My friend and former law professor John Newman recently penned a thought-provoking column for The Atlantic on an agreement between four automobile manufacturer competitors (BMW, Ford, Honda, and Volkswagen) and the State of California to work together to figure out how to make cars with higher fuel efficiency and lower carbon emissions.  The Trump administration is reportedly not happy about the project and is considering initiating an antitrust enforcement action to try to stop it.  John’s commentary on the kerfuffle, reduced to a syllogism, approximates this:

1. Federal antitrust statutes (like Section One of the Sherman Act, 15 U.S.C. § 1) were enacted to prevent and punish agreements between horizontal competitors that restrain trade, which harms consumers.

2. This particular agreement between the automakers and California, although it restrains trade in some senses, would actually help consumers by pooling industrial resources to solve pollution–a classic example of a negative externality (or market failure) in every basic economics textbook, which even neoclassical (“Chicago school,” usually pro-free-market) economists should recognize.

3. Therefore, it is categorically inappropriate to use federal antitrust law to try to stop this particular agreement.

Of course, you should read the whole column, because John is really smart and has a lot of practical and scholarly experience in this area.  (In fact, while you’re at it, if this sort of thing interests you, check out some of his blog posts and his latest paper.)

Although my gut says that John’s conclusion is correct, I am not persuaded that the second premise holds water.

A Quick Antitrust and Economics Primer

Section One of the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce . . . .”  This provision applies to all sorts of anti-competitive conduct, and courts will apply one of two rules to adjudicate a Section One claim.  First, we know from economic modeling and practical, historical experience that some forms of agreements between competitors are so obviously harmful to consumers that such agreements are per se illegal under antitrust law.  When this occurs, courts apply the “per se rule,” and defendants get no opportunity to argue or put on evidence to defend themselves from the claims.  Second, we also know from economic modeling and practical, historical experience that other types of agreements may have demonstrable pro-competitive justifications.  In these cases, courts apply the “rule of reason” and allow defendants to mount their economic defense to an antitrust claim.

The quintessentially per se illegal agreement between horizontal competitors (thus, “horizontal agreement”) is price-fixing.  Suppose Firm A and Firm B both build some kind of widget, C.  In a traditional economic model, the market-clearing or “equilibrium” price of C is derived from the intersection of the mathematical curves for the marginal cost (what it costs the firm to produce one additional unit of the widget) and marginal benefit (how much additional utility a consumer gets out of consuming one additional unit of the widget) of C.  This is a slightly more sophisticated way of saying that the price of C is a function of the aggregate supply of and demand for C.  Competition between multiple producers of C tends to promote consumer welfare because it exerts downward pressure on prices of C as supply of C matches or outpaces demand for C.

Then suppose that A and B agree in secret to sell C at an artificially inflated, above-equilibrium price to boost their profits.  (Take, for example, the international agreement to fix prices of lysine, a food additive used in agri-business, that drove the plot the hilarious 2009 film, “The Informant!,” which was based on a true story and starred Matt Damon as pathological liar and whistleblower Mark Whitacre.)  In theory, when an illicit price-fixing agreement between A and B forces consumers to pay more for C than the aggregate demand for C justifies, consumers suffer.  Specifically, paying an artificially high price results in economic waste, which can take all sorts of forms, in addition to mere accounting costs.  For example, consumers can unduly bear the opportunity costs of having to forego other things that they may also want or need, but cannot afford after paying for their allotments of C at the inflated price.

There are many other forms of per se illegal conduct, like territory allocation, in which A agrees with B to sell C only in certain geographical markets.  Such an arrangement gives A and B, respectively, monopolies on C in the geographical places where the other has agreed to restrict sales of C.  Not only can A and B unilaterally set the price of C by limiting the amount of C on the open market in their agreed territories, but neither A nor B have to work too hard to make sure that C is the best C it can be, because it’s the only C around, and people who need or want C will pay inflated prices just to get C, even if C is subpar (think about your most recent customer service experience with your internet service provider).  Concerted boycotts and refusals to deal are generally per se illegal, as are vertical resale price maintenance agreements between a manufacturer and end-point retailer of C.  But I digress.

