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Ninth Circuit Reinforces Applicability of Per Se Standard in Criminal Antitrust Cases

February 4, 2019

Ninth Circuit Reinforces Applicability of Per Se Standard in Criminal Antitrust Cases

February 4, 2019

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The question of whether a business agreement, if later challenged by the government or a private plaintiff, will be evaluated under the per se or rule of reason standard depends on the facts and circumstances in each case. 

On January 25, 2019, the U.S. Court of Appeals for the Ninth Circuit denied a challenge to the use of the “per se” standard in a criminal antitrust case involving bid-rigging. Bid-rigging among horizontal competitors is one of the trade restraints typically considered per se illegal, meaning that prosecutors or civil plaintiffs need only prove that the conduct occurred; they do not have to prove that the conduct was unreasonable. In United States v. Sanchez, three real estate investors were charged and convicted of rigging bids on foreclosed homes at municipal real estate auctions, in violation of Section 1 of the Sherman Act. The trial judge had instructed the jury to apply the per se standard. The investors challenged their convictions on appeal, arguing that the use of the per se standard deprived them of their constitutional right to have every element of the crime—including whether their conduct was unreasonable—proven beyond a reasonable doubt. The Ninth Circuit disagreed.

Sherman Act Section 1, which carries civil and criminal penalties, makes illegal “[e]very contract, combination … or conspiracy … in restraint of trade or commerce.” Since its 1911 opinion in Standard Oil v. United States, the Supreme Court has held that Section 1 prohibits only unreasonable restraints of trade. Generally, an unreasonable restraint is one that raises prices, reduces output or diminishes quality. The prevailing standard for assessing the effect on competition of most restraints is the “rule of reason,” which requires an analysis of the restraint’s actual effect on competition in a relevant market. Some practices, however, such as horizontal price-fixing, bid-rigging and market allocation agreements among competitors, are conclusively presumed to unreasonably restrain competition.

At oral argument before the Ninth Circuit in Sanchez, counsel for the three investors argued that the district court should have instructed the jury to consider the reasonableness of and procompetitive justifications for the bid-rigging scheme—namely, that their actions were necessary to counterbalance the power of the banks auctioning the foreclosed properties. The defendants’ argument is highly unusual in a criminal antitrust case. Unlike in civil cases, where the question of whether the alleged conduct falls into the per se or rule of reason category is commonly litigated, criminal cases are typically limited to per se violations. In fact, it has long been the policy of the Antitrust Division of the U.S. Department of Justice only to prosecute per se violations criminally and to litigate rule of reason cases in civil enforcement. Nonetheless, the argument appeared to gain some traction with U.S. Circuit Judge Richard Clifton, who recognized “the tension that lies between the application of a per se rule and the Supreme Court’s holding in admittedly a very different context that in criminal cases you don’t have mandatory presumptions.” In the end, however, the Ninth Circuit concluded that applying the per se standard in criminal antitrust cases does not violate a defendant’s constitutional rights. Moreover, the court ruled that the per se standard is not an evidentiary presumption at all.

The Ninth Circuit’s decision could have implications for other courts considering similar arguments. For example, in December 2018, following a remand from the Tenth Circuit Court of Appeals, the federal government asked a federal district court in Utah to reconsider its decision that the rule of reason, and not the per se standard, should apply in a criminal case charging a company and one of its executives with horizontal market allocation. In that case, United States v. Kemp, the government is arguing that application of the per se rule “hinges on the practice involved” and that “[i]t is ‘undisputed’ that an agreement to allocate or divide customers between competitors within the same horizontal market constitutes a per se violation” of Sherman Act Section 1.

The issue of whether the per se or rule of reason standard applies is also being litigated in the recent spate of private civil “no-poach” actions alleging that agreements among horizontal competitors not to hire each others’ employees, or franchise agreements prohibiting franchisees from poaching each others’ employees, violate the Sherman Act. In three such cases pending in the Eastern District of Washington—involving no-poach franchise agreements at fast-food chains Arby’s, Carl’s Jr., and Cinnabon—the Antitrust Division of the U.S. Department of Justice recently moved to intervene for the purpose of arguing that the per se standard should not apply. Citing its 2016 guidance on the subject, the Division stated that the agreements alleged in those cases fall into the category of either vertical restraints or horizontal restraints that “are reasonably necessary to a separate, legitimate business transaction or collaboration between the companies,” and thus merit rule of reason treatment. The Division hopes to file a Statement of Interest in that case prior to the hearing on a motion to dismiss scheduled for February 6, 2019.

The question of whether a business agreement, if later challenged by the government or a private plaintiff, will be evaluated under the per se or rule of reason standard depends on the facts and circumstances in each case. The outcome of that question can have significant consequences for the parties to the agreement. Application of the per se standard prevents a company or individual from arguing to a court that the agreement was justified under the conditions prevalent in the relevant market. Before entering an agreement that might invite antitrust scrutiny, companies should seek experienced antitrust counsel to advise them on the standard that a court is likely to apply.

For Further Information

If you have any questions about this Alert, please contact Christopher H. Casey, Sean P. McConnell, one of the attorneys in our Antitrust and Competition Practice Group, or the attorney in the firm with whom you are regularly in contact.


Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.