An Antitrust Allegory

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by  John J. Flynn

Hastings Law Journal
Volume 38|Issue 3 Article 4
1-1987
An Antitrust Allegory
John J. Flynn
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John J. Flynn,An Antitrust Allegory, 38 HastingsL.J. 517 (1987).
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An Antitrust Allegory
by
JOHN J. FLYNN*
John Sherman Widget Co. activities, the most likely area for con-
tinuing antitrust concern. Since the
V.
Federal Trade Commission has closed
Adam Smith Widgets, inc.,
all of its offices save those of the Com-
U.S. -, 110 S.Ct. 1410 (1990).
-
missioners, no reliable statistics are
available with regard to its activities, if
any, in enforcing the antitrust laws.
Justice SPENCER delivered the opin-
Although the few staff members re-
ion of the Court.
maining at the Commission continue
This is a treble damage action
to issue occasional studies, demon-
under the Sherman Act, 15 U.S.C. § 1
strating how a policy of laissez-faire
et seq., the only antitrust case of any
promotes the most efficient use of re-
kind filed in the federal courts in the
past two years.1 We take note of the sources (hereinafter "the neoclassical
economic model" or "The Model"), it
fact that the Attorney General an-
is apparent that neither the staff nor
nounced a year ago that ninety-five
the members of the Commission have
percent of the personnel in the Anti-
any intention of filing any new
trust Division of the Department of
antitrust or unfair competition
Justice had been transferred to other
proceedings.
duties in the Department following the
successful completion of its criminal The plaintiff, John Sherman Wid-
prosecutions against the only remain- get Co., ,alleged that the defendants, a
ing road builders not then in jail for consortium of widget manufacturers
price-fixing. A "skeleton crew" staffs and distributors,2 have engaged in a
the Division to monitor labor union wide variety of antitrust violations in-
*Hugh B. Brown Professor of Law, Col- rated itself under Delaware Law as the
lege of Law, University of Utah. Concern Widget Manufacturers Cartel & Consor-
for the well-being and reputation of several tium, Inc. The plaintiff, however, sued the
good friends who read and commented on Consortium and each of its members indi-
drafts of this allegory requires the omission vidually. In the court below the defend-
of their names from this, the normal place ants raised the issue of whether they could
for printing such information. For names, be sued individually, that is, whether the
send a self-addressed stamped envelope. plaintiff was required to sue only the entity
1. The Justice Department did file two civil they created to carry out their agreement.
antitrust cases back in 1987, but the econ- The trial court did not consider it neces-
omy has obviously been functioning effi- sary to decide this issue, although the court
ciently since then, requiring no new litiga- did observe that under Copperveld Corp. v.
tion to force it to do so. Independence Tube Corp., 474 U.S. 752,
2. The defendants are in reality a single de- 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984),
fendant since the Consortium has incorpo- there was "much merit to the defendants'
[5171
38 HASTINGS LAW JOURNAL [Vol. 38
cluding a horizontal conspiracy at the Sherman Company, is a relative new-
manufacturing level to fix the price of comer to the market, having been es-
widgets, a conspiracy to monopolize tablished in 1980. Since that time, it
the widget manufacturing business, has gained a 5% market share by ag-
and a conspiracy to engage in preda- gressive marketing through discount
tory pricing in the distribution of wid- outlets and mail-order catalogues.
gets by charging high prices in geo- The Sherman Company has refused to
graphic markets where they had no join the Consortium despite the en-
competition and "below cost" prices treaties of the Consortium. Although
in those markets where the plaintiff there are several foreign manufactur-
sold widgets. Plaintiff also complained ers of widgets, imports have been neg-
that each of the defendant manufac- ligible. The record indicates that it is
turers had imposed exclusive dealing relatively inexpensive to manufacture
contracts and geographical and cus- widgets and that the light weight and
tomer restrictions on their distributors small size of widgets make national
so as to prevent competition between marketing from a central manufactur-
those distributors and prevent compet- ing facility the normal pattern.
