Last Wednesday, the Wisconsin Supreme Court heard oral argument on whether to reinstate an antitrust lawsuit against taverns around the University of Wisconsin (story here). In 2002, the taverns agreed to eliminate drink specials after 8:00 PM on Fridays and Saturdays. A group of students filed a class action lawsuit against the taverns for injunctive relief and damages, claiming that the agreement constituted an illegal conspiracy in restraint of trade.
Well it sure as heck seems so, at least under federal antitrust law. The competing taverns agreed with each other not to offer discounts. The U.S. Supreme Court held in Catalano v. Target Sales that an agreement to eliminate interest-free short-term credit, which is effectively an agreement to deny discounts, is per se illegal. Similarly, the taverns’ express agreement to refrain from selling more booze for less money would seem to be per se illegal. It matters not that the competitors were seeking some desirable social end (less binge drinking, etc.); antitrust does not permit them to pursue that end by reducing competition. That’s the lesson of Professional Engineers, in which the Supreme Court, in condemning a price-fixing agreement purportedly aimed at providing safer buildings, emphasized that “the statutory policy precludes inquiry into the question whether competition is good or bad.”
The Wisconsin Court of Appeals, though, held that the taverns’ agreement was immune from antitrust scrutiny because the taverns entered their voluntary agreement under pressure from local government officials. That pressure, the court concluded, created a sort of state action immunity. Never mind that the government never actually acted. The fact that the handwriting was on the wall — that the taverns believed the city government would impose restrictions if they didn’t do so themselves — effectively turned the private agreement into state action, immune from antitrust scrutiny. Under this reasoning, a group of competitors could immunize their anticompetitive agreement by demonstrating simply that some government official was merely threatening to impose the agreement at issue.
The potential for mischief here should be obvious. Normally, to get state action immunity for a competition-reducing agreement, a group of competitors must convince legislators or regulators actually to impose the competition-limiting policy (or, at a minimum, to authorize self-regulation by the competitors). Adversely affected groups (consumer groups, etc.) will generally have some opportunity to argue against the policy at issue, and a majority of the state decision makers will have to approve it. Under the approach of the Wisconsin court of appeals, there is no need for an official decision by a state legislature or regulatory body — a single official’s threat to act in the future could be enough to insulate a private competition-limiting agreement. That threat could occur without any input by adversely affected parties and without approval of the majority of legislators or members of the regulatory body.
Many, many anti-consumer initiatives succeed because the “bad guys” — the ones who stand to gain from a reduction in competition — are able to front some “good guys” who convince the government that there’s some social value in the competition-reducing rule. It’s exactly what happened with Prohibition: the bootleggers, who stood to make a killing off the reduction in supplies of alcohol, put up the Baptists, who favored Prohibition for all the right reasons, to be their mouthpieces. Once the Baptists convinced the government to restrict supplies of alcohol, the bootleggers made out like bandits.
The reasoning of the Wisconsin Court of Appeals would exacerbate the bootleggers and Baptists problem, for the Baptists would no longer need to convince the government actually to impose the restriction at issue. As long as the Baptists could convince some government officials to threaten the restriction at issue, the bootleggers could respond by voluntarily limiting competition amongst themselves.
(Of course, the real lesson here is that Columbia, Missouri is a much cooler college town than Madison, Wisconsin.)