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A Dubious Dichotomy at the Heart of Antitrust Law

For decades, one analytical dichotomy has been particularly influential in antitrust law. Courts have drawn a sharp distinction between trade restraints among rivals (or horizontal restraints) and restraints among firms in a buyer-seller relationship (or vertical restraints). The body of judge-made antitrust law treats the former as suspect and the latter as generally benign.

In a 2004 decision, the Supreme Court described collusion among rivals as “the supreme evil of antitrust.” Accordingly, price-fixing and market allocation agreements among competitors are per se, or categorically, illegal. By contrast, the Supreme Court accepted vertical restraints as, at least in theory, useful methods of protecting against assorted forms of free riding and therefore entitled to a strong presumption of legality. The Court in 2018 asserted, “Vertical restraints often pose no risk to competition unless the entity imposing them has market power.” Typically, the government and other plaintiffs challenging vertical restraints must show harmful effect on “output” to establish their illegality.

In practical terms, as a June district court decision shows, this horizontal-vertical distinction means that McDonald’s franchisees cannot come together to agree not to hire each other’s employees, but McDonald’s USA generally can prohibit its franchisees from hiring each other’s employees as a condition of becoming a franchisee—which amounts to the same thing in practice.

Yet this analytical distinction does not withstand scrutiny. The horizontal (bad) versus vertical (good) dichotomy is false as a descriptive matter. Stepping away from judicial precedent on the Sherman Act and examining antitrust law and adjacent areas of law more broadly reveal a more complicated picture. This broader body of law treats certain horizontal restraints among certain classes of actors as desirable. Congress has identified some forms of coordination among rivals in their dealings with powerful buyers as beneficial, such as  labor unions and farm cooperatives, and authorized them. And it has not deemed vertical restraints, such as exclusive dealing arrangements, to be generally benign. Further, as a normative matter, remaking antitrust law as instrument for dispersing power requires abandoning a simplistic horizontal versus vertical distinction.

In multiple statutes, Congress rejected the notion of horizontal collusion as the supreme evil of antitrust. Instead, it identified “collusion” among certain classes of actors toward certain ends as socially beneficial cooperation. In the Clayton Act, it authorized an indeterminate set of concerted activities by workers, farmers, and ranchers. The law states:

Nothing contained in the antitrust laws shall be construed to forbid the existence and operation of labor, agricultural, or horticultural organizations, instituted for the purposes of mutual help, and not having capital stock or conducted for profit, or to forbid or restrain individual members of such organizations from lawfully carrying out the legitimate objects thereof; nor shall such organizations, or the members thereof, be held or construed to be illegal combinations or conspiracies in restraint of trade, under the antitrust laws.

Congress offered critical clarification in subsequent enactments. In 1922, Congress passed the Capper-Volstead Act, which authorizes “farmers, planters, ranchmen, dairymen, nut or fruit growers” to engage in collective processing, preparing, handling, and marketing of their products. A similar right was subsequently granted to fishers in 1934. And for workers, Congress, in the National Labor Relations Act of 1935, granted them a statutory right to engage in concerted activity and prohibited employers from dismissing workers for unionization and other collective action. And in authorizing certain forms of coordination among these groups, lawmakers established public oversight of their joint activity, entrusting the Secretary of Agriculture, Secretary of Commerce, and National Labor Relations Board to supervise the cooperation of farmers, fishers, and workers, respectively.

In contrast to the Supreme Court’s generally positive view of them, Congress expressly restricted certain vertical restraints. In Section 3 of the Clayton Act, Congress targeted exclusive dealing (by sellers of commodities) when the effect of the practice “may be to substantially lessen competition or tend to create a monopoly.” In other words, a non-monopolistic firm can engage in illegal exclusive dealing under Section 3. For instance, in a 1949 decision, the Supreme Court condemned exclusive dealing by an oil refiner and marketer that had a 23% share in the wholesale gasoline market in a group of Western states. And it did not stop with Section 3. In the Consumer Goods Pricing Act of 1975, Congress repealed two laws that had permitted states to legalize resale price maintenance agreements between manufacturers and distributors. When signing the bill into law, President Gerald Ford was clear what it would do: “make it illegal for manufacturers to fix the prices of consumer products sold by retailers.”

In statutory law, Congress rejected the horizontal (bad) versus vertical (good) dichotomy, and in doing so, took a nuanced approach. It expressly authorized certain forms of horizontal coordination and condemned particular vertical restraints. Accordingly, the rigid dichotomy is a judicially crafted doctrine and not an accurate description of the antitrust and related statutes.

In light of this statutory history, antitrust advocates and enforcers committed to reviving antitrust as an instrument for dispersing power in the economy should reject the current horizontal-vertical dichotomy. What courts consider collusion is sometimes beneficial cooperation, as Congress recognized. Labor unions permit workers to build power in labor markets and on the job and obtain a fair share of their firm’s wealth. Same with agricultural and aquacultural cooperatives. For many, these organizations are not vehicles for collusion but exemplars of solidarity and a solution to a power imbalance that drives wages and prices below fair levels.

Instead of being criticized for permitting “collusion,” Congress, if anything, should be faulted for not authorizing cooperation among more classes of comparatively powerless actors. Are workers, farmers, ranchers, and fishers the only powerless classes in the economy that should have the right to engage in concerted action? What about fast-food franchisees? Or Amazon flex drivers? Or even newspapers and other media being squeezed by Facebook and Google? Under current and indeed longstanding law, they cannot build power through collective action, despite being subordinated and exploited by some of the largest corporations in the world.

What courts have deemed “efficient” vertical restraints can be instruments of control and domination. Employers have robbed millions of workers of labor market mobility by requiring workers to assent to non-compete clauses. More generally, powerful firms across the economy use vertical restraints to dictate how nominally independent workers and businesses conduct their operations. For instance, Uber and other gig corporations insist their workers are independent contractors and, as such, not entitled to the rights and benefits of employment. Yet, through contract, they minutely control their fares, take-home pay, routes, vehicle condition, personal presentation, and even terms of work and dealing on rival platforms. These corporations have established a system of “control without responsibility” using vertical restraints. The gig economy is not an isolated example or novel, but merely the latest example of vertical restraints being employed as instruments of domination.

Legislators and federal regulators should embrace nuance. Horizontal coordination is sometimes good and sometimes bad; same with vertical restraints. Some restraints among rivals deserve categorical condemnation. For example, employers colluding to cap their workers’ wages or branded drug companies paying generic rivals to stay off the market are two examples deserving such strict treatment. (Ironically, despite its strong anti-collusion rhetoric, the Supreme Court has taken a more lenient approach to both practices in recent years.) While vertical restraints can be tools for subordination, that does not mean they always are and deserving of across-the-board illegality under all circumstances. Exclusive deals between a small manufacturer and a small distributor can provide long-term stability and attract external financing for both firms. And resale price maintenance provisions can induce retailers to carry a new consumer goods product by setting minimum margins.

As these examples show, inverting the current horizontal-vertical distinction would be a mistake. The deficiencies of the current dichotomy—horizontal (bad) versus vertical (good)—do not call for embracing another false dichotomy—horizontal (good) versus vertical (bad)—as an analytical tool. Instead, Congress and agencies such as the Federal Trade Commission should eschew high-level binaries and, through public input and expert study, establish rules and presumptions for specific restraints.

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