ANTITRUST ISSUES TO BE DISCUSSED AT OUR MEETING ON THURSDAY, MARCH 24, 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85M00363R001002200007-4
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 4
• Document Creation Date: December 20, 2016
• Document Release Date: September 11, 2007
• Sequence Number: 7
• Publication Date: February 24, 1983
• Content Type: MEMO

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MEMORANDUM TO: The Cabinet Council on Legal Policy
FROM: William French Smith
Attorney General
SUBJECT: Antitrust Issues to be Discussed at
Our,Meeting on Thursday, March 24, 1983
In addition to our proposed antitrust legislative reforms
(discussed in a separate memorandum), the Agenda for this. Thursday's
meeting of the Cabinet Council on Legal Policy will include dis-
cussions of antitrust policy issues concerning (1) resale price
maintenance and (2) the liability of municipalities under the
antitrust laws. This memorandum provides background for discus-
sion of these latter two subjects.
1. Resale Price Maintenance. Resale price maintenance
(RPM) is a practice by which sellers limit the prices that their
customers (and sometimes the customers of those customers) may
charge when reselling their products. It may take the form of
minimum RPM (where the limit is a price floor), maximum RPM
(where the limit is a price ceiling.), or the seller may establish
a particular resale price from which the customer is not free to
deviate.
All types of RPM are presently illegal per se under the anti-
trust laws. As such, they are held unlawful without considera-
tion of their possible procompetitive effects. While the Supreme
Court in recent years has moved away from per se condemnation of
other seller-imposed restrictions on buyers, particularly in its
decision in Continental T.V., Inc. v. GTE Sylvania, Inc., 1/
it has yet to relax the per se rules it has created against
RPM.
Since this Administration took office, the Department of
Justice has pointed out the extent to which these judicial rules
are overly restrictive. The Department has stated its intention
1/ 433 U.S. 36 (1977).
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to challenge the practice under the antitrust laws in circum-
stances in which it actually restrains competition. But in
briefs filed as amicus curiae, in testimony before Congress, and
in other public comments, the Department has pointed to the
possible procompetitive effects of RPM, and the difficulty of
distinguishing it from other "vertical" arrangements between
manufacturers and their distributors. We have argued that RPM
and other, nonprice vertical arrangements are sufficiently similar
in their basic competitive characteristics that RPM activities,
too, should be analyzed under the rule of reason. The Supreme
Court recently granted certiorari in a case (Monsanto Company v.
Spray-Rite Service Corp.) in which the Department, as amicus,
has recommended to the Court that it fully reexamine the legal
status of resale price maintenance. The Department's legal and
economic arguments regarding the competitive merits of RPM were
set forth in substantial detail in a letter from Assistant
--Attorney General Baxter to Congressman Robert McClory in June of
1982, and I have enclosed a copy of this letter for your conveni-
ence.
Briefly, a manufacturer may wish to employ RPM so that
retailers will market his product in ways that the manufacturer
desires. By setting the retail price sufficiently above the
retailer's wholesale cost, the manufacturer may induce the retailer
to provide a wide variety of point-of-sale or promotional services,
such as more intensive local advertising, more knowledgeable and
highly trained sales personnel, and quicker and more expert
repair services. All of these services may increase sales and
intensify interbrand competition.
The question arises why retailers will not increase services
unilaterally (even without RPM) if more sales would result. The
problem is that if some but not all retailers offer more services,
some, perhaps most, of the increased sales that result may be made
by those who offer lower prices because they offer no services.
Thus, a substantial number of customers may go to the higher-priced
outlet, consume the time of sales personnel in order to obtain
the appropriate counseling, but then purchase from a low-cost,
low-priced outlet, which ultimately forces all dealers to reduce
or drop services. This is referred to as the "free-rider" problem.