ing suppliers from reaching them. The On defendants' motion for sum-
plaintiff also alleged that several of the mary judgment, the trial court granted
defendants had entered into resale defendants a directed verdict at the
price maintenance agreements with end of the plaintiff's case. The court
their distributors and had actively po- did so after several evidentiary rulings
liced the distributors to insure that excluding evidence offered by the
they observed the prices established by plaintiff. The court ruled that tape re-
each of the manufacturers. cordings and minutes of the meetings
Widgets are a fungible product of the defendant members of the Con-
with a wide variety of home and man- sortium were inadmissible. Those
ufacturing applications. They are tapes and minutes indicated the de-
made in standard sizes by at least fif- fendants agreed on prices and directed
teen domestic manufacturers, fourteen certain Consortium members to cut
of which belong to the defendant prices in markets where the plaintiff
Widget Consortium of America. The was selling widgets in order to "drive
Smith Company is the dominant man- that non-conformist Sherman out of
ufacturer and distributor, with over business." The trial court also ex-
50% of the market. The plaintiff, cluded two documents that plaintiff
argument." Since the lower court did not poration is a person for constitutional and
decide the issue and the parties have not other purposes. Just as a rose is a rose by
argued it before this Court, we do not de- whatever name, a person is a person by
cide it. We note, however, that it is not a whatever name. And, since it takes two or
frivolous contention. A corporation is a more persons to conspire or have a "meet-
single person and as such it cannot con- ing of the minds" for the purpose of a con-
spire with itself. Furthermore, Copperweld tract, it is difficult to avoid the conclusion
instructs us to look at form, not substance, that the Consortium cannot contract or
in deciding who or what may be considered conspire with itself. Q.E.D. In any event,
persons for purposes of contract and con- because of our decision on the merits in
spiracy doctrine under the Sherman Act. this case, we do not think the issue is likely
Ever since Santa Clara County v. Southern to be a troublesome one in the future and
Pacific R.R., 118 U.S. 394, 6 S.Ct. 1132, 30 therefore decline to reach it.
L.Ed. 118 (1886), we have held that a cor-
March 1987] SHERMAN WIDGET v. SMITH WIDGETS
Cite as 38 HASTINGS L.J. - (1987)
claimed conclusively proved a conspir- and allocate resources." The state-
acy in violation of §§ 1 and 2 of the ment went on to claim that both pro-
Sherman Act. One document, a fifty ducers and consumers are rational
page contract among the members of maximizers of their own self-interest,
the Consortium, specifies in great de- that there is an inverse relationship be-
tail the prices, customers, and markets tween prices charged and quantity de-
allocated to each member. It is signed manded, that sellers seek to maximize
and notarized, and bears the corporate the difference between their costs and
seal of each member of the their sales revenues, and that scarce
Consortium. resources gravitate to their highest val-
The second document is an agree- ued uses if free exchange is permitted.3
ment between the Consortium, the Based on these assumptions, the
Asian Widget Manufacturers Associa- statement suggested that permitting
tion, and the European Cartel of Wid- the parties to the Consortium to en-
get Manufacturers dividing the world gage in a rational act (maximizing
market and binding its signatories to their profits) would ultimately maxi-
abide by the terms of the agreement. mize the efficient use of society's re-
This document is witnessed by the As- sources as rational consumers re-
sistant Attorney General for Antitrust sponded to rational suppliers and the
and the Chairman of the Federal market process sorted out the optimal
Trade Commission. The witnesses at- solution.4 They added that "the rights
tached a joint statement to the docu- of property and freedom of contract,
ment asserting that "efficiency de- sacred and inalienable rights in our
mands that rational businessmen be system of capitalism, require that the
permitted to implement freely their Consortium be allowed to enter into
judgments, either by contract or and have the government enforce this
5
through a partial integration of their agreement."
functions, as to how best to set prices The trial court was called upon at
3. Citing R. Posner, Economic Analysis of of course, logically counter-productive and
Law § 1.1 (3d ed. 1986). The document necessarily generates inefficiency.
quoted the following statement from Pos-
4. It is shocking to realize that just four
ner: "The reader who understands the
short years ago a United States District
three fundamental concepts ...th e inverse
Court rejected such a logical wealth-maxi-
relationship between price and output, al-
mizing argument asserted by Coca-Cola in
ternative and opportunity cost, and the
its attempt to acquire Dr. Pepper. See
tendency of resources to gravitate from
FTC v. The Coca-Cola Co., 1986-2 Trade
lower valued to higher valued uses if vol-
Cases Para. 67,208 (D.D.C. 1986).
