Citizen Publishing Co. v. United States
394 U.S. 131, 22 L. Ed. 2d 148, 1969 U.S. LEXIS 3199 (1969)
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Rule of Law:
The 'failing company' defense to an otherwise per se illegal antitrust violation, such as price-fixing or market allocation, requires the defendant to prove that the company's resources were so depleted that it faced a grave probability of business failure and that the acquiring company was the only available purchaser.
Facts:
- Prior to 1940, Tucson, Arizona's only two daily newspapers, the Star and the Citizen, were vigorous competitors.
- While the Star operated at a profit, the Citizen sustained consistent annual losses.
- In 1936, new owners purchased the Citizen, invested new capital, and were prepared to personally finance its losses for a period of time.
- The owners of the Citizen never sought to sell the newspaper to a third party or put it on the market.
- In 1940, the Star and the Citizen entered into a 25-year joint operating agreement to end all commercial competition.
- The agreement created Tucson Newspapers, Inc. (TNI) to manage their business operations, which set joint advertising and subscription rates, pooled all profits for distribution according to a fixed ratio, and prohibited either paper or its owners from engaging in any other local publishing business.
- In 1953, the parties extended the agreement's term to 1990.
- Subsequently, the shareholders of the Citizen acquired the stock of the Star.
Procedural Posture:
- The U.S. Government sued Citizen Publishing Co. and others in the U.S. District Court for the District of Arizona.
- The government alleged violations of § 1 and § 2 of the Sherman Act, and § 7 of the Clayton Act.
- The District Court granted the government's motion for summary judgment on the § 1 Sherman Act charge, finding the joint operating agreement to be a per se violation.
- A trial was held on the remaining § 2 Sherman Act and § 7 Clayton Act charges.
- The District Court found for the government, holding that the agreement created a monopoly and that the subsequent stock acquisition lessened competition.
- The District Court issued a decree ordering the divestiture of the Star and modification of the joint operating agreement.
- The defendants (Citizen Publishing Co., et al.) filed a direct appeal to the Supreme Court of the United States.
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Issue:
Does a joint operating agreement between the only two competing newspapers in a city, which involves price-fixing, profit-pooling, and market allocation, violate the Sherman Act, and can the agreement be justified by the 'failing company' defense when the allegedly failing paper was not on the verge of liquidation and no effort was made to sell it to another party?
Opinions:
Majority - Justice Douglas
No, the agreement violates the Sherman Act and is not saved by the failing company defense. The agreement's provisions for price-fixing, profit-pooling, and market allocation are per se violations of § 1 of the Sherman Act. The 'failing company' defense is inapplicable here because the defendants failed to meet the doctrine's strict requirements. First, the evidence showed that the Citizen was not on the verge of going out of business or facing a 'grave probability of business failure'; its owners were prepared to sustain its losses and were a significant competitive threat to the Star. Second, the defense requires proof that the acquiring company was the only available purchaser, but the Citizen's owners never made any effort to sell the paper to anyone else. The burden of proving the defense rests on those who assert it, and that burden was not met. The First Amendment offers no protection for private combinations that restrain trade in news and views.
Concurring - Justice Harlan
No, the extension of the agreement was illegal, making it unnecessary to evaluate the original 1940 transaction. The decisive issue is not the 1940 agreement but the 1953 decision to extend it for another 25 years. By 1953, the joint venture was consistently and increasingly profitable, and it was impossible to predict whether full competition could be renewed in 1965. Given this profitability, the 'failing company' defense could not possibly justify extending the anticompetitive arrangement at a time when neither paper was failing.
Dissenting - Justice Stewart
The case should be remanded because the Court improperly created and retroactively applied a new, inflexible rule for the failing company defense. The majority now requires proof of 'substantial affirmative efforts to sell to a noncompetitor,' a standard not previously established. The appellants presented significant evidence that the Citizen was financially dire and that no outside buyer would have purchased it in 1940. The district court erred by refusing to properly consider this evidence on the § 1 claim. The case should be returned to the district court for a full factual determination of whether the Citizen was a failing company under the standards that existed at the time.
Analysis:
This decision significantly narrows the scope and clarifies the requirements of the judicially created 'failing company' defense in antitrust law. By establishing a stringent two-part test, the Court made it substantially more difficult for a struggling firm to legally merge with or be acquired by a direct competitor in a concentrated market. The ruling effectively imposes an affirmative duty on a financially distressed company to seek out less anticompetitive alternatives, such as a sale to a third party, before entering into an agreement that would otherwise be a per se violation of the Sherman Act. This precedent has since guided merger analysis, reinforcing that the preservation of competitive market structures is a primary goal of antitrust law, even at the potential cost of a single market participant.
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