More than a century ago, the U.S. Supreme Court held that the Sherman Act does not interfere with the “unquestioned right to stop dealing,” but the legacy of the Aspen Skiing is that terminating voluntary cooperation with a rival can give rise to liability. A case now on appeal could determine whether the “right to stop dealing” remains meaningful.
Basic Facts
Align Technology Inc. (Align Tech) produces both the market-leading Invisalign brand of clear “aligners” for straightening teeth, and an intraoral scanner used to begin the process of tailoring an aligner to a patient. A Danish company called 3Shape also makes intraoral scanners and, in 2015, it entered into an “interoperability agreement” with Align Tech under which a 3Shape scanner was made to work seamlessly with Invisalign aligner fabrication.
About two years later, Align Tech first sued 3Shape for infringing its scanner patents, then terminated the interoperability agreement (as to the United States). Class-action lawyers brought suit on behalf of dental practices and patients, alleging that Align Tech monopolized the aligner and scanner markets in violation of Section 2 of the Sherman Act. The court granted Align Tech’s motion for summary judgment, and that decision is now on appeal in the 9th U.S. Circuit Court of Appeals.
The district court held that Align Tech did not violate the Sherman Act by terminating the arrangement if Align Tech had a genuine and substantial business rationale for the termination, even if Align Tech had other motives, as well. The court also found that Align Tech genuinely feared that continuing the arrangement would be used to support patent-infringement defenses (which were asserted).
The U.S. Justice Department (DOJ), appearing as amicus curiae, contends that the issue on appeal is the proper analytic framework for evaluating proffered justifications for allegedly exclusionary conduct. But the district court held that plaintiffs could not carry their initial burden. So, the issue on appeal is therefore whether the district court properly calibrated the plaintiff’s burden in challenging termination of voluntary cooperation.
The ‘No Economic Sense’ Test Is the Law
Largely to counter the DOJ’s amicus brief, I filed an amicus brief in support of affirmance. My brief advocates the “no economic sense” test, which the DOJ also advocated prior to the Biden administration. In Trinko, for example, the department argued:
Where, as here, the plaintiff asserts that the defendant was under a duty to assist a rival, . . . conduct is not exclusionary or predatory unless it would make no economic sense for the defendant but for its tendency to eliminate or lessen competition.
My brief argues that the “no economic sense” test is the law in the 9th Circuit—at least, for unilateral refusals to deal. In a 1981 predatory-pricing decision, the court declared that:
[C]onduct that will support a claim of attempted monopolization must be such that its anticipated benefits were dependent upon its tendency to discipline or eliminate competition and thereby enhance the firm’s long-term ability to reap the benefits of monopoly power. Such conduct is not true competition; it makes sense only because it eliminates competition.
In 1988, the 9th Circuit asserted the “no economic sense” test in a refusal-to-deal case. The court rejected the Section 2 claim, even though the defendant acted, in part, for reasons that could be viewed as anticompetitive. The court reasoned:
Where a monopolist’s refusal to aid a competitor is based partially on a desire to restrict competition, we determine antitrust liability by asking whether there was a legitimate business justification for the monopolist’s conduct.
A few years ago, in Qualcomm, the court endorsed imposing liability for refusal to deal only under three conditions, one of which is that “the only conceivable rationale or purpose is to sacrifice short-term benefits in order to obtain higher profits in the long run from the exclusion of competition.” The court’s phrasing is open to interpretation, but the most straightforward interpretation is that the refusal makes “no economic sense” without a payout from eliminating competition.
The “no economic sense” test also has been articulated by the 6th, 8th, and 10th Circuits. The 10th Circuit did so in an opinion by then-Judge (now Justice) Neil Gorsuch. He set out three necessary conditions for refusal-to-deal liability under Section 2, the last of which was that “the monopolist’s conduct must be irrational but for its anticompetitive effect.”
As authority, Judge Gorsuch cited my 2006 article on the “no economic sense” test (Identifying Exclusionary Conduct Under Section 2: The “No Economic Sense” Test, 73 Antitrust L.J. 413). The pages he cited explain, among other things, that short-term profit sacrifice is not sufficient for exclusionary conduct, because ordinary investment entails such a sacrifice, and that short-term profit sacrifice is not necessary for exclusionary conduct because exclusionary conduct can have an immediate payout.
The DOJ’s amicus brief argues that a business purpose must be “valid” and “sufficient” to defeat a Section 2 claim, and the “no economic sense” test implements both requirements. The “no economic sense” test asks whether the purpose of the defendant’s refusal to deal is “valid” in the sense that it does not involve profiting from eliminating competition, and whether the purpose is “sufficient” in the sense that it makes the refusal a rational business decision.
Conclusion
Monopoly itself is perfectly lawful, so the plaintiff’s burden under Section 2 of the Sherman Act cannot be discharged merely by demonstrating that greater competition would have resulted if the defendant had acted differently. A Section 2 plaintiff is obliged to show that the defendant departed from “competition on the merits,” a rubric that embraces both procompetitive conduct and any other conduct that makes business sense. The “no economic sense” test restates this obligation in a way that frames the plaintiff’s burden.