Back to the Agreement

Here, in contrast, there is no per se illegal price-fixing or territory allocation.  Rather, John essentially argues two theories for not applying antitrust law to this agreement.  First, there is a pro-market justification warranting “rule of reason” treatment of the agreement; the firms are combining to try to correct a market failure that imposes various costs on society.  John concedes the possibility that the vehicles designed and manufactured as a result of this agreement will have above-equilibrium prices, recognizing that this combination of competitors is, to an extent, is a “restraint of trade.”  To wit, designing and manufacturing new vehicle technology that reduces reliance on fossil fuels is costly, resulting in a product that is more expensive than its conventional counterpart, which has been largely standardized and mass-produced over decades.  The four automakers have to hire a lot of smart people who may not be familiar with the automobile industry, innovate and design new parts or new methods of locomotion, experiment with materials, and bear a whole host of other up-front costs–which become more affordable only when the competitors combine and pool their human capital resources, raw materials, design labs and studios, etc.

Moreover, John takes issue with “partial-equilibrium analysis,” a specific economic method that courts use to adjudicate certain antitrust claims:

To apply it, you first define a single, narrow market.  Then you ignore everything else.  Partial-equilibrium modeling is more or less just a convenient way to ignore the complexities of reality.  Spillover effects, altruistic motivations–all become irrelevant.  All you need to know is whether prices for consumers have gone up, or output down. . . . If all that matters is the market for high-end credit cards, then harm to food-stamp users becomes irrelevant [a dichotomy the Supreme Court considered in the recently decided case of Ohio v. Am. Express, 585 U.S. __ (2018)].  And if all that matters is whether car prices might go up, an agreement to build lower-emissions vehicles starts to look suspicious–despite the fact that it could literally help save the world.

That is, these competitors are self-sacrificially pursuing a laudable goal, agreeing to do something that is, according to John, “likely to increase [their] own costs, rather than their profits,” and courts should take that into account when evaluating the merits of the Trump administration’s antitrust claims.

Second, John relies on NAACP v. Claiborne Hardware Co., 458 U.S. 886 (1982), as a past example of the Supreme Court properly recognizing certain complex realities in deciding whether a certain type of horizontal agreement violated antitrust laws.

In Claiborne, NAACP members in Mississippi who were fed up with Jim Crow laws organized a concerted boycott of white-owned businesses to protest a myriad of racial injustices.  The white-owned businesses filed an antitrust lawsuit, arguing that the NAACP was shepherding a horizontal agreement to restrain trade.  The Supreme Court held that the agreement itself, although it may have restrained trade by depressing demand for certain goods, and thus sales and profits, and eroded some of the business’ goodwill in the community, did not violate antitrust law.  Specifically, the Court, applying the Noerr–Pennington doctrine, recognized the boycotters’ First Amendment rights to associate and express their sentiments on political and social injustices that persisted in their daily lives to try to bring about change.  That is, the non-violent elements of the boycott were constitutionally protected (which, as longtime readers and social media connections will recognize, warms my heart).

Therefore, John calls for the appointment of new judges–an argument he has made at The Atlantic before–who are willing, as the Court in Claiborne was, to grapple with certain practical realities when deciding Sherman Act claims.

John is undoubtedly correct in his positive statements of antitrust law.  Furthermore, although I am nowhere near as well-studied as he is, partial-equilibrium analysis seems intuitively short-sighted.  Rather, where I part ways with him is that I am not persuaded that this agreement will promote consumer welfare, precisely because of–not in spite of–certain complex practical realities.

Not All Attempts to Correct Market Failures Are Created Equal

Pollution is, as John notes, a classic textbook example of a market failure, but pollution abatement does not occur in a vacuum.  Accordingly, the first reality is that producers tend to pass their costs on to consumers in the form of increased prices, a point that, to his credit, John’s column anticipates.  Unfortunately, although solving the pollution problem may be worth paying more money for a car to some people, that has not been the case for the overwhelming majority of vehicle buyers.  Simply put, unless one is either independently wealthy and/or highly ideologically motivated, it is currently too costly and impractical for individual consumers to buy the kinds of cars that will be produced following the agreement between BMW, Ford, Honda, Volkswagen, and the State of California.  But the vehicles will still be produced for various reasons, and automakers have begun turning to a reliable revenue stream to move their inventory when traditional consumer demand stalls–the public trust–including tax incentives for individual consumers and direct subsidies through public sector procurement.

For example, the Fremont, California police department recently added the Tesla Model S to their fleet of patrol cars:

Fremont Police Department (CA) on Instagram: “#readysetgo 🚓🚨FPD employees are participating in our annual Emergency Vehicle Operations training today. Our 41 instructors come together to train our drivers on 13 different driving exercises and drills. #evoc #safetyfirst”

345 likes, 5 comments – fremontpdApril 9, 2019 on : “#readysetgo 🚓🚨FPD employees are participating in our annual Emergency Vehicle Operations training today. Our 41 instructors come to…”

Similarly, many other jurisdictions, like Manhattan, London, and the D.C. suburb of Hyattsville, Maryland, have experimented with adding electrified vehicles to their fleets.  The federal government has also been a major purchaser of electrified vehicles in recent years when nobody else stepped up to buy.