untary exchange is permitted-is prepared
to deal with a surprising variety of eco- 5. It is interesting to note that this agree-
nomic questions." According to the state- ment has been the subject of constant criti-
ment, among the economic questions an- cism before the United Nations at the in-
swered by The Model is that rational stance of the Soviet Union, the only major
maximizers know their self-interest best widget manufacturing country which has
and should be allowed freely to express it refused to join an international cartel.
through voluntary agreements. In this way Three Soviet manufacturers of widgets
"efficiency" will be realized through the openly compete on price with each other
exploitation of resources in such a way that and with the defendants in world markets.
value-human satisfaction as measured by But this irrational behavior is nothing new
aggregate human willingness to pay for for the Soviet Union. Back in 1976 our
goods and services-is maximized. Any Federal Maritime Commission had to force
government intervention in this process is, them to join our shipping cartels in the
38 HASTINGS LAW JOURNAL [Vol. 38
the summary judgment stage to deter- The court also excluded the writ-
mine whether a material issue of fact ten documents relating to the interna-
existed. An issue of fact, the court tional meeting of widget manufactur-
quite rightly noted, exists only about ers. The Model indicates it would be
propositions or events that are plausi- counter-productive and impossible for
ble or possible. Allegations that water all the world's widget manufacturers
ran uphill or that a man flew to the to engage in the conduct alleged with
moon and back without mechanical any hope of success. In reaching this
assistance do not present issues of fact. conclusion, the court relied on the as-
Accordingly, the trial court reasoned sumption that any deviation from the
that it must measure the allegations in model of perfect competition would
plaintiff's complaint and the evidence invite cheating by participants in the
offered in their support against the as- cartel, driven by the inexorable force
sumptions of The Model. of profit maximization, or that it
That Model or law, which inexo- would result in entry into the business
rably governs us all and for which we by non-widget manufacturers in quest
are deeply grateful, states universal of the monopoly profits of the cartel.7
truths about the behavior of rational Since The Model assumes the rational-
suppliers and consumers, and particu- ity of all members of the Consortium,
larly declares that all persons will at written documents suggesting a con-
all times and under all circumstances trary method of operation must refer
attempt to maximize their own bene- to events that did not take place.
fits. Plaintiff's allegations regarding Only two possible conclusions follow.
the meetings between the defendants One is that the documents themselves
and among the Consortia are obvi- do not exist, and the other is that if the
ously inconsistent with the law of per- documents exist, they are false. The
fect competition6 which exists at all trial court concluded that it could not
times and in all places, and with the consider either non-existent or false
assumption of single-minded price documents to support the existence of
competition among firms in order to a material issue of fact and that, there-
maximize profits. Thus, the trial court fore, the defendants' motion for sum-
found that the meetings could not mary judgment must be granted.
have happened and, therefore, did not In the alternative, the court ruled
happen. that even if the meetings did occur, the
North Atlantic. See "Soviet is Moving to Wright, Some Pitfalls of Economic Theory
End Slashing of Ocean Rates," New York as a Guide to the Law of Competition, 37
Times, Oct. 26, 1976, p. 1, col. 5. Va.L.Rev. 1083, 1085-86 (1951).
6. "Perfect competition" has been described 7. The court cited Easterbrook, The Limits
as follows: of Antitrust, 63 Texas L.Rev. 1 (1984).
"Perfect" competition . . . means The trial court's reading of Easterbrook is
an absolutely "frictionless" world. an accurate exposition of the consequences
Everybody knows everything, eve- of following his assumptions. The "limits"
ryone can be everywhere at once, of antitrust as a device for regulating im-
coal heavers can become brain sur- perfections in the market, in Easterbrook's
geons, and brain surgeons can be- view, are somewhere between minimal and
come coal heavers, overnight. The zero, with all doubts to be resolved in favor
capital embodied in a university can of zero.
transform itself overnight into a
battleship and so on.
