Antitrust Law Daily Wrap Up, TOP STORY—7th Cir: Lack of Per Se Illegality Ends Antitrust Suit Against Sulfuric Acid Producers, (Dec 28, 2012)

By E. Darius Sturmer, J.D.

Two Canadian and three American producers of sulfuric acid did not engage in conduct that was per se illegal under Sec. 1 of the Sherman Act by agreeing to an output model in which American companies purchased and distributed the Canadian companies’ excess sulfuric acid—an unwanted byproduct of the companies’ nonferrous mineral smelting processes—in lieu of producing their own between 1998 and 2002, the U.S. Court of Appeals in Chicago has ruled (In re: Sulfuric Acid Antitrust Litigation, December 27, 2012, Posner, R.).

The decision affirms an abrupt, unexplained holding of the federal district court in Chicago that the suit, brought by a class of chemical companies that buy sulfuric acid as one of the inputs into their manufacturing of other products like fertilizer and paper, could not proceed to trial as a per se case, only as a case governed by the rule of reason. However, the class has expressed disinterest in going to trial under the rule of reason standard, making clear that the case is over if they are not allowed to try it as a per se case.

The class contended that the principal misconduct emanated from “shutdown agreements” among the producers, which stipulated that in exchange for becoming a distributor of the sulfuric acid made by the Canadian companies—Noranda, Inc. and Falconbridge Ltd., mining companies that have since merged to form a single company named Xstrata Canada—each American producer would curtail its own production and be compensated for this by the Canadian companies’ selling at a price low enough to make distribution more profitable than production. According to the plaintiffs, by reducing total sales of acid in the United States, the agreements raised the market price, and such an agreement to restrict output and therefore raise price constituted the per se illegal offence of price fixing.

However, this was not the only plausible interpretation, in the court’s view. From the perspective of the Canadian companies, the court explained, the arrangement offered opportunity but also risk. While the U.S. producers’ distribution capabilities provided the Canadian firms the opportunity to make money from an unwanted byproduct of mining, it also led to the Canadians’ concern about the effect of the American companies’ production on the profitability of their venture into the U.S. market.

The court noted that an alternative to the shutdowns might have been the Canadian companies to negotiate long-term supply contracts with the U.S. firms, but it was not clear that the effects would be different from the effects of the shutdown agreements. Again, if the U.S. firms obtained their supply of sulfuric acid from the Canadian companies, they would not continue producing acid themselves.

The court acknowledged that the shutdown agreements were a form of price fixing. It cited Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979), as supportive of the proposition that even price fixing by agreement between competitors “was governed by the rule of reason, rather than being per se illegal, if the challenged practice when adopted could reasonably have been believed to promote ‘enterprise and productivity.’ ” The entry of Noranda and Falconbridge into the domestic sulfuric acid market “was likely to result in an eventual fall in the price of acid in that market, an unequivocally socially beneficial effect from an economic standpoint,” the court said. “If the agreements facilitated that entry,” the court added, “their net effect on economic welfare may well have been positive,” especially in light of the higher production costs of the U.S. companies.

A contention by the plaintiffs that BMI and another case with a similar holding—Polk Bros., Inc. v. Forest City Enterprises, Inc., 776 F.2d 185 (7th Cir. 1985)—could be distinguished on the basis that they described competitive restrictions “defensible as ‘ancillary’ to…socially beneficial business endeavors that create a new ‘product’ ” was rejected by the court. The shutdown agreements could be equally regarded as enabling or assisting in enabling a new product in the U.S. economy, the court reasoned.

The court found it relevant that it had “never seen or heard of an antitrust case quite like this, combining such elements as involuntary production and potential antidumping exposure.” The per se rule, it explained, was designed for cases in which experience has convinced the judiciary that a particular type of business practice has no (or trivial) redeeming benefits ever. The case was more than a mere “rerun” of U.S. v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940), which centered on the chronic oversupply of oil during the Great Depression, the court stated. The difference was that the only aim and effect of the price fixing agreement inSocony-Vacuum was to raise price. Here, “the aim was to facilitate entry into the U.S. market, which would (and eventually did…) lower prices and prevent the shutdown of Canadian smelting operations”—a situation that would itself have reduced output and raised the price of sulfuric acid in the United States.

The plaintiffs’ contention that in addition to entering into the shutdown agreements, the defendants also acted illegally per se by granting exclusive territories to their U.S. distributors was rebuffed by the court. The Canadian companies “were asking the producer-distributors to take a big risk by changing their business model,” the court observed. Thus, the granting of exclusive territories could be perceived as compensation for taking that risk, in the form of insulating them from competition at the distribution level. While exclusive territories reduced competition at the distributor level, they could increase it at the producer level, according to the court.

Finally, Noranda and Falconbridge’s formation of a joint venture with co-defendant DuPont to supply sulfuric acid to the U.S. market did not amount to a per se violation, the court determined. The joint venture “enabled substantial economies in transportation and marketing,” and after it was launched the chemical’s domestic price “dropped significantly.” Given that the venture had a legitimate business purpose, the fact that as part of the venture the prices of the venturers were coordinated did not condemn it out of hand, but instead subjected it to scrutiny under the rule of reason, in the court’s view.

A cross-appeal by the defending sulfuric acid producers, seeking decertification of the class in the event that the lower court’s dismissal of the suit had been reversed, was left unaddressed, in light of the appellate court’s decision to affirm.

The cases are Nos. 12-1109 and 12-1224.

Mary Jane Fait (Wolf, Haldenstein, Adler, Freeman & Herz) for National Alum Corp. David C. Gustman (Freeborn & Peters LLP) for Falconbridge, Ltd.

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