On July 22, 2005, the Court of Appeals for the District of Columbia Circuit denied a petition for review filed by PolyGram Holding, Inc. In so doing, the DC Circuit, in an opinion by Chief Judge Ginsburg, endorsed the Commission’s characterization of the restraint in issue as “inherently suspect”. The court held that the Commission was correct in following the analytical path that it established in In Re Massachusetts Board of Optometry.1 PolyGram Holding, Inc. v. Federal Trade Commission, No. 03-1293 (DC Cer. 2005).

The Three Tenors, Jose Carreras, Placido Domingo and Luciano Pavarotti performed in a series of concerts coinciding with the World Cup soccer finals, in 1990, 1994 and 1998. PolyGram Holding, Inc. (“PolyGram”) distributed the recording of the 1990 concert. Warner Communications, Inc. (“Warner”) distributed the 1994 concert album. Both albums were highly successful, and remained on the top ten classical list, throughout 1994 through 1996.

In 1997, PolyGram and Warner formed a joint venture to distribute the 1998 concert album. Representatives met to discuss the “marketing and promotional activities” involved in a joint marketing program for the 1998 album. According to notes of a meeting between the joint venture partners, they agreed on an “advertising moratorium”, to prevent “free riding” by the earlier, but separately distributed, albums. By the time the Three Tenors performed for the 1998 album, PolyGram and Warner had exchanged letters reaffirming their commitment to suspend advertising and discounting on the 1990 and 1994 concert albums, and agreeing that the moratorium would run from August 1 through October 15.

Within a week of the meeting, however, both parties exchanged letters repuderating any pricing or advertising restrictions relative to the earlier albums. However, there were private assurances between the joint venture partners that, in fact, they intended to honor the agreement. They did so.

In 2001, the FTC issued complaints against PolyGram and Warner, charging that the moratorium agreement violated Section 5 of the Federal Trade Commission Act. Warner consented to an order barring it from making any similar agreements in the future. PolyGram went to trial before an Administrative Law Judge (“ALJ”), who ruled that PolyGram was in violation of Section 5.

In In Re PolyGram Holding, Inc.,2 the Commission, in a 61 page Opinion by Chairman Muris, affirmed the ALJ. In doing so, the Commission revived its characterization and analytic framework announced in In Re Massachusetts Board of Optometry.3 It began with the characterization that the conduct was “inherently suspect” as a restraint on competition in that the conduct “appears likely, absent an efficiency justification, to restrict competition and decrease output.”4 Chairman Muris wrote for the Commission that only where the competitive harm is not readily apparent from the nature of the restraint itself, or where the charged party offers a plausible competitive justification for the restraint, must the Commission engage in a more searching analysis of the market circumstances surrounding the restraint, and thus make a determination as to competitive effects within a relevant market.5

The Commission determined that the agreement between PolyGram and Warner to prohibit discounts and advertising was “inherently suspect”, because the restraints by their nature would tend to raise prices and reduce output.6

The Commission then looked to PolyGram to articulate a plausible competitive justification for the restraint. PolyGram objected to the Commission’s analysis, and urged that it was incumbent upon the Commission to first offer evidence of anticompetitive effects, as the case was being analyzed under the rule of reason. PolyGram argued that they “moratorium” was justified because it prevented the earlier albums from “free riding” upon the marketing efforts of the joint venture partners. Thus, the restraints would create an incentive for each of the joint venture partners to vigorously promote the new album, and thus increase output.

The Commission rejected the proffered efficiency justification as legally insufficient. Having rejected the proffered efficiency justification, the Commission held that the restraint could then be condemned, without further analysis, and without any obligation on the part of the Commission to offer anticompetitive effects evidence.

Judge Ginsburg found that the Commission’s analytical path was consistent with the Supreme Court’s approach in analyzing claims under Section 1 of the Sherman Act, through a transition over a 25 year period from a “dichotomous” categorical approach to a more nuanced, “quick look” inquiry. The court held that there was no longer a bright line distinction between per se analysis and analysis under the rule of reason. Rather, the extent of the inquiry is tailored to the suspect conduct in a given case. Citing NCAA v. Board of Regents,7 and FTC v. Indiana Federation of Dentist’s8 the court held that it was proper for the Commission to adopt an intermediate inquiry, generally dubbed at the “quick look”, to evaluate horizontal restraints.9

Judge Ginsburg was “quick” to add that the “quick look” is not a new category of analysis that is an intermediate position between “per se” condemnation and a full-blown rule of reason” analysis. He held that the Supreme Court has not moved from a “dichotomy” to a “trichotomy,” but instead, has backed away from any reliance upon fixed categories and has moved towards a continuum, citing California Dental Association v. FTC.10

Judge Ginsburg held that:

“Rather than focusing upon the category of which a particular restraint should be assigned … the essential inquiry is “whether … the challenged restraint enhances competition.”11

In order to make that determination, a court must make “an enquiry meet for the case, looking to the circumstances, details and logic of a restraint.”12

Judge Ginsburg held that it was appropriate for the Commission, pursuant to Massachusetts Board of Optometry13 to first determine whether it is obvious. from the nature of the challenged conduct that it will likely harm consumers. If so, then the restraint may be deemed “inherently suspect”. Unless the defendant then comes forward with a plausible, and legally cognizable competitive justification for the restraint, it will be summarily condemned. If the Commission explains that it can confidently conclude, without adducing “effects” evidence, that the restraint likely harmed consumers, or in the alternative, that anticompetitive effects are in fact likely, then the evidentiary burden shifts to the defendant to show that the restraint in fact does not harm consumers, or has “procompetitive virtues” that outweigh its burden upon consumers. The court held that the Commission was correct in rejecting PolyGram’s proffered procompetitive business justification.14 An agreement between “joint venturers” to restrain price cutting and advertising with respect to products that are not part of the joint venture “looks suspiciously like a naked price fixing agreement between competitors, which would ordinarily be condemned as per se unlawful.”15 The court held that PolyGram’s proffered “free riding” argument was nothing more than a “frontal assault on the basis policy of the Sherman Act.”16

In sum, because PolyGram failed to identify any competitive justification for its moratorium agreement with Warner to refrain from advertising or discounting their competitive Three Tenors products, the agreement violated Section 5 of the Federal Trade Commission. Accordingly, it was not necessary for the Commission to determine whether the Commission’s findings of fact concerned actual competitive harm, supported by substantial evidence in the record as a whole.

  1. 110 FTC 549 (1988).
  2. 2003 WL 21770765 (July 24, 2003).
  3. 110 FTC 549 (1988).
  4. FTC Opinion at 22-24.
  5. Id. at 29.
  6. Id. at 35-40.
  7. 468 U.S. 85, 100 (1984).
  8. 476 U.S. 447 (1986).
  9. Citing Areeda & Hovenkamp, Antitrust Law, Section 1911A (2004).
  10. 526 U.S. 756, 779 (1999).
  11. Id. at 779-80 (quoting NCAA, at 104).
  12. Id. at 781.
  13. 110 FTC 549 (1988).
  14. Judge Ginsburg notes that the Commission appears to acknowledge that as economic learning and market experience evolves, so will the class of restraints subject to “quick look” summary adjudication. See California Dental, 526 U.S. at 781.
  15. Slip Opinion at 7.
  16. Citing National Soc. of Prof. Engineers v. United States, 435 U.S. at 695.

Authored by:
Don T. Hibner, Jr.