Inferring Agreement in Hub-and-Spoke Conspiracies

The presence of a hub-and-spoke conspiracy critically depends on whether a horizontal agreement exists among the spokes, commonly stated as whether there is evidence of a “rim” that connects the spokes. This “rim requirement” is now well-established antitrust law, with courts often rejecting per se huband-spoke claims based on an absence of sufficient evidence (or factual allegations, at the motion-to-dismiss stage) that the spokes agreed among themselves to comply with the hub’s contract demands. This article shows that the circumstantial evidence a court may properly use to infer such an agreement in a hub-and-spoke-conspiracy case is substantially more limited than the circumstantial evidence a court may use in a standard horizontal-conspiracy case.

To survive a motion to dismiss, a plaintiff’s allegations of agreement based on circumstantial evidence must include, in addition to parallel behavior, “plus factors” that “raise[ ] a suggestion of a preceding agreement.” Courts have identified a number of plus factors, most importantly, whether the defendants had “any rational motive” to conspire, and whether each defendant’s conduct, absent a conspiracy, was not “consistent with the defendant’s independent interest.”

The Supreme Court outlined the circumstantial evidence that may be used to infer agreement 80 years ago in Interstate Circuit, a case that is highlighted in virtually every antitrust casebook and that continues to be widely cited in antitrust litigation. Interstate Circuit, a film exhibitor with close to a monopoly in first-run exhibition in several Texas cities, demanded that film distributors introduce certain restrictions, most importantly, doubling minimum admission prices in the contracts they entered into with later-run exhibitors operating in Interstate Circuit cities. Although there was no direct evidence in the record of meetings, conversations, or exchanged documents indicating the distributors communicated with one another regarding joint acceptance of the Interstate Circuit contract demands, the Court concluded that the existence of such a horizontal agreement could be inferred from circumstantial evidence.

The circumstantial evidence on which the Court in Interstate Circuit based its inference of agreement included, in addition to the distributors’ uniform parallel behavior in accepting Interstate Circuit’s contract demands, several plus factors: (1) universal distributor doubling of minimum later-run-exhibition prices was a “radical departure from the previous business practices of the industry”; (2) the lack of “any persuasive explanation, other than agreed concert of action,” for the distributors’ parallel actions; (3) Interstate Circuit’s contract demands were made in a letter sent simultaneously to all the film distributors, which included all the distributors as co-addressees, so that “from the beginning each of the distributors knew that the proposals were under consideration by the others”; and (4) while the distributors may have had a joint interest in increasing later-run prices, complying with Interstate Circuit’s contract demands was contrary to each film distributor’s individual economic interests, absent assurance that all distributors would similarly comply. “Each was aware that all were in active competition and that without substantially unanimous action . . . there was risk of a substantial loss of the business and good will of the subsequent-run and independent exhibitors.”

Based on this circumstantial evidence, the Court concluded that “[i]t taxes credulity to believe” the distributors would “have accepted and put into operation with substantial unanimity such far-reaching changes in their business methods without some understanding that all were to join, and we reject as beyond the range of probability that it was the result of mere chance.”

I argue in this article that, contrary to the Court’s reasoning, the plus factors identified in Interstate Circuit cannot be applied to infer agreement because what was involved was an alleged hub-and-spoke conspiracy—not a purely horizontal conspiracy. To properly determine whether such circumstantial evidence can be used to infer agreement in the context of a hub-and-spoke conspiracy, one must explicitly consider the vertical relationship between the hub and spokes and exclude the possibility that parallel spoke behavior is “nothing more than a series of separate, similar vertical agreements.”

Determining whether a fact pattern should be considered circumstantial evidence of a horizontal agreement or merely a series of purely vertical agreements is often difficult. As the Ninth Circuit perceptively observed in In re Musical Instruments & Equipment Antitrust Litigation (Guitar Center), in hub-and-spoke cases, “the line between horizontal and vertical restraints can blur.” This article clarifies how this line should be drawn by focusing on evidence of the key distinguishing economic condition—the hub’s ability to unilaterally enforce its vertical contract demands. Inference of an agreement must refute the possibility that the hub’s vertical contract enforcement sanction is sufficient, by itself, to obtain universal spoke compliance without any agreement among the spokes.

To illustrate, consider a simple vertical contract restraints case, such as the resale price maintenance contracts that were the subject of Leegin. One obviously cannot infer a horizontal agreement among the retailers to accept Leegin’s demand for resale price maintenance solely based on parallel retailer acceptance of the demand, combined with the circumstantial “plus factors” that (1) Leegin communicated its contract demand simultaneously to all retailers, (2) each retailer’s decision to stop discounting was a major change from its previous practices, and (3) each retailer’s acceptance of the Leegin contract demand to stop discounting appears contrary to the retailer’s selfinterests, absent all retailers similarly agreeing to stop discounting.

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