October 17, 2011 Articles

When Business Torts Give Rise to Antitrust Liability

Where the tortious business conduct of a powerful rival causes harm as the result of a disruption of the competitive process, antitrust laws will impose severe sanctions.

By Kevin McCann and Alyse L. Katz

In the appropriate circumstances, the conduct underlying unfair trade practices and other business torts can also give rise to an antitrust claim. Especially in markets characterized by vigorous competition, attorneys who counsel and litigate on behalf of bitter rivals must be able to not only recognize potentially tortious competitive conduct, but also understand when conduct may be considered anticompetitive, raising the risk of liability under antitrust laws. Although the legal consequences of committing an unfair or deceptive trade practice may be severe, the consequences of violating antitrust laws can be devastating. In addition to injunctive relief, a successful antitrust plaintiff will be entitled to recover three times its damages plus the attorney fees incurred in pursuing the action.

The law encourages vigorous competition; indeed, it recognizes competition as privileged conduct in defense of many alleged business torts. But the law also severely sanctions conduct that crosses the line from vigorous, or even unfair, competition to become unlawful exclusionary conduct that harms competition itself and thereby injures rivals and deprives consumers of the lowest prices and greatest number of choices in the marketplace.

When Is a Business Tort an Antitrust Violation?
A business tort can arise from any act that wrongfully harms a rival, either directly or through improperly winning a customer. However, the circumstances in which a business tort may also be considered an antitrust violation are more rare. In general, before the unilateral tortious conduct of a market rival may be considered anticompetitive, the conduct must violate Section 2 of the Sherman Act. Section 2 provides, in pertinent part, that “Every person who shall monopolize, or attempt to monopolize . . . any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.” 15 U.S.C. § 2. This terse statute has been interpreted to require that before any conduct, including a business tort, may rise to the level of an antitrust violation, three fundamental elements must be present: The defendant must have engaged in predatory or exclusionary conduct; the defendant must be a monopolist or have a dangerous probability of achieving monopoly power; and there must be harm to the market, not just to one competitor. SeeSpectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993).

Predatory or Exclusionary Conduct
In determining whether a defendant has engaged in improper predatory or exclusionary conduct, preliminary issues that are common to many tort cases may arise. For example, to evaluate the propriety of an alleged misrepresentation that is alleged to have distorted the competitive balance in the market, the court may still have to examine the distinction between fact and opinion, the knowledge or due care of the speaker, the reliance of those allegedly deceived, and the reasonableness of any such reliance. The application of tort standards of wrongfulness alone, however, will not be sufficient to ascertain whether improper conduct should be considered exclusionary under the Sherman Act.

Both lawful and unlawful acts may have the effect of forcing rivals out of a market, but only “anticompetitive” conduct will be considered improperly exclusionary and thus violative of the antitrust laws. As the Supreme Court has recognized, “[I]t is sometimes difficult to distinguish robust competition from conduct with long-run anticompetitive effects.” Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 767–68 (1984). Indeed, courts have found it difficult to establish a general standard for determining whether conduct may be considered “anticompetitive.” The oft-quoted dichotomy set forth in United States v. Grinnell Corp. provides some cryptic guidance, defining anticompetitive conduct as “the willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” 384 U.S. 563, 570–71 (1966). But it is clear that for conduct to be deemed “anticompetitive,” it must harm the competitive process itself and thereby ultimately harm consumers. Harm to business rivals alone is not sufficient for conduct to be considered exclusionary or “anticompetitive.”

Monopoly Power
The second requirement that must be satisfied before a business tort may give rise to antitrust liability is that the improper conduct must have been undertaken by an actor through its accused conduct. Conduct that would not be considered anticompetitive when perpetrated by one who does not possess monopoly power might be deemed exclusionary and anticompetitive when perpetrated by one who does possess such power.

Monopoly power is most frequently defined as “the power to control prices or exclude competition.” United States v. E.I. DuPont de Nemours & Co., 351 U.S. 377, 391 (1956). Before it can be determined whether an actor possesses such power, it is necessary to define the relevant market in which the power is said to be wielded. “Without a definition of that market, there is no way to measure [a rival’s] ability to lessen or destroy competition.” Walker Process Equip. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965). Thus, the definition of the relevant market is critical in assessing or proving any claim under Section 2.

