Institutions and Incentives in Antitrust Enforcement

Abstract

One of the most vexing questions in U.S. antitrust law is the meaning of the rule of reason under Section One of the Sherman Act. The U.S. Supreme Court has struggled for over a century to give meaning and guidance for the broad language of the Sherman Act banning contracts, combinations, and conspiracies in restraint of trade. The modern Supreme Court has a relatively new interpretative strategy to consider what legal standard should apply to agreements that potentially harm competition.

The Court’s methodology can be paraphrased as follows. First, the Court states that the rule of reason is the default rule in antitrust. Second, per se condemnation (or some rebuttable presumption) is reserved for a limited group of practices that economics and experience show to be inevitably destructive of competition with little or no redeeming features. Third, reasonable people and lower courts disagree about the likely competitive effects of the type of agreement under consideration. Therefore, lower courts going forward should apply the rule of reason on a case by case basis to determine whether there is any likely competitive harm and any likely significant procompetitive benefits. However, lower courts also should structure and streamline their analysis by applying one or more new rules of thumb that the Court identifies. The Supreme Court then moves onto the next case on its docket and assumes that the lower courts will work things out.

The Supreme Court followed this basic approach in the 2007 Leegin case applying the rule of reason to resale price maintenance agreements (vertical price fixing) and the 2013 Actavis decision applying the rule of reason to pay for delay agreements (reverse payments) involving branded and generic pharmaceutical manufacturers.

This essay explores where this strategy has been successful (Actavis) and where it has not (Leegin) and what best explains these divergent results. I focus less on the substantive law and emphasize the institutions and incentives in antitrust enforcement that determine when the pronouncements of the law on the books by the Supreme Court gets translated into the law in action in the trenches in the lower courts. I conclude with suggestions for the Court in future antitrust cases to best ensure that their pronouncements are taken seriously and that adequate litigation develop to apply this type of structured rule of reason analysis in the real world.

Keywords: antitrust; sherman act; restraints of trade; actavis; leegin; resale price maintenance; pay for delay; reverse payments; enforcement; private litigation; treble damages; class actions

JEL Classification: k21, k40, k41, k42, l12, l4, l40, l41,l42