If the manufacturer is to be successful in increasing his
sales by affecting the manner in which his distributors mar-
ket his product, he must be able to shelter the profit margins
of cooperative distributors from free riders. For this reason,
he may wish to impose RPM on all dealers. Such arrangements can
promote competition and consumer welfare, and are clearly not
of the category of covert cartel practices (e.g., bid rigging)
that should be subject to a rule of per se illegality.
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It is important to note that in the Sylvania case, the
Supreme Court viewed the free-rider problem as justifying the
imposition of reasonable nonprice vertical territorial and cus-
tomer restraints. A manufacturer may impose such restraints
precisely for the purpose of protecting his distributors from
certain types of intrabrand price competition that the manufac-
turer considers harmful and adverse to intense promotion of his
product in competition with other brands. This analysis indicates
the logic of treating RPM as other vertical arrangements are
treated under the antitrust laws, under the rule of reason.
2. Municipal Liability. Under the "state action" doctrine,
competitive restraints imposed by a state as sovereign are immune
from the federal antitrust laws, if the state has clearly articu-
lated and affirmatively expressed a policy to limit competition
and has provided for active state supervision. Municipalities
:may be eligible for such a state action exemption, but only
where the state has authorized or directed their conduct pursuant
to such a state policy. The Supreme Court held in its 1978 City
of Lafayette decision 2/ that municipalities are not equated
with states for antitrust purposes, and may not claim a state
action exemption in the absence of a state policy to limit compe-
tition. The Court's 1982 Boulder decision 3/ established that
home-rule municipalities are not exempt from that standard and,
like other municipalities, must base any claim for state action
immunity on a clearly expressed and actively supervised state
policy.
Local government officials have expressed serious concerns
that fear of antitrust treble-damage liability could inhibit the
performance of legitimate governmental functions. They fear that
the City of Lafayette and Boulder rulings could require state
legislatures to prescribe municipal policy in detail in order to
avoid antitrust liability. Many state officials, on the other
hand, have opposed granting subordinate governmental entitiesc
antitrust immunity in the absence of a state.policy to limit
competition.
There have been a number of proposals for legislation
affording antitrust immunity to municipalities in the wake of
City of Lafayette and Boulder. One such proposal, favored by
associations of municipalities, would simply equate the actions
of local governments with those of the states for antitrust pur-
poses. Other proposals would go further and alter the complex
2/ 435 U.S. 389 (1978).
3/ Community Communications Co. v. City of Boulder, 455 U.S.
40 (1982).
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state action doctrine itself, as that doctrine has evolved in
several recent Supreme Court decisions. Each proposal has
presented its own set of difficult legal and policy issues. The
Administration probably will be asked for its views on legisla-
tion in this area during the current Congress.
Although the concerns of local governments are serious ones,
it is not clear that the Boulder decision requires a special anti-
trust exemption for municipalities beyond the scope of the state'
action exemption. It is important to note that the Supreme Court
did not hold in Boulder or City of Lafayette that the city had
violated the antitrust laws. The Court emphasized in Boulder
that it was dealing only with antitrust immunity, and specifically
suggested that a "flexible" approach to the question of actual
liability would probably be appropriate. Thus, the normal con-
duct of municipal affairs, including the purchase or provision
of municipal services, may well be found by the courts to present
no serious substantive antitrust concerns. The Court also empha-
sized, as the plurality had in City of Lafayette, that it was
not reaching the question of what remedies might be appropriate
if municipal conduct were found to constitute an antitrust
violation. Finally, the Court repeated in Boulder the standard
articulated by the plurality in City of Lafayette, which requires
only that anticompetitive municipal conduct be "authorized or
directed" by the state to qualify for state action immunity. The
plurality in City of Lafayette explained that its holding did not
mean that a city "necessarily must be able to point to a specific,
detailed legislative authorization" before it may assert a state
action exemption.
These factors have led the Department of Justice to question
the need for legislation in this area at this time. The Depart-
ment is keeping abreast of developments and continuing to study
the issues.
Enclosures
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