were in fact vertical, not horizontal, restraints and defensible as such. But if the court were now to overrule Dr. Miles, underwriting arrangements might look very different for antitrust purposes and like plausible candidates for analysis under the rule of reason. Indeed, the plaintiffs in CSFB might argue that without Dr. Miles, courts would not have had to discover an implied exemption in order to uphold the restraints employed in underwriting that are both vertical in nature and efficiency-enhancing. Moreover, because the specific restraints challenged in CSFB do not appear to originate with issuers acting in their own interest, the plaintiffs have a strong argument that courts are not precluded from scrutinizing them under the Sherman Act. Implied repeal of the antitrust laws for securities underwritings regulated by the SEC, they could argue, is no longer necessary to make the regulatory scheme (and the underwriting syndicates it contemplates) work. Indeed, antitrust law seems essential to ensure that the public offering of a security is controlled principally by its issuer, not by underwriters acting in concert. By the same token, lawyers seeking to overturn the Dr. Miles rule in Leegin might benefit by citing the efficiency and long-standing legitimacy of price-maintenance restrictions imposed by issuers on underwriters in initial public offerings. Although these restrictions have never before been recognized as the vertical restraints they are, the logic of, and experience with, resale price maintenance in the underwriting context should help to persuade the Supreme Court-as they have persuaded many of my students-that vertical price-fixing often makes good economic sense and should no longer be subject to a per se rule. Clark C. Havighurst is the William Neal Reynolds Emeritus Professor of Law at Duke University.

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