Sherman Antitrust Act (federal preemption)

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To determine whether the Sherman Antitrust Act preempts a state law, courts will engage in a two-step analysis, as set forth by the Supreme Court in Rice v. Norman Williams Co..

  • First, they will inquire whether the state legislation "mandates or authorizes conduct that necessarily constitutes a violation of the antitrust laws in all cases, or ... places irresistible pressure on a private party to violate the antitrust laws in order to comply with the statute." Rice v. Norman Williams Co., 458 U.S. 654, 661; see also 324 Liquor Corp. v. Duffy, 479 U.S. 335 (1987) ("Our decisions reflect the principle that the federal antitrust laws pre-empt state laws authorizing or compelling private parties to engage in anticompetitive behavior.")
  • Second, they will consider whether the state statute is saved from preemption by the state action immunity doctrine (aka Parker immunity). In California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980), the Supreme Court established a two-part test for applying the doctrine: "First, the challenged restraint must be one clearly articulated and affirmatively expressed as state policy; second, the policy must be actively supervised by the State itself." Id. (citation and quotation marks omitted).

The antitrust laws allow coincident state regulation of competition.[1] The Supreme Court enunciated the test for determining when a state statute is in irreconcilable conflict with Section 1 of the Sherman Act in Rice v. Norman Williams Co.. Different standards apply depending on whether a statute is attacked on its face or for its effects.

  • A statute can be condemned on its face only when it mandates, authorizes or places irresistible pressure on private parties to engage in conduct constituting a per se violation of Section 1.[2]
If the statute does not mandate conduct violating a per se rule, the conduct is analyzed under the rule of reason, which requires an examination of the conduct's actual effects on competition.[3] If unreasonable anticompetitive effects are created, the required conduct violates Section 1[4] and the statute is in irreconcilable conflict with the Sherman Act.[5] Then statutory arrangement is analyzed to determine whether it qualifies as "state action" and is thereby saved from preemption.[6]

Rice sets out guidelines to aid in preemption analysis. Preemption should not occur "simply because in a hypothetical situation a private party's compliance with the statute might cause him to violate the antitrust laws."[7] This language suggests that preemption occurs only if economic analysis determines that the statutory requirements create "an unacceptable and unnecessary risk of anticompetitive effect,"[8] and does not occur simply because it is possible to use the statute in an anticompetitive manner.[9] It should not mean that preemption is impossible whenever both procompetitive and anticompetitive results are conceivable.[10] The per se rule "reflects the judgment that such cases are not sufficiently common or important to justify the time and expense necessary to identify them."

Another important, yet, in the context of Rice, ambiguous guideline regarding preemption by Section 1 is the Court's statement that a "state statute is not preempted by the federal antitrust laws simply because the state scheme might have an anticompetitive effect."[11] The meaning of this statement is clarified by examining the three cases cited in Rice to support the statement.[12]

In New Motor Vehicle Board v. Orrin W. Fox Co., automobile manufacturers and retail franchisees contended that the Sherman Act preempted a statute requiring manufacturers to secure the permission of a state board before opening a new dealership if and only if a competing dealer protested. They argued that a conflict existed because the statute permitted "auto dealers to invoke state power for the purpose of restraining intrabrand competition."
In Exxon Corp. v. Governor of Maryland, oil companies challenged a state statute requiring uniform statewide gasoline prices in situations where the Robinson-Patman Act would permit charging different prices. They reasoned that the Robinson-Patman Act is a qualification of our "more basic national policy favoring free competition" and that any state statute altering "the competitive balance that Congress struck between the Robinson-Patman and Sherman Acts" should be preempted.
In both New Motor Vehicle and Exxon, the Court upheld the statutes and rejected the arguments presented as
Merely another way of stating that the . . . statute will have an anticompetitive effect. In this sense, there is a conflict between the statute and the central policy of the Sherman Act -- 'our charter of economic liberty'. . . . Nevertheless, this sort of conflict cannot itself constitute a sufficient reason for invalidating the . . . statute. For if an adverse effect on competition were, in and of itself, enough to render a state statute invalid, the States' power to engage in economic regulation would be effectively destroyed.[13]
This indicates that not every anticompetitive effect warrants preemption. In neither Exxon nor New Motor Vehicle did the created effect constitute an antitrust violation. The Rice guideline therefore indicates that only when the effect unreasonably restrains trade, and is therefore a violation, can preemption occur.
The third case cited to support the "anticompetitive effect" guideline is Joseph E. Seagram & Sons v. Hostetter, in which the Court rejected a facial Sherman Act preemption challenge to a statute requiring that persons selling liquor to wholesalers affirm that the price charged was no higher than the lowest price at which sales were made anywhere in the United States during the previous month. Since the attack was a facial one, and the state law required no per se violations, no preemption could occur. The Court also rejected the possibility of preemption due to Sherman Act violations stemming from misuse of the statute. The Court stated that rather than imposing "irresistible economic pressure" on sellers to violate the Sherman Act, the statute "appears firmly anchored to the assumption that the Sherman Act will deter any attempts by the appellants to preserve their . . . price level [in one state] by conspiring to raise the prices at which liquor is sold elsewhere in the country." Thus, Seagram indicates that when conduct required by a state statute combines with other conduct that, taken together, constitutes an illegal restraint of trade, liability may be imposed for the restraint without requiring preemption of the state statute.

