Scalia’s Antitrust Legacy: Part 2, The Dissenting Opinions

In March, we wrote about Justice Antonin Scalia’s three majority opinions in substantive antitrust cases. Notably, Scalia also authored three dissenting opinions in substantive antitrust cases, in rapid-fire succession in 1991, ’92 and ’93. In the majority opinions, Scalia seized upon alternative, innocuous explanations for alleged anticompetitive conduct, even when an anticompetitive motive was equally if not more plausible, and in two cases reversed jury verdicts for plaintiffs. In the dissents, Scalia’s skepticism regarding the antitrust laws is even more evident: Scalia does not attempt to explain away what some (including two juries) characterized as anticompetitive conduct, as in the majority opinions; rather, he recognized and accepted plaintiffs’ characterizations of defendants’ conduct (as required by the posture of the cases), but concluded that even so, plaintiffs could not find a remedy in the antitrust laws. Furthermore, in each dissent, he also would have had the court reverse the U.S. Court of Appeals for the Ninth Circuit and affirm the particular California federal district court in the case, and grant judgment for defendants on the pleadings or on summary judgment.

Summit Health v. Pinhas, 500 U.S. 322 (1991), involved allegations of a conspiracy in violation of Sherman Antitrust Act Section 1, stemming from a hospital’s peer review and termination of staff privileges of Dr. Simon Pinhas at a Los Angeles hospital. “Prior to 1986, most eye surgeries in Los Angeles were performed by a primary surgeon with the assistance of a second surgeon,” increasing the cost of the surgery, the opinion said. Medicare announced that it would no longer reimburse the services of assistant surgeons, and thereafter, many hospitals abandoned the assistant surgeon requirement.

Pinhas requested that Midway Hospital Center also abandon the requirement. Midway refused, and because of Medicare’s refusal to reimburse, Pinhas faced an additional $60,000 per year expenses. Thus, Midway offered Pinhas a sham contract (for services he would never actually render) worth $60,000 per year. Pinhas refused. Thereafter, Midway and others instituted peer review of Pinhas and ultimately terminated his medical staff privileges. Midway also planned to disseminate the peer review report to all hospitals that Pinhas had staff privileges or might seek them.

Did the alleged conspiracy in the Los Angeles hospital market sufficiently affect interstate commerce such that antitrust jurisdiction existed? The U.S. District Court for the Central District of California dismissed the complaint on the ground that interstate commerce could not be affected by the removal of a single doctor from a hospital’s medical staff. The Ninth Circuit reversed, holding that Pinhas “need not … make the more particularized showing of the effect on interstate commerce caused by the alleged conspiracy to keep him from working” but rather “he need only prove that peer review proceedings have an effect on interstate commerce, a fact that can hardly be disputed.”

The U.S. Supreme Court ultimately affirmed the Ninth Circuit, observing that the alleged impact on interstate commerce may be indirect and fortuitous, and holding that the focus of the courts’ inquiries should not be on Pinhas’ practice, but rather the potential effect of Midway’s conduct on other participants and entrants into the relevant market, if left unchecked.

Scalia dissented, lamenting the shift in the Supreme Court’s position on the necessary effect on interstate commerce to state a claim under the federal antitrust laws. Until McLain v. Real Estate Board of New Orleans, 444 U.S. 232 (1980), the question would have been “whether the restraint at issue, if successful, would have a substantial effect on interstate commercial activity”; thereafter, the inquiry focused on whether the defendants’ activities alleged to have been “infected” by a conspiracy or restraint have a substantial effect on interstate commerce. Scalia noted that the court’s decision in Pinhas took the law even further astray, by holding that “to determine Sherman Act jurisdiction it looks neither to the effect on commerce of the restraint, nor to the effect on commerce of the defendant’s infected activity, but rather … to the effect on commerce of the activity from which the plaintiff has been excluded.” In Scalia’s view, the proper question was whether the peer review and termination of Pinhas would have a substantial impact on interstate commerce (the answer being a self-evident “no”). Instead, in Scalia’s view, the court improperly permitted the application of antitrust laws to facts that more clearly stated a claim for only a business tort.

In 1992, the court heard Eastman Kodak v. Image Technical Services, 504 U.S. 451 (1992). Once again, the California federal district court (this time the Northern District) granted summary judgment for Eastman Kodak Co., only to be reversed by the Ninth Circuit. Kodak was in the copying and micrographic equipment business, and allegedly tied the aftermarkets for parts (the tying market) to service (the tied market). The plaintiffs, independent service organizations (ISOs), complained that Kodak had prevented sales of Kodak parts to customers who used ISOs for service and prevented outside manufacturers of Kodak equipment from selling parts to anyone other than Kodak. Thus, many ISOs, which offered less expensive service than Kodak, were driven out of business and customers were forced to deal only with Kodak to obtain parts and service for their Kodak copy equipment.

