Scalia's Flexibility on Antitrust, Business Belies Reputation

Antonin Scalia staked out a spot on the U.S. Supreme Court as the panel's leading "originalist," promoting the view that judges are bound to interpret the Constitution through the framers' initial intent rather than as a vehicle for establishing an ever-growing list of new rights for citizens and regulatory authorities for the federal government.

That stand established him as a conservative bulwark in the country's culture wars over abortion and gay rights and over the government's ability to act on issues such as climate change and gun ownership.

But the popular reputation he developed as a strict constitutionalist on hot-button social issues contrasted to a fair degree with his willingness to pull modern economic theory into antitrust and other businesses cases.

In antitrust circles Scalia is most noted for his writings in two major cases, his 2004 opinion for the majority in Verizon vs. Trinko and his dissent in Kodak vs. Image Technical Services.

In Trinko, the Supreme Court ruled against a customer of AT&T (T) who argued that by failing to comply with Federal Communications Commission rules requiring telecom monopolies to lease access to their networks to competitors, Verizon (VZ) had also violated antitrust law. In Trinko's local market, Verizon was the incumbent provider and AT&T a competitor trying to make inroads. Scalia wrote that the requirements of telecom regulation did not create new obligations under antitrust law, even for firms that have acquired a dominant market position in a lawful way.

"Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers," he wrote "Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities."

Morgan, Lewis & Bockius partner Hill Wellford, a former chief of staff at the Department of Justice's Antitrust Division, said, "Trinko stopped a emerging trend in its tracks, which was to head antitrust law in the direction Europe was developing-- that a dominant firm, or firm with a large market share or significant physical investment or intellectual property investment it came to legitimately, must share that asset with smaller rivals."

"The court in Scalia's opinion said that if [industry] regulators want to step in and create a forced-sharing or essential facilities system, that's not a concern of antitrust law."

In the Eastman Kodak  (KODK) case, known to antitrust lawyers as "Big Kodak," the court in 1992 found that Kodak had violated antitrust law by refusing to sell replacement parts for Kodak copiers to third-party repair services. Scalia authored a dissent that since has become the more accepted position among antitrust practitioners.

He argued that because Kodak was one competitor in a highly competitive copier market, it had developed a legitimate business model that allowed it to gain market share by selling copiers at lower prices and make up for low profits or losses by recouping the diminished revenue with its own servicing contracts on the machines.

"The Supreme Court accepted the plaintiff's argument that the relevant market in this case was services for Kodak copiers," Wellford said. "But Scalia said the market really was an extremely competitive one for copiers generally and Kodak was up against Xerox (XRX) , Canon (CAJ) and others and needed a strategy to compete." Kodak's approach, selling copiers cheaply and trying to create technical and contractual barriers against third-party servicers that would prevent it from carrying out its business model promoted competition in the copier market, Scalia found.

"If the interbrand market is vibrant, it is simply not necessary to enlist [antitrust law's] machinery to police a seller's intrabrand restraints," Scalia wrote. "In such circumstances, the interbrand market functions as an infinitely more efficient and more precise corrective to such behavior, rewarding the seller whose intrabrand restraints enhance consumer welfare while punishing the seller whose control of the after markets is viewed unfavorably by interbrand consumers." Scalia's economic insight is now recognized as the correct approach by a majority of antitrust lawyers.

Scalia's willingness to bring this kind of economic thinking into Supreme Court rulings shows that when statutes are vaguely written, as is the Sherman Act's prohibition against anti-competitive behavior, the justice was more willing to let judges establish federal common law than his reputation as a strict constitutionalist would indicate, Wellford said.

In that sense Scalia and fellow Justice Stephen Breyer shared common ground, he said.

Even though the Supreme Court has not ruled substantively on merger law since the mid-1970s, their role as the court's intellectual leaders on antitrust and economics more broadly legitimized the inclusion of rigorous economics into legal reasoning that has filtered down to the many lower court rulings in merger cases during their decades on the court.

White & Case partner Eric Grannon, a former counsel to the assistant attorney general in charge of the DOJ's Antitrust Division, noted Scalia believed that even when dealing with fairly ambiguous statutes such as the Sherman Act there are limitations on judges' ability to make common law. "It's fair to say Justice Scalia was a fairly reliable vote for idea that all statutes should be interpreted according to the text," he said. In the case of the Sherman Act, he said, the law's vagueness left room for reasonable interpretation of the prohibition on anticompetitive behavior, "but it is not a bottomless tool kit to fix anything that is not pro-competitive."

That stance sometimes put him at odds with the court's current majority, Grannon said. For instance, in its 2013 ruling in FTC v. Actavis, the majority led by Justice Stephen Breyer found that although "pay for delay" settlements calling for generic drug makers to delay bringing competition to branded pharmaceuticals were not illegal on their face, the settlements were subject to antitrust scrutiny and could be found anticompetitive on a case-by-case basis. Scalia sided with the dissent authored by Chief Justice John Roberts, which called for antitrust scrutiny to be more limited and give more deference to patent law.

"There's a big philosophical difference between Scalia's view and Breyer's view in that decision, which is that antitrust provides an open-ended mandate for judges to impose pro-competitive outcomes," said Grannon, who was counsel of record for two of the generic defendants in the Actavis case. "Scalia would say that Congress passed the Sherman Act in 1890 as a prohibition on very specific anticompetitive conduct, not as a mandate for judges to create pro-competitive marketplace conditions."

Those differences are very significant to antitrust practitioners and their clients, but to everyday Americans Scalia's influence on their lives may simply be his desire to push for oversight of business in a way that is both constitutional and grounded in good business sense.

Said Wellford: "His impact on federal common law and law and economics has had an impact that is just as great or greater on the lives of average people and the dealmaker/businessman as his scathing dissents on constitutional issues. He was famous for his dissents, but his impact on the economy was much greater in his writings for the majority and I believe they will stand the test of time."

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