March 1987] SHERMAN WIDGET v. SMITH WIDGETS
Cite as 38 HASTINGS L. _ (1987)
matters that the tapes and minutes in- maintain a suit in these circumstances.
dicated were topics of discussion8 Because reality can be viewed only in
could not be made the basis of a snapshots lest The Model itself be de-
Sherman Act claim because they could stroyed,9 the court stated that any sub-
not have caused the type of injury to sequent raising of prices after the
the plaintiff the antitrust laws were plaintiff was driven from the market
designed to prevent. The court found could be appraised only at the time it
that if the defendants did engage in the took place and only at the instance of
activity alleged, they would have con- a consumer claiming to be injured by
ferred a benefit on the plaintiff rather reason of a conspiracy to raise
than harmed it. According to The prices.10 The court concluded with
Model, the defendants would have the further observation that the plain-
been selling above marginal cost which tiff would lack standing to sue in any
would have allowed the plaintiff to un- event because it would be impossible
dercut them in the marketplace, as- to prove that any of the alleged con-
suming the plaintiff was operating effi- duct was the proximate cause of any
ciently. If the defendants were cutting measurable antitrust injury to it.
prices below marginal cost to drive the
I
plaintiff out of the market, that con-
duct would confer the benefit of lower We think it important to set forth
prices on consumers-the sole in- the trial court's skillful analysis of the
tended beneficiary of the antitrust law leading it to its conclusions. Cit-
laws. Since the plaintiff was a compet- ing Matsushita Electric Industrial Co.
itor and not a consumer, the court v. Zenith Radio Corp., 474 U.S. ,
held the plaintiff lacked standing to 106 S.Ct. 1348 (1986), 11 the trial court
8. Among the topics of discussion the tapes avoided by confining the analysis to a fixed
and minutes recorded are: prices, "de- set of quantifiable variables measured by
stroying the Sherman" firm, "wiping Sher- snapshots of the static world placed under
man off the face of the Earth," "getting our the analytical microscope, thereby avoid-
returns back up to a decent 60% rate," ing destruction of The Model for analysis.
"keeping distributors in line on customers,
10. Such a claim would, of course, be sub-
territories, and prices," cutting off "distrib-
ject to the indirect-purchaser standing de-
utors who deal with that non-conformist
cisions of this Court and the policy of let-
Sherman and cut prices," price schedules,
ting the market correct the problem itself
subsidizing those members of the Consor-
through cheating by members of the Con-
tium who had to cut prices in Sherman's
sortium and the inevitable new entry that
areas of operation, etc.
prices above marginal cost would attract.
9. This is so because The Model would be We would also expect any suit by a cheater
unmanageable if too many variables were disciplined by the other parties to the
included in the analysis or if the variables agreement, or a suit by a new entrant
were permitted to be dynamic and chang- claiming the Consortium engaged in strate-
ing. Professor Leff's reformulation of the gic behavior designed to raise entry barri-
problem of the second-best sums up the ers or exclude it, to be resolved by the
difficulty: "If a state of affairs is the prod-
well-established maxim that the antitrust
uct of n variables, and you have knowledge
laws are designed to protect competition,
of, or control over, less than n variables, if
not competitors.
you think you know what's going to hap-
pen when you 'vary' your variables, you're 11. In that case, evidence tendered by the
a booby." Leff, Economic Analysis of Law: plaintiffs allegedly showed that Japan's
Some Realism About Nominalism, 60 consumer electronics manufacturers, their
Va.L.Rev. 451, 476 (1974). "Boobiness" is export trading companies, and their United
38 HASTINGS LAW JOURNAL [Vol. 38
noted that this Court has instructed respondent to a motion for summary
that motions for summary judgment in judgment in an antitrust case to show
antitrust cases are to be judged by the that the predictions of The Model do
predictions of the neoclassical eco- not follow from the assumptions of
nomic model, not the facts. The court The Model.12 The trial court pointed
reasoned that Matsushita requires the out that economic theory instructs us
States distributors had formed a cartel ment earmarking the industry for growth
designed to raise prices for their products and export, and expert witness testimony
in Japan's protected domestic market to indicating that the defendants were not op-
support lower fixed prices in the United erating pursuant to the assumptions of The
States market. The same model television Model. As is obvious, we held that for
set manufactured in Japan was sold in the purposes of a motion for summary judg-
United States at up to 50% below the price ment in an antitrust case, a court is to de-
charged for it in the Japan market. The termine whether the complaint states a
agreement to price high in Japan and low claim by measuring it against the assump-
in the United States was allegedly reached tions and predictions of The Model, rather
through and administered by the Televi- than against the evidence produced by the
sion Export Council, a cartel of all of Ja- parties. The Third Circuit finally got the
pan's major consumer electronics manu- message on remand of the case. See In re
facturers. Plaintiff alleged that the JapaneseE lectronic ProductsA ntitrust Liti-
Japanese government encouraged the for- gation, 807 F.2d 44 (CA3 1986) (dis-
mation of the cartel and orchestrated its missing both the antitrust and Antidump-
export activities. The agreement also di- ing Act claims; plaintiffs are foreclosed
vided customers and limited each manufac- from arguing the predictions of The Model
turer to distributing through five United do not follow from the assumptions of The
States distributors. Over the fifteen plus Model regardless of the facts in the record
years of its operation, Japan's manufactur- of the case).