The relevant market is defined in two dimensions: a relevant product market and a relevant geographic market. The relevant product market is determined by assessing the reasonable interchangeability of use of potential alternatives. Products that can reasonably be used interchangeably are generally considered to compete with each other, and thus are in the same product market. The relevant geographic market is the region within which customers can reasonably seek alternative sources of the product. A rival who can control prices or exclude competition in a properly defined relevant market will be deemed to possess monopoly power within the meaning of Section 2 of the Sherman Act. Regardless of the nature of its conduct, a rival who cannot be said to possess such power, or who possesses insufficient market power to pose a dangerous probability of achieving monopoly power through its accused conduct, cannot be found to violate Section 2 of the Sherman Act.

Harm to the Market as a Whole
The third requirement for an antitrust claim is proof of harm to competition in the relevant market. Proof of harm to a specific competitor, which is all that tort law requires, will not sustain an antitrust claim. “Isolated business torts, such as falsely disparaging another’s product, do not typically rise to the level of a section 2 violation unless there is a harm to competition itself.” See Amer. Council of Certified Podiatric Physicians & Surgeons v. Amer. Bd. of Podiatric Surgery, 323 F.3d 366, 371–72 (6th Cir. 2003).

The conduct of a monopolist who bribes a rival’s employees to work secretly for the monopolist and to obtain trade secret information is an example of a business tort that may give rise to an antitrust claim. See Associated Radio Serv. Co. v. Page Airways, Inc., 624 F.2d 1342 (5th Cir. 1980), cert. denied, 450 U.S. 1030 (1981). Another example might arise from a market leader’s sales representatives attempting to persuade retailers to carry the leader’s products and discontinue those of its rivals by continuously removing and discarding its rivals’ product racks and point-of-sale advertising from stores, while also providing misleading information to retailers regarding the relative desirability of competing brands. See Conwood Co., L.P. v. United States Tobacco Co., 290 F.3d 768 (6th Cir. 2002), cert. denied, 537 U.S. 1198 (2003).

Even where the effects of such acts in isolation might be de minimis, the cumulative impact of several such practices might be sufficient to raise competitive concerns. Where the impact on rivals is significant and lasting, and the competitive opportunities of rivals in the relevant market are impeded, tortious misconduct in the marketplace can constitute exclusionary behavior that harms competition in general.

Incentives for Casting Business Torts as Antitrust Claims
The standards for proving antitrust claims are rightly rigorous; they are strict in order to reduce the risk that enforcement of the antitrust laws may chill the very sort of vigorous, competitive conduct they are intended to encourage. “The Sherman Act is not a panacea for all evils that may infect business life.” Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 287–88 (2d Cir. 1979), cert. denied, 44 U.S. 1093 (1980). At the same time, the antitrust laws incentivize plaintiffs to bring antitrust actions to redress anticompetitive business behavior in appropriate cases. Typical tort remedies are not intended to promote the public interest in encouraging robust competition while failing to deter conduct that undermines the competitive process. In contrast, the antitrust laws contain provisions to incentivize plaintiffs to look beyond the individualized harm they may have suffered as a result of the tortious conduct of business rivals, and to consider prosecuting broader antitrust claims as “private attorneys general” to redress competitive harm to the market as a whole.

The most significant of the incentives for plaintiffs is set forth in Section 4 of the Clayton Act, which provides that a plaintiff “shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney’s fee.” 15 U.S.C. § 15. Thus, in an appropriate situation in which a colorable claim of harm to competition caused by wrongful business conduct can be sustained, a plaintiff who has suffered individual harm is strongly incentivized to attempt to vindicate the public’s interest in maintaining competition in the marketplace, while also seeking to redress the injury he or she has suffered at the hands of a rival.

As the U.S. Court of Appeals for the Sixth Circuit has explained, “Isolated tortious activity alone does not constitute exclusionary conduct for purposes of a § 2 violation, absent a significant and more than a temporary effect on competition, and not merely on a competitor or customer. . . . Business torts will be violative of § 2 only in ‘rare gross cases.’” Conwood Co., L.P. v. United States Tobacco Co., 290 F.3d 768, 783–84 (6th Cir. 2002) (citing 3A Areeda & Turner, Antitrust Law, ¶ 782(a), at 272 (2002)). But, as the appellate court went on to recognize, “[T]his is not to say that tortious conduct may never violate the antitrust laws.” Id. at 784. Where the tortious business conduct of a powerful rival causes harm as the result of a significant and nontransitory disruption of the competitive process, antitrust laws will impose severe sanctions. Such sanctions are intended both to incentivize injured parties to police competition in the marketplace, and to deter businesses from engaging in such anticompetitive behavior.

Keywords: litigation, business torts, antitrust liability, unfair trade practices

Kevin McCann and Alyse L. Katz – October 17, 2011

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