So when increased automaker costs to produce higher-fuel-efficiency, lower-carbon-emitting vehicles translate to higher prices, consumers are rationally incentivized to buy less expensive vehicles that use fossil fuels, and taxpayers are left holding the bag for whatever inventory remains–i.e, everyone winds up paying for these vehicles through government procurement, whether or not they ever personally drive one.

Perhaps adding insult to injury, despite President Barack Obama famously driving one, and promising to buy one after his presidency ended, General Motors recently, ahem, pulled the plug on the Chevy Volt.  Therefore, not even the ever-replenishing public trust is enough to sustain demand for green-energy vehicles!  Furthermore, this analysis does not account for future ownership of any intellectual property developed as a result of the four’s joint efforts, and how one, some, or all of the four holding patents on new technologies will affect prices of the vehicles they produce.

Again, it may (or may not) be worth the additional costs and expenses to producers and consumers to achieve pollution abatement, but that is a normative claim–not a premise that anyone should assume as a given when examining the merits of this particular agreement.  I defer to John on whether “increased taxes to fund public procurement of green-energy vehicles” is something that would cut against the notion of promoting consumer welfare for antitrust purposes–I just know that my default posture is to think that it is, as he says, suspicious.  (Moreover, although partial-equilibrium analysis seems short-sighted, it does not follow that courts should countenance restraints of trade just because the impetus for an agreement between horizontal competitors is ostensibly good public policy.)

Second, because green-energy vehicles are so pricey, and thus in such low demand relative to less expensive, fossil-fuel-powered alternatives, it is unlikely that this agreement “could literally help save the world.”  Even if the United States achieved virtually uniform adoption of green energy vehicles, pollution and climate change are a global problem–a classic prisoner’s dilemma, meaning that, despite an offer of a better outcome for all, every individual actor has powerful incentives to “cheat.”  China’s carbon emissions more than double the United States’, so even the rosiest successes in America will not necessarily translate a meaningful amelioration of the carbon problem.  (I concede, however, that eliminating basically one-third of all pollution produced by the world’s top two offenders would be a good start.)

On this point, it is important to remember that, to set a foothold on the international economic stage, the Chinese government requires that foreign companies (like American companies) in certain “pillar industries,” which seek market access to over a billion new Chinese consumers, form joint ventures with Chinese companies and transfer technology and intellectual property in those arrangements.  The automobile industry is one such pillar industry, and all four of the parties to the California agreement have Chinese joint ventures.  So development of new emissions-reducing technology in the United States could, at least in the long run, lead to industrial change in China.

Finally, a doctrinal counterpoint:  Claiborne is distinguishable.  John is the bonafide antitrust scholar here, so he knows better than I do how broadly Claiborne has been applied to save horizontal agreements driven by altruism.  But what saved the agreement in Claiborne was the Constitution’s Supremacy Clause, not the mere presence of an important socio-political experiment.  Under Marbury v. Madison, 5 U.S. 137 (1803), statutes must give way when they conflict with the Constitution’s various protections, because the Constitution is the supreme law of the land.  In Claiborne, the First Amendment’s protections of the boycotters’ rights to engage in nonviolent protest of Jim Crow overrode antitrust liability for whatever was prohibited by Mississippi’s antitrust statute.  In contrast, these four automakers do not have a constitutionally protected right to solve pollution, nor do individual automobile consumers have a constitutionally protected right to clean(er) air.  Therefore, the altruistic motive alone may not be enough, as a matter of law, to avoid antitrust liability.

All of that said, just because I am not currently persuaded does not mean that I am not persuadable!

Postscript

Someone once told me that they thought antitrust law was pretty standard fare in a legal curriculum.  That person went to Harvard Law School, and I assuredly did not.  My law school has a longstanding reputation for churning out practice-ready lawyers in Tennessee, but it does not have such a reputation for more theoretical study or connecting graduates with the kinds of law firms that do a lot of antitrust work.  Antitrust Law was an upper-division elective at my law school, and I think there were only seven students in my class drawn from two different cohorts (2Ls and 3Ls).  But I loved every minute of the course, especially because it gave new life and color to a few courses that frustrated me in graduate school.  Bottom line:  If your law school does not require antitrust law as a component of the core curriculum, but it is offered in the catalog, I highly recommend taking it–especially if you’re a law student at the University of Miami, where you can now study with John Newman.

photo by:  Undead warrior