At issue was Kodak’s lack of market power in the larger equipment market, where competition was robust. The court faced the question, “Whether a defendant’s lack of market power in the primary equipment market precludes—as a matter of law—the possibility of market power in derivative aftermarkets.” The court ultimately held on the Section 1 tying claim that there were two discrete, tied markets for Kodak parts and service, and that Kodak had market power in the tying market for parts, which it exploited to force customers to purchase Kodak service in the tied market. This reduced competition, increased prices and forced consumption of Kodak services. On the Section 2 monopoly claim, the court held that a single brand can constitute a relevant market, and that Kodak could monopolize the markets for its parts and service. The court affirmed the Ninth Circuit and remanded the case for trial.

Scalia dissented over the court’s bringing the “sledgehammer of Section 2 into play.” Scalia argued that Kodak’s lack of market power in the equipment market was the only check that was necessary on Kodak’s behavior in the aftermarkets. If Kodak was to abuse its power in the aftermarkets, it would lose market share in the broader equipment market to competitors who offered cheaper parts and service, due to the cross-elasticity of demand. The high transaction costs of conducting this life cycle cost analysis to determine which equipment manufacturer was offering the best package, cited by the majority, was no obstacle to consumers’ ability to comparison shop, given their ability to guesstimate those costs. Thus, where interbrand competition was vigorous, Scalia thought it was a great misstep to hold that even an “insignificant player” at the interbrand level could possess market power in the aftermarkets for its brand. “The sort of power condemned by the court today is possessed by every manufacturer of durable goods with distinctive parts.”

Finally, in Hartford Fire Insurance v. California, 113 S.Ct. 2891 (1993), the court again affirmed the Ninth Circuit’s reversal of the California federal district court’s (here, the Northern District) grant of a motion to dismiss. The issue was whether the antitrust laws applied extraterritorially to U.K.-based insurance companies that allegedly conspired with their U.S. counterparts to require, through refusals to deal, the use of a revised, standard form for commercial general liability insurance, which had the general effect of limiting the insurer’s potential exposure. In relevant part, Scalia disagreed with the court’s decision to permit the extraterritorial application of the U.S. antitrust laws. Despite it being well-established that the antitrust laws apply extraterritorially, and despite the fact that the conduct at issue was directed to the United States., Scalia would have refused to exercise that jurisdiction in the interest of comity and out of deference to U.K. courts and regulators that had taken steps to regulate the insurance industry.

In all three dissents, when faced with anticompetitive conduct—such as blackballing a physician who refused to charge unnecessary fees to patients or successfully conspiring to eliminate an entire industry of aftermarket parts and service providers—Scalia would have prevented the application of the antitrust laws on the basis that the conduct at issue was just not the sort of conduct the antitrust laws were designed to regulate, in his view. While outside the scope of this article, Scalia also dissented in Oneok v. Learjet, 135 S. Ct. 1591 (2015), just last year. In that case, he lamented the possibility that “state antitrust courts” might “engage in targeted regulation” of an aspect of the natural gas industry that he argued had been occupied by the federal Natural Gas Act. This was an unusual position for a judge who often attempted to limit federal power. In this most recent dissent before his passing, as in the others, Scalia was not motivated by a suspicion of the states and their courts, but it would seem, of the power and reach of the antitrust laws themselves. As he famously stated at his Senate confirmation hearing, “In law school, I never understood [antitrust law]. I later found out … that I should not have understood it because it did not make any sense.”

Carl W. Hittinger is a senior partner in Baker & Hostetler’s antitrust group and litigation group coordinator for the firm’s Philadelphia office. He concentrates his practice on complex commercial and civil rights trial and appellate litigation, with a particular emphasis on antitrust and unfair competition matters. He can be reached at 215-564-2898 or chittinger@bakerlaw.com. Julian D. Perlman is a senior associate in the firm’s litigation group, with a focus on complex commercial litigation, including antitrust litigation matters. He is resident in the firm’s New York City office, and his practice frequently brings him to Philadelphia, his hometown. He can be reached at 212-589-4629 or jperlman@bakerlaw.com.

Reprinted with permission from the “May 1, 2016” edition of the “The Legal Intelligencer”© 2016 ALM Media Properties, LLC. All rights reserved.

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