Nynex Corp. v. Discon, Inc.
142 L. Ed. 2d 510, 1998 U.S. LEXIS 8080, 525 U.S. 128 (1998)
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Rule of Law:
A single buyer's decision to favor one seller over another, even for anticompetitive reasons, does not constitute a per se illegal group boycott under Section 1 of the Sherman Act unless it involves a horizontal agreement among direct competitors.
Facts:
- NYNEX Corporation, through its purchasing subsidiary Materiel Enterprises Company, procured telephone equipment removal services for its operating company, New York Telephone.
- Discon, Inc. was a vendor providing these removal services to Materiel Enterprises.
- Materiel Enterprises terminated its business relationship with Discon and began purchasing removal services exclusively from Discon's competitor, AT&T Technologies.
- Discon alleged this decision was part of a fraudulent scheme to inflate costs for regulatory purposes.
- Under the alleged scheme, Materiel Enterprises paid AT&T Technologies an inflated price for its services, which New York Telephone then used to justify higher rates charged to consumers.
- AT&T Technologies would then provide a year-end rebate to Materiel Enterprises, which was shared with the parent company, NYNEX.
- Discon claimed its contract was terminated because it refused to participate in this rebate scheme.
- As a result of losing the contract with Materiel Enterprises, Discon went out of business.
Procedural Posture:
- Discon, Inc. filed a lawsuit in the Federal District Court against NYNEX Corp. and its subsidiaries, alleging violations of the Sherman Antitrust Act.
- The District Court dismissed Discon's complaint for failure to state a claim upon which relief could be granted.
- Discon appealed the dismissal to the U.S. Court of Appeals for the Second Circuit.
- The Second Circuit affirmed in part but reversed the dismissal of the antitrust claim, holding that Discon had stated a potential claim under both the rule of reason and the per se rule for group boycotts.
- The Supreme Court of the United States granted certiorari to review the Second Circuit's decision regarding the applicability of the per se group boycott rule.
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Issue:
Does a single buyer's decision to terminate its relationship with one supplier and favor a competing supplier, even for fraudulent or anticompetitive reasons, constitute a per se illegal group boycott under Section 1 of the Sherman Act in the absence of a horizontal agreement among competitors?
Opinions:
Majority - Justice Breyer
No. A buyer's decision to switch suppliers, even for improper motives, is not a per se illegal group boycott without a horizontal agreement among competitors. The per se rule against group boycotts is limited to cases involving horizontal agreements where firms at the same level of the market, such as a group of competitors, agree to disadvantage another competitor. The Court's precedents, like Klor's, involved not just a vertical agreement between a buyer and seller but also a horizontal agreement among multiple suppliers to refuse to deal with the plaintiff. The agreement between Materiel Enterprises and AT&T Technologies was purely vertical. To apply the per se rule in this context would improperly transform ordinary business torts, fraud, or decisions based on personal pique into treble-damages antitrust cases and would discourage the freedom to switch suppliers, which is central to the competitive process. The harm alleged here stemmed from regulatory fraud and the exercise of lawful monopoly power, not from injury to the competitive process in the removal services market. Therefore, Discon must allege and prove harm to competition itself under the rule of reason, not merely harm to itself as a single competitor.
Analysis:
This decision significantly narrows the scope of the per se rule against group boycotts, reinforcing the critical distinction between horizontal and vertical restraints in antitrust law. The Court clarified that the 'group' in 'group boycott' for per se purposes refers to a plurality of actors at the same market level acting in concert. By refusing to apply the per se rule to a purely vertical decision to switch suppliers, the ruling prevents the expansion of antitrust liability into areas of business tort or fraud. Future plaintiffs alleging similar vertical arrangements must now meet the higher burden of the rule of reason, proving that the conduct caused actual harm to the overall competitive process, not just to an individual competitor.
