In re Sulfuric Acid Antitrust Litigation
703 F.3d 1004 (2012)
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Rule of Law:
An agreement that restricts output is not a per se violation of antitrust law if the restraint is ancillary to a legitimate, pro-competitive business purpose, such as facilitating market entry. Such agreements must be evaluated under the rule of reason to assess their overall effect on competition.
Facts:
- Noranda, Inc. and Falconbridge Ltd. were Canadian mining companies that produced sulfuric acid as an involuntary byproduct of their smelting operations.
- Due to Canadian environmental regulations requiring them to capture sulfur dioxide, the companies had an excess supply of sulfuric acid they could not sell in Canada.
- To sell their excess acid in the U.S., Noranda and Falconbridge needed a distribution network, which they lacked.
- The Canadian companies approached existing U.S. sulfuric acid producers to act as distributors for their product.
- Noranda and Falconbridge entered into 'shutdown agreements' with several U.S. producers.
- Under these agreements, the U.S. producers agreed to curtail or cease their own production of sulfuric acid in exchange for becoming distributors of the Canadian-produced acid, often within exclusive territories.
- In 1998, Noranda and Falconbridge formed a joint venture with DuPont, a major U.S. chemical company, to supply sulfuric acid to the U.S. market, utilizing DuPont's extensive distribution network.
Procedural Posture:
- A class of chemical companies that purchase sulfuric acid sued Noranda, Falconbridge, and others in a U.S. District Court, alleging a price-fixing conspiracy in violation of Section 1 of the Sherman Act.
- The district court certified the class action.
- After the case was reassigned to a new judge, the defendants moved for a ruling on the applicable legal standard.
- Shortly before trial, the district court ruled that the case must proceed under the rule of reason, not a theory of per se liability.
- The plaintiffs declined to proceed to trial under the rule of reason, thereby allowing the court's ruling to become a final, appealable dismissal of their case.
- The plaintiffs (appellants) appealed the dismissal to the U.S. Court of Appeals for the Seventh Circuit.
- The defendants (appellees) filed a cross-appeal, asking the court to decertify the class only if the dismissal was reversed.
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Issue:
Do agreements between foreign producers entering the U.S. market and domestic producers, where the domestic producers agree to curtail their own production in exchange for becoming distributors, constitute a per se violation of Section 1 of the Sherman Act?
Opinions:
Majority - Posner, Circuit Judge.
No, these agreements do not constitute a per se violation of the Sherman Act. An agreement that restricts output but is ancillary to a pro-competitive purpose, such as facilitating market entry, must be analyzed under the rule of reason. The per se rule is reserved for practices with no redeeming competitive virtues. Here, the 'shutdown agreements' were plausibly necessary to persuade U.S. producers to become distributors, thereby enabling the Canadian companies' entry into the U.S. market. Without these agreements, the Canadian companies might have been deterred from entering, which would have resulted in higher, not lower, prices for consumers. This case is distinguishable from classic price-fixing cases like Socony-Vacuum, where the sole purpose of the agreement was to raise prices. The novel business context, involving involuntary production and potential anti-dumping liability, makes per se treatment inappropriate. Similarly, the joint venture with DuPont had a legitimate business purpose—creating efficiencies in distribution and marketing—and therefore must also be scrutinized under the rule of reason, not condemned per se.
Analysis:
This decision solidifies the modern judicial trend of favoring the rule of reason over per se rules in complex antitrust cases. It establishes that even horizontal agreements to reduce output, which traditionally are viewed as paradigmatic per se violations, can escape such harsh treatment if they are ancillary to a legitimate, pro-competitive collaboration. The case provides a significant precedent for companies structuring market-entry strategies that involve cooperation with existing competitors, signaling that courts will look past the form of an agreement to its underlying economic purpose and effect. Future litigants will likely use this case to argue for rule of reason analysis in a wide variety of business arrangements that might otherwise appear suspect.
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