ers increased their U.S. market share from While some may think statutes like the
5% to 50%. The plaintiffs' theory and ex- antitrust laws are intended to control irra-
pert witness testimony claimed all this took tional conduct, Matsushita establishes that
place by pricing well below United States the assumptions of The Model (all markets
manufacturers in the United States market are perfectly competitive and driven by ra-
while fencing United States manufacturers tional profit maximizers) determine what
out of Japan's market where the cartel facts can sensibly be believed and that The
maintained high fixed prices.
Model dictates the goals the antitrust laws
We ignored this and additional evidence
seek to achieve (to maximize consumer
of a coordinated effort to price below cost welfare). It would, therefore, be irrational
and support low prices in the United States
to assume that competitors would behave
with high prices in the protected Japan in ways contrary to the behavior of rational
market because The Model dictated that
maximizers; it would also-of course-
such conduct could not happen. 106 S.Ct., bring chaos to the analysis to permit the
at 1359. We stated that no rational busi-
antitrust laws to serve goals other than the
nessman, driven by the single-minded pur-
maximization of "consumer welfare"-
suit of profit, would conspire with competi-
whatever that means.
tors for twenty years to monopolize the
United States market by predatory and be- 12. The Matsushita opinion requires the
low-cost pricing without hope of recouping non-moving party to come forward with
the lost profits plus interest. In the course "specific facts showing that there is a genu-
of our opinion, we ignored attempts to ine issue for trial." 106 S.Ct., at 1356. If
vary the number of variables to be ac- the claim is one "that simply makes no
counted for by The Model for decision, see economic sense," according to The Model,
n. 9, supra, such as evidence that the de- the party moved against "must come for-
fendants were motivated by a need for ward with more persuasive evidence to
growth and market share rather than support their claim than would otherwise
profit, that they had a need to dump their be necessary." Ibid. The balance of the
products because of excess capacity attrib- opinion is devoted to showing how none of
utable to policies of the Japanese govern- the explanations by the party moved
March 1987] SHERMAN WIDGET v. SMITH WIDGETS
Cite as 38 HASTINGS L.J. - (1987)
that efforts to cartelize a market are clivity of members of such a
fruitless because "rational maximiz- conspiracy to cheat and "free ride" is
ers" know they can never in that way assumed and taken into account by ra-
achieve success on a long-term basis tional maximizers in deciding whether
nor recoup the losses incurred in cut- to enter into such an agreement in the
ting prices to drive out a competitor.13 first place. Since, by definition, the de-
We agree. Losses are certain to fendants are rational maximizers, it is
arise because The Model assumes that impossible for them to have contem-
competitors cannot fence out new en- plated or entered into the type of con-
trants or discipline effectively mem- spiracy plaintiff claims they entered.
bers of the cartel who cheat. The pro- Even assuming the unlikely event that
against demonstrate that the predictions of "naked" restraints of trade. Since the
The Model do not follow from the assump- agreement did not explicitly call for a re-
tions of The Model. Attempts to demon- duction in or limitation of output, the
strate that the assumptions of The Model agreement-if it did exist-was character-
did not equate with the facts of the dispute ized by the trial court as "partially
were either ignored or found to be based on clothed" and "an ancillary agreement" re-
speculative or inadmissible testimony. straining trade rather than a "naked" or
Some of the evidence plaintiff relied upon non-ancillary restraint of trade. See
was found irrelevant and speculative be- Rothery Storage & Van v. Atlas Van Lines,
cause the assumptions and predictions of 792 F.2d 210, 224 (D.C. Cir. 1986) (Bork,
The Model made the evidence not plausi- J., distinguishing between the "naked" and
ble. The evidence that was ignored was ev- the "partially clothed" and the "ancillary"
idence suggesting the assumptions of The and the "non-ancillary" on the grounds of
Model were not operative in the circum- whether the restraint is pursuant to a par-
stances in dispute. We think the Court's tial integration to make the main agree-
approach in that case is mandated by the ment more effective). Here, the parties
logic of The Model which has, of course, have used the cartel to integrate partially
become the logic of the legal process in their functions; the agreement on prices is
these kinds of cases. See n. 19, infra. clearly ancillary to the main agreement
As for any claim that The Model is and designed to make the integration more
based on unrealistic assumptions, we need effective. Hence, there is much merit to
not concern ourselves with such a non-sci- the trial court's classification of this re-
entific approach. In the science of econom- straint as "ancillary and not naked."
