Polygram Holding, Inc. v. Federal Trade Commission
416 F.3d 29 (2005)
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Rule of Law:
An agreement between competitors in a joint venture to restrain price and advertising competition on products outside the scope of the venture is presumptively unlawful under antitrust law. A justification that such a restraint is necessary to prevent 'free-riding' and increase the venture's profitability by suppressing competition from the collaborators' other products is legally insufficient to rebut this presumption.
Facts:
- PolyGram distributed the 1990 'The Three Tenors' concert album, and Warner Communications distributed the 1994 album; both were highly successful and remained on classical best-seller lists.
- In late 1997, PolyGram and Warner formed a joint venture to distribute the forthcoming 1998 'The Three Tenors' concert album.
- In early 1998, representatives from both companies agreed to an 'advertising moratorium' on their 1990 and 1994 albums to support the 1998 album's release.
- In June 1998, the companies learned the 1998 concert repertoire would substantially overlap with the 1990 and 1994 concerts, which they believed jeopardized the new album's commercial viability.
- By July 1998, PolyGram and Warner finalized an agreement to suspend all advertising and discounting of their respective 1990 and 1994 albums for a ten-week period surrounding the new album's release.
- Despite public-facing memos purporting to repudiate the deal, executives from both companies privately assured each other the moratorium would be honored, and the companies substantially complied with it.
Procedural Posture:
- In 2001, the Federal Trade Commission (FTC) issued a complaint against PolyGram Holding, Inc. and Warner Communications, Inc., alleging their moratorium agreement was an unfair method of competition violating § 5 of the FTC Act.
- Warner Communications entered into a consent order, agreeing to cease similar conduct.
- PolyGram contested the complaint, proceeding to a trial before an Administrative Law Judge (ALJ) within the FTC.
- The ALJ ruled that PolyGram had violated § 5 and issued an order prohibiting similar future agreements.
- PolyGram appealed the ALJ's decision to the full Commission of the FTC.
- The full Commission affirmed the ALJ's decision, finding the agreement was an unreasonable restraint of trade.
- PolyGram then petitioned the U.S. Court of Appeals for the D.C. Circuit, as the petitioner, for review of the FTC's final order, with the FTC as the respondent.
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Issue:
Does an agreement between two competing music distributors, who are partners in a joint venture to release a new album, to suspend advertising and discounting of their independently-owned, competing albums by the same artist violate § 5 of the Federal Trade Commission Act?
Opinions:
Majority - Chief Judge Ginsburg
Yes, the agreement violates § 5 of the Federal Trade Commission Act because it is an inherently suspect restraint of trade for which the defendant failed to provide a legally cognizable procompetitive justification. The court endorsed the FTC's analytical framework, which aligns with the Supreme Court's 'quick look' approach, where a restraint that appears likely to harm competition is presumed unlawful. An agreement between competitors to suspend price and advertising competition is 'inherently suspect' because it closely resembles a naked price-fixing agreement. The burden then shifted to PolyGram to offer a valid procompetitive justification. PolyGram argued the moratorium was necessary to prevent 'free-riding'—where promotion for the new 1998 album might inadvertently boost sales of the older, competing albums—thereby protecting the joint venture's profitability. The court rejected this justification as legally insufficient, stating that eliminating what is simply legitimate competition from products outside the joint venture is not a procompetitive benefit. The court reasoned that a restraint cannot be justified solely on the ground that it makes a new product launch more profitable, as this would be a 'frontal assault on the basic policy of the Sherman Act.' Because PolyGram failed to offer a valid justification, the agreement was condemned without a full rule-of-reason analysis of market power or actual anticompetitive effects.
Analysis:
This decision solidifies the use of an intermediate 'quick look' or 'inherently suspect' analysis in antitrust law, which avoids the rigidity of the traditional per se and rule of reason categories. It clarifies that ancillary restraints within a legitimate joint venture must be genuinely procompetitive and not merely mechanisms to shield the venture from outside competition. The case establishes a strong precedent that 'preventing free-riding' is not a valid justification when the so-called 'free-riding' is simply the normal market competition posed by a joint venture partner's other products. This holding significantly limits the ability of collaborating competitors to suppress competition in related markets, even if they claim it is necessary for the success of their joint project.