Rice v. Norman Williams Co. supports this misuse limitation on preemption. Rice states that while particular conduct or arrangements by private parties would be subject to per se or rule of reason analysis to determine liability, "[t]here is no basis . . . for condemning the statute itself by force of the Sherman Act."[14]

Thus, when a state requires conduct analyzed under the rule of reason, a court must carefully distinguish rule of reason analysis for preemption purposes from the analysis for liability purposes. To analyze whether preemption occurs, the court must determine whether the inevitable effects of a statutory restraint unreasonably restrain trade. If they do, preemption is warranted unless the statute passes the appropriate state action tests. But, when the statutory conduct combines with other practices in a larger conspiracy to restrain trade, or when the statute is used to violate the antitrust laws in a market in which such a use is not compelled by the state statute, the private party might be subjected to antitrust liability without preemption of the statute.

Evidence from legislative history[edit]

The Act was not intended to regulate existing state statutes regulating commerce within state borders. The House committee, in reporting the bill which was adopted without change, declared:

"No attempt is made to invade the legislative authority of the several States or even to occupy doubtful grounds. No system of laws can be devised by Congress alone which would effectually protect the people of the [322 U.S. 533, 575] United States against the evils and oppression of trusts and monopolies. Congress has no authority to deal, generally, with the subject within the States, and the States have no authority to legislate in respect of commerce between the several States or with foreign nations."[15]

See also the statement on the floor of the House by Mr. Culberson, in charge of the bill,

"There is no attempt to exercise any doubtful authority on this subject, but the bill is confined strictly and alone to subjects over which, confessedly, there is no question about the legislative power of Congress. ..." [16]

And see the statement of Senator Edmunds, chairman of the Senate Judiciary Committee which reported out the bill in the form in which it passed, that in drafting that bill the committee thought that "we would frame a bill that should be clearly within our constitutional power, that we would make its definition out of terms that were well known to the law already, and would leave it to the courts in the first instance to say how far they could carry it or its particular definitions as applicable to each particular case as the occasion might arise." [17]

Similarly Senator Hoar, a member of that committee who with Senator Edmunds was in charge of the bill, stated "Now we are dealing with an offense against interstate or international commerce, which the State cannot regulate by penal enactment, and we find the United States without any common law. The great thing that this bill does, except affording a remedy, is to extend the common-law principles, which protected fair competition in trade in old times in England, to international and interstate commerce in the United States." [18]