ics, reality is compared with the predic-
In any event, Rothery requires a showing
tions of The Model-not the assumptions
of relevant product and geographic mar-
underlying The Model. See M. Friedman,
kets as well as a showing of monopoly
The Methodology of Positive Economics,
power in the markets defined before a vio-
in Essays in Positive Economics 3 (M.
lation of § 1 may be found. In the instant
Friedman ed. 1953). This view of eco-
case, plaintiff refused to introduce such evi-
nomic models has frequently been termed
dence, arguing that it had filed a § I case
the "Ouija Board" theory-if it works, be-
not a § 2 monopolization case. We reject
lieve it.
plaintiff's argument that proof of relevant
13. Citing D. Armentano, Antitrust and markets and power in the market defined
Monopoly: Anatomy of a Policy Failure are irrelevant in a § 1 case. The Model as-
(1982); Brozen, Dialogue, Are Economists sumes that economic efficiency as defined
Taking Over?, in Changing Antitrust Stan- by The Model, see n. 3, supra, is the sole
dards 31 (Conf. Bd. Research Bull. No. goal of antitrust policy. And there can be
144, 1983) (where collusive arrangements no showing of either a decrease in eco-
do not bar entrance, no need to be con- nomic efficiency or a violation of the Act
cerned about consumer welfare). The trial unless there is proof of a reduction in out-
court also cited R. Bork, The Antitrust put through the exercise of monopoly
Paradox (1978) for the proposition that power in a relevant market. Hence, §§ 1
only those arrangements resulting in a re- and 2 of the Sherman Act are aimed at the
duction of output should be condemned as same evil and mean the same thing.
38 HASTINGS LAW JOURNAL [Vol. 38
the defendants stupidly engaged in the riders," the scourge of rational mar-
activity alleged, the trial court held keting.15 Even though widgets are
that it should not intervene, for fear sold strictly on price, are fungible, and
that it might make a mistake. As require no repair or warranty work,
Judge Easterbrook has perceptively the court still held that it was com-
and humbly written: "judicial errors pletely within the prerogative of the
that tolerate baleful practices are self- rationality of each supplier to impose
correcting, while erroneous condem- the vertical restraints-including price
nations are not."'14 restraints-in order to prevent what
Citing Continental TV., Inc. v. each supplier perceived to be "free rid-
GTE Sylvania, Inc., 433 U.S. 36, 97 ing." Any distributional practice by a
S.Ct. 2459, 53 L.Ed.2d 568 (1977), the distributor objected to by its supplier
trial court rejected plaintiff's claims and lessening the supplier's return on
that the defendants' vertical restraints the item was defined as "free riding"
violated § 1 of the Sherman Act. The and a threat to the right of the supplier
court reiterated its analysis of why it to maximize profits.
was irrational and impossible for the The trial court also rejected the
defendants to impose the vertical re- claim that Monsanto v. Spray-Rite Ser-
straints through a horizontal agree- vice Corp., 465 U.S. 752, 104 S.Ct.
ment among themselves and why it 1464, 79 L.Ed.2d 775 (1984), required
would not be an antitrust injury to the a finding of per se illegality for vertical
plaintiff even if the defendants had in price fixing, noting that the Court in
fact done so. The court further found that case was not presented with the
that if each firm imposed the distribu- question of whether the per se rule
tional restraints individually, each one should be abandoned.16 The court
must have done so to prevent "free opined that if this Court, "a Court
14. Easterbrook, n. 7, supra, at 3. to The Model's prediction. This
courts cannot do, lest the closed
15. The trial court summarily rejected nature of The Model be destroyed,
plaintiff's claim that "the free rider con- discretion invade the analysis, and
cept is a clich6 indiscriminately used to decision-makers relying upon The
make reprehensible the very competition Model be deprived of the use of de-
the antitrust laws were designed to pro- ductive logic in its application.
