7th Circuit Rejects Application of Per Se Rule to Unusual Horizontal Output Agreement

In In re Sulfuric Acid Antitrust Litigation, (7th Cir., Dec. 27, 2012), the 7th U.S. Circuit Court of Appeals (Judge Richard Posner) held that a somewhat unusual output agreement is not subject to the per se rule against price-fixing or output-reduction agreements. The facts of the case are important and somewhat complicated. Some companies outside the United States produce—as an unwanted manufacturing byproduct—a waste chemical for which there is little or no market in their home country. There is, however, a U.S. market for the chemical and U.S. producers who manufacture it. Because the foreign companies have no U.S. distribution network, they signed up the U.S. producers as distributors (giving them exclusive territories), in return for “shutdown” agreements that preclude the U.S. producers from manufacturing their own supplies of the chemical. Absent the shutdown agreements, there would be an oversupply, and the foreign companies might sell into the United States at a loss. They might be willing to do that to avoid the environmental and storage costs they would otherwise incur, but then they could be subject to antidumping proceedings brought by the U.S. manufacturers.

Judge Posner held that given the facts at issue, the shutdown agreements—which one might otherwise consider to be agreements among competitors and a per se violation of the Sherman Act—are subject to a Rule of Reason analysis. Although the agreements, in theory, still could be found to be unlawful under the Rule of Reason, the fact that the plaintiffs in Sulfuric Acid abandoned a Rule of Reason case suggests that they thought it would be very difficult to win. After all, the agreements facilitated market entry, which is pro-competitive. Given the unusual and somewhat peculiar facts in Sulfuric Acid, care should be taken in extending its holding to other output agreement scenarios.

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