  1. ^ See Exxon Corp. v. Governor of MD., 437 U.S. 117, 130-34 (1978) (state law with anticompetitive effect upheld to avoid destroying the ability of the states to regulate economic activity); Conant, supra note 1, at 264., Werden & Balmer, supra note 1, at 59. See generally 1 P. Areeda & D. Turner, Antitrust Law P208 (1978) (discussing the interaction of state and federal antitrust laws); id. P210 (discussing areas where federal law expressly defers to state law).
  2. ^ Rice, 458 U.S. at 661. If a statute does not require a per se violation, then it cannot be preempted on its face. Id.
  3. ^ See [Rice, 458 U.S. at 661.]
  4. ^ National Soc'y of Professional Eng'rs v. United States, 435 U.S. 679, 687-90 (1978); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977)
  5. ^ See Battipaglia v. New York State Liquor Auth., 745 F.2d 166, 175 (2d Cir. 1984) (while declining to decide whether a statute required an antitrust violation in a facial attack, the court left open the possibility of preemption based on the statute's operation), cert. denied, 105 S. Ct. 1393 (1985); Lanierland Distribs. v. Strickland, 544 F. Supp. 747, 751 (N.D. Ga. 1982) (plaintiff failed to show anticompetitive effects sufficient to violate the rule of reason); Wine & Spirits Specialty, Inc. v. Daniel, 666 S.W.2d 416, 419 (Mo.) (en banc) (declining to decide whether the rule of reason might invalidate a law on the record before them), Appeal dismissed, 105 S. Ct. 56 (1984); United States Brewers Ass'n v. Director of N.M. Dept' of Alcoholic Beverage Control, 100 N.M. 216, , 668 P.2d 1093, 1099 (1983) (rejecting a facial attack on a statute but reserving a decision on whether the actual application of the statute might violate the antitrust laws), appeal dismissed, 104 S. Ct. 1581 (1984). But see infra note 149 for a discussion on the possibility of a much more limited rule of reason preemption analysis.
  6. ^ See Rice, 458 U.S. at 662-63 n.9 ("because of our resolution of the pre-emption issue, it is not necessary for us to consider whether the statute may be saved from invalidation under the [state action] doctrine"); Capitol Tel. Co. v New York Tel. Co., 750 F.2d 1154, 1157, 1165 (2d Cir. 1984) (holding that the state action doctrine protected the conduct of a private party after assuming that it violated the federal antitrust laws), cert. denied, 105 S. Ct. 2325 (1985); Allied Artists Picture Corp. v. Rhodes, 679 F.2d 656, 662 (6th Cir. 1982) (even if conduct violated Sherman Act, the statute is saved by the state action doctrine); Miller v. Hedlund, 579 F. Supp. 116, 124 (D. Or. 1984) (statute violating Section 1 saved by state action); Flav-O-Rich, Inc. v. North Carolina Milk Comm'n, 593 F. Supp. 13, 17-18 (E.D.N.C. 1983) (though conduct violates Section 1, state action saves statute).
  7. ^ Rice v. Norman Williams Co., 458 U.S. 654, 659 (1982).
  8. ^ Id. at 668 (Stevens, J., concurring in the judgment).
  9. ^ See Grendel's Den, Inc. v. Goodwin, 662 F.2d 88, 100 n.15 (1st Cir.) (power to control others not sufficient for facial preemption where party had no institutional reason to make anticompetitive decisions especially likely), aff'd on other grounds, 662 F.2d 102 (1st Cir. 1981) (en banc), aff'd sub nom. Larkin v. Grendel's Den, Inc., 459 U.S. 116 (1982); Flav-O-Rich, Inc. v. North Carolina Milk Comm'n, 593 F. Supp. 13, 15 (E.D.N.C. 1983) (in an oligopolistic market, price posting would result in an antitrust violation).
  10. ^ But cf. Allied Artists Pictures Corp. v. Rhodes, 496 F. Supp. 408, 449 (S.D. Ohio 1980) (indicating that a statute neither requiring nor permitting an anticompetitive collaboration gives the private party enough freedom of choice to preclude preemption), aff'd in part and remanded in part, 679 F.2d 656 (6th Cir. 1982)
  11. ^ Rice, 458 U.S. at 659.
  12. ^ Id. (citing New Motor Vehicle Bd. v. Orrin W. Fox Co., 439 U.S. 96, 110-11 (1978); Exxon Corp. v. Governor of MD., 437 U.S. 117, 129-34 (1978); Joseph E. Seagram & Sons v. Hostetter, 384 U.S. 35, 45-46 (1966)).
  13. ^ New Motor Vehicle Bd. v. Orrin W. Fox Co., 439 U.S. 96, 110-11 (1978) (quoting Exxon Corp. v. Governor of MD., 437 U.S. 117, 133 (1978)).
  14. ^ Rice v. Norman Williams Co., 458 U.S. 654, 662 (1982).
  15. ^ H.R.Rep. No. 1707, 51st Cong., 1st Sess., p. 1.
  16. ^ 21 Cong.Rec. 4089.
  17. ^ 21 Cong.Rec. 3148
  18. ^ 21 Cong.Rec. 3152.