tect." Citing Pitofsky, In Defense of Dis- We agree with the trial court's assess-
counters: The No Frills Case for a Per Se ment of the plaintiff's invidious and sub-
Rule Against Vertical Price Fixing, 71 versive argument. The internal coherence
Geo.L.J. 1487 (1983). The trial court of The Model would be completely de-
stated: stroyed and its ability to predict outcomes
Were this court to entertain such an with certainty would be eliminated if such
argument it would plunge the court an argument were to be entertained.
into an examination of the permissi-
ble scope of the property and con- 16. In Monsanto, we rejected the attempt of
tract rights of those imposing the the Solicitor General and amici to raise the
restraint-moral questions com- issue because it had not been argued below
pletely irrelevant to this dispute. and not because the argument lacked
Such an inquiry would upset the merit. The trial court held that the logic
symmetry of The Model by permit- used in Sylvania and by the advocates of
ting a questioning of the rationality The Model, when coupled with the policy
of the "rationality" assumption, assumptions of The Model, at least re-
and requiring an inquiry into the quires that vertical price fixing be mea-
kind of legal system The Model as- sured on a rule of reason basis, if not be
sumes is in existence to give effect declared per se lawful.
March 1987] SHERMAN WIDGET v. SMITH WIDGETS
Cite as 38 HASTINGS LJ. - (1987)
which a few short years thereafter sical model of economic theorizing
came down with the Matsushita deci- and that The Model indicates that re-
sion," had been presented with the is- ality cannot behave in the manner
sue, it would have held that the per se claimed by the plaintiff." The court
prohibition on vertical price fixing further noted that the plaintiff is "a
should be abandoned. The court con- shining example of the validity of The
cluded this part of its opinion with the Model since it has entered the market
observation that it is the purpose of and gained a 5% share in the face of
the legal system to protect the prop- the alleged cartel."17 Consequently,
erty and contract rights of suppliers or the court found the case was "one
anyone else in a position to bargain for where summary judgment should be
or impose such restraints. The court the rule and not the exception" and
asserted that its role was to remain that the plaintiff's claim that the court
neutral towards the economic activity was trampling on its jury trial rights
of free persons and not to condemn was "unfounded because there were no
those imposing restraints for doing the facts that could be in controversy."
"rational and efficient thing." The The trial judge stated: "If you wish to
court observed: "That's what free en- be philosophical about it, The Model
terprise is all about, and it behooves dictates not only what the law is but
courts to be vigilant in protecting and also what the facts are." In view of the
promoting free enterprise by prevent- "obviousness" of the dictates of The
ing governmental meddling with it and Model and the plaintiff's awareness
by bringing the full force and effect of thereof, the court granted the defend-
the law to bear in protecting property ant's Rule 11 motion for sanctions. In
and contract rights of the sort defend- light of this Court's holding in Matsu-
ants have exercised here." shita and the clear dictates of The
The court rejected the plaintiff's Model adopted in that decision for de-
assertions that markets are not per- termining antitrust disputes, the court
fectly competitive, that the defendants' held that the plaintiff had filed a "friv-
motives and incentives to engage in olous lawsuit" that it knew or should
the cartel may encompass a much have known was frivolous, and
wider range of objectives than just ob- awarded defendants attorneys' fees
taining long-term monopoly profits and costs of $650,000.
and supra-competitive prices, and that A panel of the Seventh Circuit af-
the evidence constitutes a "lay down" firmed the trial court's decision, per
case of conspiracy in violation of the curian. Citing various law review ar-
Sherman Act. The court did so on the ticles authored by members of the
grounds "that Matsushita establishes panel, that court found the plaintiff's
that the sole goal of the antitrust laws appeal wholly without merit and an
is to achieve economic efficiency as attempt "to undermine public and ju-
that concept is defined by the neoclas- dicial confidence in the teachings of
17. The fact that plaintiffis in bankruptcy is presented. In any event, plaintiff's entry
irrelevant to our analysis. Plaintiff's diffi- into the market and securing of a 5% mar-
culties could be caused by innumerable fac- ket share indicate that entry barriers were
tors, including its failure to act rationally not insuperable and that they were entry
and maximize profits by joining the barriers of the type which are inherent in
Consortium when the opportunity was this type of business.